The inauguration of Donald J. Trump, the 45th President of the United States of America, will bring many changes to government policies for the next 4 years. One of such policies is Trade policy, a topic that arguably has been the signature issue discussed by the new president. Much has been discussed about re-negotiating NAFTA, declaring China a “currency manipulator” and concerted criticisms towards U.S. companies who operate abroad, to the point of ultimatums towards these companies being made even before the new administration takes place. Forgetting the moral and dangerous implications that authoritarian style governance represents, these acts of intimidation to produce and manufacture in the U.S., or otherwise face a huge tax, are the economic implications that these actions represent, where unrestrained executive power chooses winners and losers in a clear populist move, with the pretext of “protecting american jobs” – quite simply, old age protectionism typical of the age of mercantilism.
Now, one could surely argue and say that protectionist measures in order to boost national employment and production are nothing new, and that previous administrations have implemented them, and this is certainly true, but is has been a while, at least as far as I can remember, that a U.S. President has been very vocal and explicit about his idea to bolster employment at the expense of international trade and globalization.
Before entering into the reasons and arguments against old adage mercantilism and protectionism proposed by the Trump Administration, it is fundamental to comprehend the concept of methodological individualism, a key proposition that is fundamental in the study of the science of human action, that is economics. In its essence, methodological individualism means that “only individuals make choices in life”. What this means is that phenomena that we see in markets and in every single aspect of social life simply reflect actions that are always carried and initiated by invidivuals, who in the pursuit of their self interest, which is not to be confused with greed, are motivated by expectations of being better of, by choosing actions and deciding between alternatives. Understanding that only individuals act is very important because it helps to aide in understanding that collective action means nothing more than the concerted actions of individuals in a group. Thus, methodological individualism represents a crucial tool for economists and policy analysts, because it allows them to watch the true nature of policies. A clear example is in Trade policy and Commerce, which will be discussed next, but also by decisions made in the realm of national defense and war. When in the news, the headline states something to the matter of “The U.S. is sending 10,000 troops to Russia” for example, what it really means is that somebody, that is an individual or group of individuals made the decision to send the troops. Methodologial individualism also helps to understand why nothing in this world is free, including healthcare and education, which is funded through taxation which affects individuals one way or another.
Back to Trump and his misguided Trade and Commerce policies: When the Trump Administration employs measures in order to protect “American jobs” he is resulting to old style mercantilism, albeit in different forms. Mercantilism, according to Argentinean Professor Alberto Benegas Lynch, consists in the notion that “the wealth of nations consists in the accumulation of money locally”, in the old days it was precious metals, such as gold and silver. In order to accomplish the task of accumulation of riches at home, governments then would impose tariffs, and restrictions in order to boost exports and reduce imports. Governments would then impose price controls, strict licensing requirements to operate businesses and unionization, privileges were given to certain industries at the expense of others, thereby creating incentives for the resurgence of monopolies, which drives prices of products and services up, while quality is significantly reduced, as well as subsidies, which distorts markets. Sound familiar to Trump’s plans? I dare to say that it sounds too familiar!
Where the Trump administration fails to comprehend when it comes to trade and commernce is that there is essentially no difference between local commerce and international commerce, they are two sides of the same coin. Again, citing professor Benegas Lynch, “Oceans, rivers, mountains or any other conventional political border do not change at all the principles and teleological relationships inherently in the economy. The concept of a Nation does not commerce or trade, what happens is that individuals trade and exchange articles amongst themselves directly or indirectly through different associations of disctinct nature. Treating international commerce differently from national commerce is a result of the many fallacies related to international trade”.
What we call in local commerce buying and selling, in the international realm is called imports and exports. Is buying then better than selling? the question really makes no sense, and as economist Adrian Ravier explains, “Buying and Selling, importing and exporting are the same, we sell so that we can buy, we export so that we can import”. It makes no sense to export continuously if the money accumulated is not going to be used to purchase imported products and services.
This also brings into question Trump’s criticisms towards the U.S. balance of payments and the trade deficit. Trump has been an avid critic of the U.S. balance of trade which is currently a deficit. The problem with his criticism towards the trade deficit is that it ignores the fundamentals of such deficit. The United States, arguably the richest nation in the world, experiences the biggest trade deficit of probably any nation. What is forgotten is that the reason for such deficit is because the American consumer is guilty in a good way for such deficit. Americans enjoy a high purchasing power, the ability to obtain goods and services at any time, often at cheaper prices than many other individuals would in other nations that have trade surpluses. This is all due to the institutions in place which make the U.S prosperous: protection of private property rights, rule of law and a relatively stable monetary system, if we compare to that of other nations. This, also combined to the high levels of foreing direct and indirect investment, make goods and services cheaper for americans to buy, hence boosting imports.
My suggestion for the new Trump administration is to be extremely careful when devising trade policies, to adhere to sound economic principles and to understand that commerce, trade and globalization makes everyone better in the medium to long run. Perhaps a good word of advise would be to listen to what Jacques Rueff, french economist and former advisor to french president Charles de Gaulle had to say about international trade and statistics: “The obligation of governments is to remain blind to statistics related to international trade and commerce, never to worry about them and never adopting policies to modify them. If it was my will, I would not hesitate in eliminating such statistics due to the harm that they have produced in the past, the harm that they continue to do today, and that I am affraid will continue to do in the future, in the name of protectionism”.
Benegas Lynch (h), Alberto. Fundamentos de Análisis Económico. 12 edición, Abeledo-Perot, Buenos Aires, Argentina.
Ravier, Adrian. La Globalizacion como orden espontaneo. Union Editorial, Argentina.
Rueff, Jacques. Balance of Payments. McMillan.