A lesson on trade

Here is a letter to Trump from Don Boudreaux.

DB's economic analysis is correct, but misses some mitigating factors.  For example:

It is unlikely that Trump fails to understand trade - having attended Wharton.  However, most voters fail to understand trade, so you can't get elected by telling them the truth about trade.

It is desirable to maintain productive capacity in the US because you may not always have access to foreign productive capacity.  For example, is it a good idea to have foreign aircraft manufacturers undersell US aircraft manufacturers to the point that the latter cannot produce the best military aircraft?

"unfair" trade directed against US firms benefits US citizens at the expense of foreigners (assuming the US Government does not interfere).  For example, if foreigners sell us their washing machines for free, we benefit because we get something for nothing and the foreigners get nothing for something.  The dislocation of domestic washing machine workers to other jobs is painful, but does not change that fact.  The problem is that foreigners will be able to take advantage of us after they have destroyed our domestic washing machine capability.  There is a case to be made for Trump's demand for "fair" trade that academics typically ignore.

Here is the letter.
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23 January 2018

Mr. Donald Trump
1600 Pennsylvania Ave., NW
Washington, DC 20500

Mr. Trump:

I wasn’t joking yesterday when I wrote to you that my washing machine is broken and that a repairman was to come today to fix it. Well, the repairman came. He tells me that the difficulty and monetary cost of fixing the machine are prohibitively high. He recommends buying a new washer.

So, a new washer will be bought.

Because of your punitive tax on Americans who buy new washers assembled outside of the United States or Canada, the price that I’ll pay for the new washer will be higher than it would have been without this punitive tax on me and other Americans who buy new washers. (After all, raising the prices of new washers sold in the U.S. is the whole point of your tariff.) And of course the prices of new washers rose the moment the tariff was announced: when announced, the scarcity of new washers in the U.S. immediately rose relative to demand.

I don’t know – no one does – the exact amount by which the price to be paid for the new washer will be higher than the price that would have been paid in the absence of your punitive tax on buyers of new washers. But, again, that price will certainly be higher. This fact means, in turn, that some money that I would have spent or invested elsewhere will now not be spent or invested. I cannot say just where, but simple arithmetic reveals the truth of my claim. Perhaps a restaurant meal that I would have bought will go unbought as I dine in one evening instead of dining out. Perhaps one night I’ll watch an older movie on Netflix rather than go to see a new movie at a theater. More likely, in my case, my savings account will have fewer dollars in it than otherwise – which means that my bank will have fewer dollars to lend to someone who wants to buy a new Ford pick-up truck, or lend to an entrepreneur who needs additional liquidity to keep his small business afloat.

Because of your tariff, some businesses somewhere in the American economy will suffer unnecessarily lower demands for their outputs, or get fewer dollars for investment. Because of your tariff, some outputs somewhere in the American economy will be lower than otherwise. Because of your tariffs, some people will lose, or not get, jobs that they otherwise would not lose or would get. Because of your tariff, some other people will not get pay raises that they would otherwise have gotten.

And, thanks to you, the cost to all of us Americans of laundering our clothes will be higher.

Yet I don’t doubt that you and your troupe of crony-capitalist protectionists will bleat about how your punitive taxes on American consumers will make Americans more prosperous.

It’s preposterous, sir – and disgusting.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030