Trump trade war, it can make us tragically poorer

March 25, 2018

 

 

It looks like we are indeed on the verge of a trade war brought on by Trump who obviously knows nothing about how international trade increases real incomes in all nations that trade with each other. With Trump's trade war on the horizon it is important to understand how trade works so as to increase the real incomes of all nations. At its simplest, trade among nations is good in the same way that trade among states and regions within a nation is good, and it is good in the same way that we specialize at our jobs and use our earnings to purchase goods and services produced by the labor and capital of others.

 

Adam Smith in his polemic The Wealth of Nations wrote of this in 1776, and in 1817 David Ricardo extended the argument to gains from specialization and trade, to trade between regions and nation states. Modern economists have extended the the analysis of ways that we gain from international trade to the increases in competition and the lessening of market power of large corporations that it affords and the enlarging of markets that allow the advantage of decreasing costs of large scale production thereby lowering prices and increasing the variety of choices to consumers worldwide.

 

Think how much poorer we would be if each of us had to produce for ourselves everything we ourselves want to consume rather than specializing in our job or career and using that income to trade so we can get the products we want that are made by the labor and investments of others. Think about trade among the states in America. I live in Virginia, across the Potomac River from Washington, DC. What if Virginia imposed very high tariffs on goods and services produced in other states and offered for sale to residents of  Virginia so that goods and services produced in these other states  were either unavailable or available for only a very high price in Virginia - oranges from Florida, wine from California, wheat from Kansas, potatoes from Idaho, automobiles from Michigan, Ohio, Indiana and Kentucky, and bourbon from Kentucky. Virginia is good at producing coal and tobacco and boats and ships and chickens, turkeys, oysters and crabs, and pleasure for tourists who want to come to a "Virginia is for lovers" holiday, but Virginia is not so good with oranges and it only dabbles in wine and could probably replace Idaho potatoes, but you see what I mean. If we Virginians had to produce everything for ourselves we would be very much poorer. And if the United States had to produce everything we ourselves wish to consume, we could do it, at least most of it, probably almost all of it, we are a big country, but we would be quite a lot less well off.

 

And if we Americans had to do without international trade, how less well off would we be? Well in my blog post "Trump threatens disastrous trade war," (see link below) I site a conservative estimate that average U.S. household annual income is on the order of $18,000 higher because of the expansion in our international trade that has happened over the years since the end of WWII. Think of that, on average, U.S. households would be $18,000 per year poorer if it weren't for the lowering of trade barriers and tariffs and the resulting expansion of international trade that occurred over the years since the end of WWII. 

It is true that many workers who labored in sectors of the economy that were in direct competition with imports were dislocated and suffered income losses, but those losses in total pale in comparison to the gains from trade afforded to the rest of us. The remedy for this was to fashion programs to compensate the trade impacted workers and to generously fund them via taxes on all of us who gained from international trade. The gains from international trade were easily on the order of five times as high as the losses to workers who were adversely affected, so modest tax increases on all of us who gained would still have left all of us much better off.

 

Instead, we get Trump as president and a threatened trade war that may lead to losses in real incomes. As Trump would say in one of his tweets, "Sad."

For more on international trade search my blog posts under the tag "international trade."

   

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