One area on which economists generally agree is international trade. They have been staunch supporters of free trade, dating back to Adam Smith and David Ricardo.
Throughout the postwar period, their guiding principle has been that the benefits of trade outweigh the costs, but some leading economists are rethinking this premise in light of the problems that have arisen since developing countries liberalized their trade regimes and integrated into the world economy.
According to economic historian Douglas Irwin: Between 1985 and 1995, “the greatest reduction in trade barriers in the history of the world” was achieved. During this time, developing countries in Latin America and South Asia drastically reduced their import restrictions, the collapse of Communism led Eastern European countries to integrate with Western European countries, and China and Vietnam opened their economies to the world.
Irwin’s view is that the main factor behind this change was the influence of economists at high-ranking policy makers, who saw import restrictions and an overvalued exchange rate as hindering economic development.
One unexpected development wasThe 1997-1998 Asian Financial CrisisAs a result, China and other Asian countries built up dollar reserves. Large amounts of capital from official sources flowed into the United States, causing record current account deficits during the decade that China joined the World Trade Organization. Ben Bernanke described this as “a“Global savings glut”
Robert Alibar, professor emeritus of international economics and finance at the University of Chicago Graduate School of Business, has long been a critic of China and other countries that run persistently large current account surpluses. In an interview 10 years ago, he said theyCountries adopted “predatory trade and monetary policies”He believes that by maintaining high tariffs and a low value of the domestic currency, these practices have led to significant job losses in American manufacturing.
Alibar argued that the solution was an orderly reduction of the bilateral trade surplus between China and the U.S. Means to achieve this included allowing the Chinese currency to appreciate, lowering tariffs on Chinese imports, and asking China to increase supplies from U.S. companies. If a satisfactory agreement could not be reached, he supported imposing a 10% tariff on Chinese imports and increasing the tariffs until the trade surplus was reduced.
Criticism of those who support “fair trade” Proponents of free trade are primarily concerned with economic efficiency rather than social justice.“When efficiency is accompanied by an upward redistribution of wealth, [economists’] Advice often becomes little more than a license to plunder.”
Deaton is more skeptical about the benefits of free trade to American workers, given what happened to blue-collar workers. Economic theory dictates that workers who lose their jobs should be compensated by those who profited from trade, but Deaton points out that this redistribution never actually happens.
Research by David Autor, David Dorn, and Gordon Hansen“China Shock: The Final Chapter” supports Alibar and Deaton’s findings. It finds that trade with China has led to the loss of approximately 1.5 million U.S. manufacturing jobs, roughly a quarter of all manufacturing jobs lost between 1990 and 2007. These job losses were concentrated in small and medium-sized communities in the American heartland, where displaced workers struggled to find other work.
A tracking study from 2000 to 2019 concluded that the China Shock was essentially over by 2010. But American communities never recovered from the deindustrialization because politicians on both sides of the aisle failed to enact effective policies to help workers cope with the pain through trade adjustment assistance and job retraining programs.
In recent times, national security considerations have taken precedence over economic considerations in formulating trade policy. By 2023, speechNational Security Advisor Jake Sullivan has argued that the “Washington Consensus” that supports free trade and globalization should be replaced with a new consensus that “invests in the sources of our economic and technological strength.”
The industrial policy is the basis for the Biden administration to maintain the tariffs imposed by President Donald Trump in 2018-2019 and supplement them with additional tariffs on Chinese-made EVs and lithium batteries.
Former European Central Bank President Mario Draghi Europe also had to develop its own industrial policy. In a recent speech, Draghi said he aims to boost EU productivity by making research and innovation a common priority and creating incentives to close an investment gap of more than $293 billion per year. He believes the EU should pressure China to play by international trade rules and not be afraid to impose tariffs or use its own subsidies if it doesn’t.
Finally, while some economists are open to using tariffs to address trade disputes, it is not clear that increasing tariffs would achieve that goal. Paul Krugman has said the dirty secret isA 10% tariff would have a relatively small impact on the U.S. economy.
Donald Trump took even tougher measures against China in 2018 and 2019, raising tariffs on Chinese products by 100%.25 percentHowever, these measuresChina broke its promise to increase imports$200 billion loss from the United States.
As a result, President Trump has threatened to raise tariffs on Chinese products.60 percentand will raise tariffs on Chinese goods shipped through Mexico. So we’ll see what impact tougher trade barriers will have if Trump is elected president.
The challenge for economists, therefore, is to find ways to reduce payment imbalances without resorting to unchecked protectionism that would invite retaliation.
Dr. Nicholas Sagen is an economic consultant with Fort Washington Investment Advisors and is affiliated with the University of Virginia Darden School of Business. He said:Global Shocks: An Investment Guide for Volatile Markets.“
