Since taking office in January 2017, President Donald Trump seems to have declared or threatened economic war on many of America’s leading economic trading partners, including China, the European Union, and most recently Mexico. Two things stand out in all this: first, he presumes that international trade is a zero-sum game in which if the U.S. wins, some other country must lose; and, second, he presumes that he is an economic czar with absolute powers to do as he wishes with almost no legal or constitutional restraint. Both are extremely dangerous assumptions with potentially serious negative consequences for the people of America and the rest of the world.
President Trump looks at the world with a highly collectivist conception of “them vs. us” in international relationships. Yes, there are individual American consumers and producers, but in the realm of global economic politics, it is “America” in confrontation with the rest of the nations of the world. Does “America” have industries and jobs that he considers valuable, important, and productive, or do they exist somewhere else on the planet outside of the territorial jurisdiction of the United States?
Trump’s Collectivist Worldview
In this, by the way, President Trump is no different than virtually all his political rivals on “the left.” They too speak in collectivist terms about “the rich” versus “the “poor,” the “privileged” versus the “oppressed,” or the “1 percent” versus the “working middle and lower classes.” Trump’s focus, instead, is on the American nation-state versus all other countries with which the United States has economic interaction.
When he says or implies that if China is more prosperous and economically powerful it must be at the expense of America being less prosperous and economically powerful, this is just another variation on the same theme as those who say if “the rich” have more wealth it must be because others in society have less. Society is divided into economic winners and losers.
Now, there is a sense in which this is not a completely unreasonable way of seeing things. But to do so, we must ask, what enables some to gain at others’ expense? The answer, classical liberals and libertarians have long argued, is regulatory and redistributive intervention by government. In the arena of free, open, and competitive exchange and association, each individual in society will only enter into those relationships and transactions that they consider, all things considered, more or most advantageous from their personal perspective.
Free Markets Enable Individuals to Decide
That does not mean that we like all the choices we have to make, or don’t wish that circumstances were different either on our part or on that of others in terms of the skills we have and the products we sell and the value others place upon them who we wish would buy them. But, nonetheless, if I choose to buy a specific shirt at a particular price, I do so because I consider it a better bargain than doing without it or paying the price at which some rival supplier is offering to sell a similar piece of clothing.
I may wish that others viewed my labor skills to be more highly valued than prospective employers may find them in terms of the wage they are willing to pay me. I may regret not finishing high school or not majoring in some other field in college, or having not picked my parents more wisely in terms of the standard of living that otherwise they might have provided me. But at the moment of deciding and accepting a job at a particular salary, it was because it was the most profitable, again, all things considered.
And a private enterpriser might wish he was a better forward-seeing entrepreneur in judging where the market for his product is going, or that he had a more innovative idea on the basis of which to manufacture a saleable product, or could devise less costly methods of production to undersell a rival for customers’ business. But given his circumstances, he markets and sells his product on the terms that consumers are willing to pay, given the competitive alternatives.
What is certain is that that the open, free, and competitive market offers the widest latitude of opportunities and flexibilities to both demanders and suppliers of all sorts to find the potential transactions that will be most beneficial to them. Furthermore, by making no government-provided employment, sales, price, or market-share guarantees, a free market creates an economic environment in which it is in each individual’s self-interest to attempt to do the best they can to successfully make the sales, earn the revenues, and obtain the employment that is always moving the economic system as a whole in the direction of more, better, and less expensive products and services from which we all, as individuals, gain the most in the longer run.
Free Market Choice or Political Privilege and Plunder
More than 90 years ago, the British economist Edwin Cannan observed in An Economist’s Protest (1927) that “modern civilization, nearly all civilization, is based on the principle of making things pleasant for those who please the market and unpleasant for those who fail to do so, and whatever defect the principle may have, it is better than none.”
What is the alternative to improving our own lives by “pleasing” the market, which means nothing more than offering mutually agreeable terms to those with whom we may wish to peacefully trade? Basically, that alternative is plundering and privilege gained by using the government to obtain favors, subsidies, anticompetitive protections, or compulsory redistributions of other people’s wealth for our own benefit.
The problem is that there is no certainty that you or the social subgroup to which you belong will be the winners of a political process in which if you lose, the government compels you to provide the benefits enjoyed by others. And being a winner today in the political process in no way ensures that there will not be a bad turn of fate the next time the election cycle shifts power into different hands.
Political Power Creates a “Them vs. Us” World
The history of the world is a long and tragic tale of one society after another being totally or partially based on the use of political power to gain what is owned or produced by others through the legitimized means of force that is possessed by government. When the political means to desired ends is successfully drawn upon, then, no doubt, there are “winners” and “losers,” and many social outcomes become zero-sum results such that if you gain another must lose, or even such that everyone is worse off a few steps down the road.
Why? Because the individual or groups of individuals who bear the burden of the benefits bestowed on others have no peaceful, nonviolent way of avoiding being victims of the political game. The government makes you pay your taxes, and forcibly prevents you from competing or offering better terms to others, while the privileged ones live under the umbrella of political largess of one type or another. (See my articles “Free Market Capitalism vs. Crony Capitalism” and “Crony Capitalism the Cause of Society’s Problems.”)
The answer to this type of political division of society into “them” versus “us” is to abolish, repeal, and eliminate the system and network of politically provided favors, privileges, subsidies, and anticompetitive protections and compulsory redistributions. In its place, instead, there should be an impartial rule of law that recognizes, protects, and enforces each individual’s freedom to peacefully live his life as he chooses and voluntarily enter into any and all transactions that the participants consider to be providing mutual benefits and gains from trade.
But notice, this is not the social division that Donald Trump or any of his would-be Democratic Party candidate rivals explain or propose to the American people. Each in their own way merely wants to divide up the political booty into different shares, ladled out to different selected-as-deserving groups at the expense of others expected to foot the bill under government duress.
While socialists or undeclared socialists of all stripes talk about the class, or gender, or racial conflicts between groups within and between countries, Trump tweets away about nation-state conflicts and competitions that require him as president, and, therefore, as the voice and representative of all Americans, to use the power of his office to redistribute industries, employments, and populations between the United States and the rest of the world. In this, he is as much of a socialist as the others, a government central planner of men, material, and societal outcomes.
While it is important to point out the dangers from the policies promised by the huge field of candidates fighting for the Democratic Party nomination for the presidency in 2020, it is Donald Trump who is sitting in the White House for another year and a half, and maybe another four years beyond that. It is his wielding of executive power now and tomorrow that threatens more of the liberty and prosperity of the citizens of the United States. (See my articles “The Green New Dealers and the New Socialism” and “The Nightmare Fairyland of the Green New Dealers” and “The Dangers of the New Democratic Socialism.”)
Individual Imbalances of Trade Don’t Matter
The fact is, as has been explained and understood at least since the time of Adam Smith in the 1770s, nations do not produce and trade; individual human beings do so. George produces shoes and is interested in trading them for a new hat and a new coat. Bob’s American-made hats are of better quality and lower price than Pierre’s, who produces and sells hats in France. On the other hand, Wolfgang is a tailor in Germany whose coats are of a more fashionable cut and nicer material than Sam’s American jackets, though a bit lower in price than Wolfgang’s.
George, therefore, buys a “made in America” hat, but a “made in Germany” coat. Wolfgang, on the other hand, likes Pierre’s Parisian-style hats compared to Bob’s American version, while Sam doesn’t wear a hat, rarely puts on a coat, and prefers American-grown strawberries and likes to smoke Havana cigars.
Each pays for the goods that he wants to buy out of the earnings he has acquired from selling his own goods to somebody else. Where the product has been made has mattered little or not at all to each of the respective buyers; they have looked for good value for the price asked, given what they are interested in purchasing. And each seller has happily sold what he or she has for sale to whoever is interested in purchasing their wares, regardless of the national flag under which the respective buyer happens to live.
This brings out another aspect of this process: individual balances of trade with exchange partners matter for nothing, and are irrelevant to each person’s buying and selling decisions. George sells his American hats to buyers from somewhere for a total revenue of $1,000. He purchases a $100 hat made by his fellow American, Bob; spends $250 for one of Wolfgang’s German-made coats; and buys from other American and foreign suppliers the remaining $650 he earned from his hat sales.
Wolfgang does not reciprocate by buying one of George’s hats, having decided to acquire one from Pierre for the equivalent of $125. Pierre does not buy one of Wolfgang’s coats, but decides to purchase one of Bob’s hats instead. When the arithmetic has been worked out on each person’s budget-ledger book, the trading partners will have balance-of-trade surpluses with some and balance-of-trade deficits with others. What will matter, at the end of the day, is that each of their respective total expenditures equals their total revenues or receipts.
The logic remains exactly the same even if we make the process a bit more complicated by including borrowing and lending, in which some spend more today than they have earned because they have borrowed someone else’s savings, while the saver spends less than their current earnings would permit because they have forgone part of their money’s use until some time in the future by lending it to someone who will pay it back (with interest) at an agreed-upon time later on.
National Balances of Trade Are Statistical Illusions
It needs to be held tightly and clearly in view that only individuals trade, only individuals buy and sell, only individuals might purchase in money terms more than they may have sold to some trading partners, and, on the other hand, they may have sold more in money terms to others than they have bought from them. There is no “national” balance of trade or payments separate from these individual ledger books.
The national balance of trade and payments is merely a statistical adding up of all the individual balances of trade and payments into a total that is no one’s balance of trade or payments, because “nations” do not produce or buy and sell. And nothing happens to “the nation’s” balance of trade that does not originate in some change in the trading patterns of the individual citizens of a particular country.
But Donald Trump focuses on these individual ledger-book entries: so much sold to China by the United States and so much bought by America from China; and the same for the European Union, or the other countries in North or South America. He then considers it “bad” to be buying more from China than “we” sell to them, for instance.
The only way President Trump has to “correct” this is by trying to restrict what and how much is purchased from the other country in question. His economic policy tool of choice is import taxes on goods from the “offending” country. He says that he will make China, or Mexico, or countries in the European Union “pay” for their economic “crimes” against America. But in this, too, he shows his economic illiteracy.
Making America Great by Making Americans Worse Off
It is certainly true that if it becomes more costly for Americans to buy various Chinese or Mexican goods due to the import tax, the producers of those goods in China or Mexico will likely experience some falling off of sales in the United States, which may reduce their dollar earnings from America. President Trump can then claim he has hurt the economic “enemy.”
But the real and substantial burden falls on the American buyers and consumers of those Chinese or Mexican goods. The American importers, who are links in the supply chains leading to the final buyers in the U.S., experience reduced sales and revenues. American private enterprises in these import sectors of the U.S. economy lose sales, may experience lower profits, and might have to let go some American workers employed in their sectors of the market.
But, wait, it may be said, American domestic producers and sellers benefit. Their sales increase, their profit margins may widen, and they may hire additional workers in their parts of the economy, as fewer foreign goods are sold in the United States at higher prices.
But the net effect is to make Americans, in general, less well off. Suppose that the imported foreign product had sold for $125 before the import tax resulted in its price increasing to, say, $150. Yes, some American producers and sellers may now make additional sales at $150, to the extent that American consumers decide that it is worth that price to continue buying some of this good.
But it now costs $150 instead of the previous $125, from the buyers’ point of view. The extra $25 to buy the American-made version must mean an equivalent reduction in $25 of purchases of other things out of people’s budgets. Some other producers and sellers in America must see a decline in their sales by that $25 amount, meaning lower profits and perhaps fewer employed workers in their part of the market.
And overall, the American buying public is $25 poorer. Before they had the product bought from abroad for $125 plus $25 worth of other goods they could afford to buy. Now they have only the American-made version of the product for $150 and $25 less of other things. Standards of living, in general, have declined in the name of making “America” great, at the expense of making actual flesh-and-blood individual Americans less well off. (See my articles “The Balance of Trade Doesn’t Matter — Unless Caused by Government” and “Tariff Wars and the Fallacy of the Balance of Trade.”)
The Danger and Harm From Import-Tax Absolutism
But besides making Americans poorer than they otherwise need to be due to Trump’s tariff wars, the president has arrogantly used executive authority to arbitrarily impose higher import taxes (or their threat) at his own discretion and whim. The ideal policy reform would be to repeal any and all legislation that allows any sitting president to capriciously dictate and impose price controls on the importing of goods into the United States, because that is what his tariff policies amount to in practice.
He basically uses his presidential power to influence the minimum price below which it becomes too costly for the foreign seller and the import dealers to offer the good affected to American buyers. He thereby, also, tries to dictate a minimum price below which American consumers cannot purchase a good from a willing foreign seller.
In this he is no less of an economic tyrant than, say, Nicolas Maduro, the socialist dictator of Venezuela. He, too, rules by command and decree.
Trump’s powers in these avenues are not as wide as this South American central planner, yet, they have the equivalent coercive authority of prohibiting and punishing any who attempt to resist or evade the dictates of Comrade Trump, economic commissar of tariff policy. As long as he tweets “national security” before declaring his new planned or initiated tariff increase, it seems that nothing stands in the way of Trump trying to have his way in the realm of international trade relations.
At a minimum Congress should rein in this or any president’s powers to impose import taxes on selected Americans in this way. Otherwise, we will remain — regardless of who sits in the Oval Office in the White House — under political absolutism in this crucial area of human interaction.
This article was originally published at The American Institute for Economic Research.