Trump’s War on Trade
2019-09-06 · Guest: Don Boudreau (George Mason University economics professor) · 51:47
Common myths and misconceptions about international trade
Bob Zadek and George Mason University economics professor Don Boudreau dismantle common myths surrounding international trade, specifically focusing on the rhetoric of the Trump administration. They explain why trade deficits are actually beneficial, how tariffs function as taxes on domestic consumers, and why “currency manipulation” is essentially a country-wide sale for American buyers.
Topics: Trade, Tariffs, Trade Deficit, Comparative Advantage, Currency Manipulation, Economics, Donald Trump, Don Boudreau
Speakers: Bob Zadek, Don Boudreau
Introduction to the Trade War [00:00]
Bob Zadek: Hello everyone, welcome to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio. We are in our 12th year and counting. Thanks so much for listening this Sunday morning. We are always the show of ideas, never ever, not once, the show of attitude. And what I try to do on our show every Sunday morning is we offer opinions, we solicit opinions of our listeners and of course of our guests, but opinions themselves are not all that interesting. What we try to do is to probe down and ask the most important question of all when discussing opinions, and that is the “why.” I care a little bit less about what you feel; I do care about why you feel it. And when people share with each other the why, why they feel that way, then true learning takes place. And that’s what we try to do every Sunday morning.
You can’t avoid articles, broadcasts, articles in the media or broadcasts on mainstream media or not mainstream media about trade war—the war with the alleged war with China and with other countries, sometimes Mexico, sometimes Canada. The trade war where the commander-in-chief of the trade war is, of course, President Trump. It is discussed a lot by the media. Everybody seems to have an opinion on it. And what troubles me so much, and the reason for this morning’s show, is what troubles me is the discussion of trade is replete with misunderstanding. Even the vocabulary of a conversation about trade is confusing, misleading, and a distortion. Words like trade deficit, exporting jobs, currency manipulation, deficits—those words sometimes have a meaning that’s the opposite of what you would expect. And therefore, when Americans try to understand what’s going on, they get all into a rabbit hole and confused, and the conversation about trade deteriorates rapidly.
Well, I have the cure. The cure is this morning’s guest. I’m happy to welcome back to the show Don Boudreau. Don is a senior fellow at the Mercatus Center, he’s a GMU, George Mason University economics professor, and most importantly to my life, he’s the curator of the incredibly readable Cafe Hayek. Cafe Hayek is a daily blog that I receive. I cannot, I cannot start my day without reading Don’s posting every morning called Cafe Hayek. It is a must-read if you even have a vague curiosity about economics specifically and the world at large. You cannot start a day without reading Cafe Hayek. I invite you to subscribe, and if I haven’t convinced you, one hour from now when we finish our show, you will be hooked as I am on the wit and wisdom of Don Boudreau. Don, welcome to the show this morning.
Don Boudreau: Thank you, Bob, and thanks for those very kind words.
Trade is Between Individuals, Not Countries [02:26]
Bob Zadek: Well, Don, you are one of a very small group of my own private tutors. You help me to understand, you help me to learn and to grow intellectually, and you have for over a decade. So the thank you should go from me to you, not from you to me. Now, Don, this morning I would like to talk about the issue of trade: trade deficits, tariffs, the exporting of jobs—a phrase that makes no intellectual or economic sense whatsoever. Help—we’re going to help our friends understand at least what the terms mean and what’s going on. And it’s a pleasurable task because if we shed the cumbersome vocabulary, the concepts are really quite simple to understand.
Now, let’s start with the relationship between the US and China and the concept of trade in general. So Donald Trump and others, his advisor Navarro and many others, Stephen Moore, have complained that China has been, from a trade standpoint, treating us unfairly—an absurd concept, as our friends will see. Tell us what the economic relationship between the two countries is. And you will explain, I’m sure, that really the countries have no economic relationship; it’s the trading partners that do, not the countries. But let’s start at the country-wide level. What is the conversation all about, and what is the complaint that Trump and others have about our trade relationship to China?
Don Boudreau: You alluded in your remarks to the place where we should begin, and that is trade does not take place between countries. Trade is carried out by flesh-and-blood individuals. And international trade just happens to be trade that is carried out between individuals, each of whom are citizens of different political jurisdictions. So the first thing to recognize is there is nothing at all unique about international trade. International trade is the same as national trade. So when I trade with you, we’re both Americans, that’s motivated by the same sentiments, it has the same consequences as when you or I trade with someone in Mexico or China or in Canada. There’s no difference. Trade is trade; it’s motivated by the same reasons regardless of which particular agency issues a person’s passport.
So when Americans—and so that gets to the second fundamental point—trade by its nature is voluntary. So when I buy something from China and some Chinese seller sells me something, both of us do so voluntarily. We both expect to gain from that trade. Of course, we can make mistakes; people make mistakes all the time. But I know my best interests better than anyone else knows my best interests. The person in China knows his or her best interests better than anyone else knows his or her best interests. And so when we trade, us two, we can be sure—most people can be sure—that each of us is overwhelmingly likely to be made better off by that trade. So trade is mutually beneficial whether it occurs between citizens of the same country or whether it occurs between citizens of two different countries.
But for some bizarre reason—actually, it’s not really bizarre, I think I understand why—for some reason, people think that trade that occurs with a foreigner is fundamentally different than is trade that occurs with a fellow citizen, and it’s not. So let me say this to start: any problem that you show me, whether real or not, that is created by trade with foreigners, I can show you as existing between—as occurring from trade with fellow Americans. Any benefit that we get from trading with each other, with our fellow Americans, we can possibly get from trading with foreigners. Again, there’s nothing fundamentally different about trading with foreigners and trading internationally.
Job Destruction and the Atkins Diet [04:44]
Don Boudreau: Now, of course, what people say is, “Oh, when we trade with foreigners, that destroys domestic jobs.” It is true that when we buy imports, there are some of our fellow Americans who might lose jobs. But that is true whenever we change the way we trade with our fellow Americans. My favorite example is, remember about 20 years ago the Atkins diet became a fad in America? So Americans changed their diet; we ate less carbohydrates and we ate more protein. It had nothing to do with international trade, and yet Krispy Kreme Doughnuts, the doughnut franchise, they closed several of their stores and they blamed the Atkins diet. I think correctly. Whenever consumers change the way they spend their money, some people lose jobs, other people gain jobs. And that is true whether that change in the way people spend their money is caused by imports or whether it’s caused by anything else.
And so jobs are always being destroyed, always being created by the dynamic economy that we’re in when consumers change the way they spend their money. And so when Americans lose jobs to imports, as some Americans do, that’s not any different than when Americans lose jobs to any other form of economic change. There’s nothing special about it. Now, you can protect those—you can protect Americans from losing those jobs, but you can only do that by harming other Americans, by making other Americans pay unnecessarily higher prices for things like steel or aluminum or textiles or whatever it is that you want to stop Americans from buying from China. You can protect an American job in a Pittsburgh or Ohio steel factory by imposing punitive taxes on Americans who want to buy Chinese or Brazilian steel. You can definitely do that. But one consequence of that—and this is the fact that people like Trump and protectionists always miss—it’s not only the fact that that raises the cost to Americans of acquiring steel and aluminum and the other things that are protected by tariffs, but that also destroys jobs in other American sectors.
So you can protect jobs in some sectors, but only by destroying jobs in other sectors. When we prevent Americans from buying or obstruct Americans from buying foreign steel, that means foreigners have fewer American dollars. Foreigners accept American dollars when they sell us stuff for the same reason that we Americans accept dollars: we want to spend them or invest them in America. So when foreigners get fewer dollars because they’re selling us less due to tariffs, they have less money to spend buying our exports. That destroys jobs in some American sectors. They have less money to spend investing in America. That destroys jobs in other American sectors. And so one of the factors that is proven over and over again in economics—it’s as strong as any proposition at all in the social sciences—is that protectionism does not increase the number of jobs. What protectionism does is protect jobs in relatively inefficient industries by destroying jobs in relatively efficient industries. And over time, as anyone who thinks about it can tell, over time what that does is lower the standard of living in so far as we have protectionism. Because when you’re protecting jobs in inefficient industries, you’re protecting less productive jobs. And when you protect less productive jobs, that means that those wages are going to be lower over time. You’re preventing jobs from arising in more efficient, more dynamic industries. And so when people like Trump worry about trade, all they see—and it’s very common, but it’s wrong—all they see are the jobs destroyed by imports. That’s all they see, and they stop looking there. And they see, “Oh, well, if we stop those imports from coming in, we’ll save those jobs.” And they’re correct in that. But they don’t see the much larger, bigger, and more important picture, and that is the destruction of jobs in other parts of the economy, the increase in prices that Americans must pay, and the overall slowing and encumbrances that are put on the economy because of this intervention.
Protecting Salaries, Not Jobs [12:50]
Bob Zadek: Now, two comments, Don, and thank you so much for that. Number one is the concept of destroying jobs. I would qualify that, and my question is, am I right? That activity of trying to protect jobs—those jobs are not being lost. Those jobs can be saved if the worker would be willing to do the same task at less of a salary. So it’s not saving the job; it’s saving the salary, not the job. Every job that’s lost in America could be saved. We could be manufacturing refrigerators and television components and the like if American workers would be willing to work at the same salary as a foreign worker. So there is a profound distortion, and that is to say, not only does a worker have a right to a job—and there’s no such thing as “my job”; you only have a job if somebody is willing to—has decided you are worth what you want—but it’s not preserving the job, it’s preserving the salary, not the job. And that’s where the discussion, I think, really breaks down. Aren’t I correct that every job that is quote “lost” or quote “sent overseas”—almost an obscenity to even say the words—every job could be saved if that worker would work for less? So aren’t I correct that it’s not the job that they want to save, it’s the salary, not the job?
Don Boudreau: You are correct, and you make two important and related points in what you just said. One point is that jobs are not things that are owned by someone. A job is a service that is performed for someone who chooses to buy something from me. And if someone chooses to, say, hire me to give an economics lecture, that person doesn’t thereby commit himself or herself for the rest of eternity to continue to buy my economics lectures. That person will continue to hire me to give an economics lecture for as long as that person feels it’s worthwhile. But that person’s under no moral or economic obligation to continue doing that. Jobs are worthwhile only in so far as they are productive. As soon as consumers don’t want as much as they did earlier the things that are produced, then that producer should find something else to do.
Bob Zadek: At the price, Don. Don, it’s at the price. The buyer has to not only want the product, but at the price the seller demands.
Don Boudreau: Exactly right. So this gets me to the second point. You’re exactly right. I mean, we Americans could still be making low-value toys and low-value textiles if we were willing to be paid the low wages that people are paid to produce those things. But it’s a good thing and not a bad thing that we’re not willing to be paid those wages. Americans lose jobs—and this is a fact that most people miss—when Americans so-called get priced out of jobs by imports, that’s because most Americans have better options. The reason wages are high in America is because American workers are very productive. You don’t want very productive workers wasting their time doing much less productive tasks. And so, yes, obviously, if you’re willing to work at a lower wage, you can have almost any job you want at that lower wage. But you have to find someone willing to pay you to work at a higher wage to produce something. We lose jobs when our wages rise, and that’s a good thing. We are basically pricing ourselves voluntarily, in a manner of speaking, out of producing things that foreigners can produce at a lower cost so that we can move into producing things that are more productive and that will eventually pay us higher wages.
The Trade Deficit Myth [17:45]
Bob Zadek: Now, so the concept—and you made this point in a Cafe Hayek article—is that I’m in California where I live, and California has a—probably a huge—we export lots and lots and lots of food. So California probably has a trading surplus with other states, and other states, let’s say Nevada, which doesn’t make that much agriculturally and no manufacturing base, probably has a huge trade deficit. The governor of Nevada is not wringing his hands and bemoaning the fact that Nevada has a trade deficit. It doesn’t suffer; it’s neutral. California is neither better off nor worse off than Nevada. And if the concept of trade deficits makes no sense, it seems absurd in a one-state versus another, it is equally absurd in a one-country versus another. It is a manufactured fear that has no basis in reality. Now, what is the fear? Can you help us understand when those who seek to impose tariffs and to restrict and to limit our quote “trade deficit,” what is their fear, albeit wrong-headed and has no basis in economics whatsoever? Can you give us some insight into what they think is wrong with our trading relationship with China and other countries?
Don Boudreau: It’s too bad we don’t have 24 hours rather than one hour to talk about this, because there’s no concept in all of economics that is more thoroughly misunderstood and more consistently used to demagogue in favor of bad policies than this so-called trade deficit. And so let’s just start with what I think is the biggest single misunderstanding, and that is President Trump says it all the time: that when we run a trade deficit, it means we’re losing. And it doesn’t mean any such thing. All a trade deficit is is a situation in which during some period of time, like a month, where the citizens of the domestic country import in value more than they export. And so if Americans import this month a billion dollars worth of stuff from foreigners and we sell as exports less than a billion dollars, we have a trade deficit to the extent of that difference.
But first of all, a better name for it would be a “good surplus.” That means we’re getting more goods than we’re giving up. That should be a good thing. Ultimately, that’s the reason people work, that’s the reason people invest, that’s the reason people take risks, that’s the reason people roll out of bed early in the morning to go to work—it’s because we want to increase the amount of goods and services that we have for ourselves and our families to increase our standard of living. And so when we run a trade deficit, we’re getting more goods from foreigners than we’re giving up to foreigners. That’s not a bad thing; that’s a good thing. It just has this unfortunate name “deficit” for bizarre historical reasons.
But what’s not seen also is that when foreigners don’t spend all the money that they earn when they sell us stuff buying our stuff, what they’re doing with that money is instead investing it in America. The way these accounts are set up—and most people don’t understand this, but this is just a matter of fact, simple fact—the way these accounts are set up is a trade deficit (the more correct name is current account deficit, but we’ll stick with trade deficit), the trade deficit is exactly offset by something called a capital account surplus. Exactly offset, down to the last cent. And so when Americans run a trade deficit, Americans are also running, in the exact same monetary amount, a capital account surplus. That means that foreigners are choosing to invest here. They’re building factories, they’re lending money to American corporations, sometimes lending money to Uncle Sam, they’re starting restaurants. And so these investments promote and improve the American economy, and they’re also evidence that foreigners believe in the promise of the American economy, at least relative to the promise of other countries in which they can invest.
A trade deficit is nothing that Americans should be ashamed of, nothing that Americans should fear. It’s something we Americans should be proud of and something we should be glad of. We should be proud that foreigners choose consistently to invest a lot of their dollar earnings in the American economy rather than to cash them all out immediately buying stuff that we make. We should be encouraged that these investments are coming to America and increasing our capital base. These things are all good. But because it’s called a trade deficit, and because it’s so easy to demagogue, people miss this fact.
Another fear that people have about the trade deficit is—and this is also a fear held by a lot of people who should know better—is they argue that a trade deficit is like a government budget deficit in that every time we run a trade deficit, we go further and further into debt. And that’s simply untrue. Every time Uncle Sam runs a budget deficit—which is a very different thing than a trade deficit—the US government goes further into debt because to run a government budget deficit is necessarily to borrow money from creditors. But a trade deficit does not mean that Americans are going further into debt.
I’ll give you a simple example. Not long ago, I bought some furniture from IKEA. Let’s say I spent a thousand dollars on that furniture. So I spent a thousand dollars buying something from a foreign company. If IKEA then takes that thousand dollars that it got from me and uses it to improve one of its stores in San Diego or in Newark, New Jersey, those dollars are coming back to America as investments. That increases the American trade deficit by a thousand dollars, but it doesn’t harm us, nor does it mean we’re going further into debt. We don’t owe IKEA any more money because it chose to spend the thousand dollars on improving its stores. The language here is so misleading. A trade deficit is not a deficit. It simply means that foreigners, again, rather than choosing to spend all of their dollars buying stuff from us, choose to spend some of their dollars investing in our economy. We should be, again, proud of that fact. We should be pleased by that fact. And yet, because of the name “deficit” sounds bad, and because it’s no crime not to know economics, but because most people don’t know economics, so that when they hear “trade deficit,” they think, “Oh, that sounds bad,” they panic. And of course, politicians generally are more than happy to have people panic because the more people panic, the greater is the demand for political intervention. And so it’s a sort of a perfect storm of bad language and political opportunism that gives rise to all these baseless fears about trade deficits. In short, we should be pleased with trade deficits, not in any way upset or discouraged by that fact.
Comparative Advantage and Babe Ruth [26:15]
Bob Zadek: In your last comments, you invited—and as soon as we get back from break, we’re going to cover it—you sort of segued into a very important economic concept that drives all of this, and that is the concept of, Don, as of course you know, as you have taught me, comparative advantage. And that concept is crucial, and that shows so clearly how we benefit from an absurd concept called trade deficit. We’re going to talk about comparative advantage, which to me, once you understand that, you understand almost everything about trade. We’ll discuss that in 30 short seconds when we come back with our conversation with Professor Don Boudreau. Please stay tuned.
[Commercial Break]
Bob Zadek: Welcome back to the Bob Zadek Show, the longest-running live libertarian talk radio show on all of radio, always the show of ideas, never ever the show of attitude. We always inquire into the “why” of opinions, not just the fact of the opinion. Now, Don, the key to me, the key to understanding almost all that we have talked about is the concept of comparative advantage, which drives it all. A very simple economic concept that I’ll ask you to explain to our listeners. And by the way, you may want to make reference—it’s up to you—to the laughably absurd comment by Elizabeth Warren bemoaning the fact that pencils aren’t made in America. She doesn’t understand anything about comparative advantage, and of course, the irony that she picks the pencil, which was the subject of a wonderful essay by Leonard Read called “I, Pencil,” which is mandatory reading by anybody who wants to understand economics. But comparative advantage, Don, please explain that and how that affects our conversation this morning.
Don Boudreau: Yeah, first of all, I want to applaud you for mentioning Leonard Read’s essay “I, Pencil.” It’s one of the greatest things ever written, and I encourage all your readers to find it online. There’s actually a nice video of it too. It’s a beautiful and important story. So comparative advantage boils down to its simplest essence is that each person can produce some things at a lower cost than can most other people. So I have a comparative advantage—this one that I developed over time—at teaching economics and writing economics. My eye doctor has a comparative advantage at doing ophthalmology. My department store has a comparative advantage at retailing clothing. And so all that means is when I spend my time earning income to teach economics or to write economics, I’m spending my time doing that which I do most efficiently, at least relative to other people and relative to anything else I could do. And so that means I can earn more money doing that.
And again, because trade is always among individuals, if we observe Americans buying pencils from Canada or Indonesia or wherever it is we buy pencils, that must mean that Canadians or Indonesians or whoever it is that produce the pencils, they can produce pencils at a lower cost than we can produce them. Why should we then produce pencils ourselves? As Adam Smith, the great founder of economics, said—it’s not an exact quotation—he said something like, when you run a household, you produce some things in the household yourself, but the vast majority of things you buy from merchants. And so too with a country. And he said it just as it would be folly to produce in a household something that the household can acquire by buying it at a lower cost from a seller, it would be folly for a country to do the same thing.
And so, yes, we could make pencils in America, of course. But if we refused to buy pencils from foreigners—or more realistically, if government somehow obstructed our ability to buy pencils from foreigners—then all pencils that we would get for ourselves, we’d have to make ourselves, meaning we’d have to make them at a higher cost. And so, yes, we could produce pencils, but because we would acquire those pencils at a higher cost, the amount of other things that we give up to produce those pencils is greater than the amount of things that we give up when we buy pencils from more efficient foreign producers. And it’s because it makes no sense for you or me personally to incur unnecessarily high costs to acquire the things that we want to acquire, it makes no sense for us as a country to pay unnecessarily high costs to acquire things that we want to acquire. When foreigners can sell us things at a lower cost than it we incur to make those things ourselves, we make ourselves richer by buying those things from foreigners rather than making the things ourselves.
The fact that Senator Warren doesn’t get this fact, doesn’t understand this reality, of course, doesn’t surprise me. She is a politician, and you know, there’s a great quotation—I think I’m going to get it close to right—by the great Thomas Sowell, who said that the first rule, the first law of economics is that reality is not optional, and the first law of politics is to deny the first law of economics. And so, you know, politicians are in the business of pretending to be miracle workers. And of course, there are no miracles in the economy. And the job of the good economist, and the job of the good public intellectual such as yourself, is to point out what works and what doesn’t in a realistic way and to pierce the fallacies and illusions that politicians try to create in order to pave their way to power.
Bob Zadek: I find the concept of comparative advantage a useful tool in explaining it is to make a reference—and today’s a good day to make this reference because it’s the start of the first Sunday of the football season—but if you look at a football team, a football team operates most effectively and to the highest collective benefit when each position is staffed by the one most competent to do it. Now, you can assign positions on a football team at random or in a way that seems fair to the players, but the team will be grossly ineffective, it’ll be grotesque, it won’t work. So what you do is everybody does what they do best, as a result of which the team as a unit is very efficient and does its job of winning games in the best manner. Think of instead of a football team, think of a planet like Earth, to pick one at random. Earth will function most efficiently if everybody on Earth is contributing by doing what they do the best, and what they don’t do the best, they take their earnings from what they do best and buy the services of the others. To me, that’s—I think I don’t think it’s being overly simplistic, but that is comparative advantage. And when Donald Trump and others talk about bringing jobs home, well, as Don said earlier, of course you can bring the jobs home, but you’ll be getting the same product more expensively than if you bought it overseas. How does that possibly make sense? And bringing jobs home to me, Don, is nothing other than the mother of all wealth transfers. It’s transferring wealth from American consumers to a tiny subset of the Americans whose jobs are quote “protected.” It’s just a wealth transfer in disguise, with the government being the mover of the wealth from one to the other. And it causes people to be overpaid for what they are doing based upon their contribution to the economy.
Don Boudreau: Yeah, your NFL example of comparative advantage is a good one. One of my favorites is also a sports one, but as many of your listeners might know, Babe Ruth was a truly great pitcher in Major League Baseball. He was a great pitcher. But he was an even better slugger. And so the Boston Red Sox and then later the New York Yankees, even though he was probably a better pitcher than anyone else on those teams, they chose instead to use him as a slugger because that’s where he was most effective. And that’s a good example of comparative advantage. Yes, we Americans could produce pencils. In fact, maybe by some measures, we Americans could produce pencils more efficiently than Indonesians or Canadians or whoever produces the pencils. But the problem is, when we produce pencils, because it costs us more to produce pencils than it costs the Indonesians or Canadians or whoever produces the pencils, if we produce pencils ourselves, we give up more of other things to produce and acquire those pencils than we give up by buying them from foreigners. And that is simply—that’s not the way to wealth. A handful of pencil producers in America might be made better off, but Americans as a whole are made poorer. Jobs—this is an important point that a lot of people don’t immediately get, but it’s important—jobs are costs, they are not benefits. We work in order to acquire the things that work allows us to acquire. We don’t work because work is itself the end goal of economics. It’s true many of us love our jobs—I love my job—but if George Mason University and the Mercatus Center stopped paying me, I would stop working for them. I would find some other job. I work ultimately, as much as I love my job, in order to acquire the income to buy things for myself and my household. And so a job is valuable only in so far as it allows us to increase our standard of living. To protect jobs in a way that decreases our standard of living, which is what protectionism does, makes no sense whatsoever.
Tariffs as Taxes on Americans [39:01]
Bob Zadek: Now, tariffs, of course, in the news almost every single day, Don. And tariff is, of course, where a government—in this case, the United States government—imposes adds to the cost of an imported product to make the imported product less desirable to Americans because now it costs more, and maybe it costs more than the American-made product, and therefore Americans now buy the now less expensive American product because the foreign product has the added cost, i.e., the tariff. Now, in the subject of tariffs, there are two questions. Trump has been criticized a lot by using tariffs because tariffs are, as I just have said, a tax on American buyers. It is in effect taxing Americans for exercising their free choice of buying a Chinese product. It says if you want to enjoy the freedom of buying a Chinese product, we will charge you for the exercise of that freedom—a concept that’s offensive to you and I, Don. Now, speak to two issues on tariffs. Number one, Trump will defend tariffs as being, “Yes, I understand I am taxing Americans, but it is nothing other than a short-term tactic in order to cause a renegotiation of trade treaties.” Now, we can spend a whole show on the concept of trade treaties; that’s a whole other topic. But speak to the use of tariffs as simply a temporary—and of course, anything the government does is temporary quickly becomes permanent—but as a temporary tactic to accomplish the ultimate goal of opening up the Chinese markets to American goods more so than they are now.
Don Boudreau: First of all, Trump and more his advisors have sometimes asserted exactly what you said. They say, “Oh, no, our tariffs are really a tool to make trade freer in the long run.” There are a lot of problems with this claim. So let’s start with the recognition, by acknowledging that you can imagine a situation in which when Uncle Sam raises his tariffs, that causes foreign governments to lower theirs. But one problem with that is it never works in reality. History knows only a tiny fraction, a tiny handful of situations in which such things have worked. By far what happens in most such situations when one country raises its tariff is that the foreign country, rather than cutting its tariffs, raises its tariffs in retaliation. And of course, that’s what we see happening in the current situation. History lends no comfort to those who believe that unilaterally raising tariffs is an effective tool for eventually leading to lower tariffs. So that’s the first problem with it: it’s practically a non-starter; it just doesn’t work, in fact, it has the opposite effect of causing tariffs to rise even higher.
The second problem with this claim by the Trump people is that what Trump, judging by everything the man says and has said for more than 30 years about trade—he doesn’t understand trade—his ultimate goal is not to have Americans get as much as possible from foreigners in exchange for as little as possible. Trump’s goal, what he wants to bargain for, is for us Americans to export as much as possible and to import in exchange as little as possible. This is a bad thing for Americans, but Trump thinks it’s a good thing. So his goal, what he’s bargaining for, is something that I hope we never get, because what he’s bargaining for is for other governments to agree to accept more American exports and in exchange to send to us as few as possible of their country’s exports to us as imports. And that’s bad. So because Trump and his advisors do not understand trade—in fact, their understanding of trade is exactly backwards—what they are bargaining for is something that is misconceived and misbegotten. So this whole notion that Trump is playing this clever, never-before-played-as-brilliantly long game to make trade free and to bring about a regime of free trade, which is what Steve Moore mistakenly says, this is just nonsense. There’s nothing that Trump has ever said that indicates that he understands what free trade is and that he truly wants free trade. Trump is a mercantilist, which means he wants America to export as much as possible and to import as little as possible, which is just foolish. That means he wants Americans to work more and more hard to supply foreigners with goods and services in exchange for us to get from foreigners as little as possible. That’s the way to make America poor and not to make America rich, and that is true despite the fact that Trump does not understand that simple reality.
Currency Manipulation as a Sale [50:01]
Bob Zadek: Now, there’s another concept as we are trying to help people better understand phrases that find their way into the discussion all the time. Another phrase that is so misleading is the concept of what is called currency manipulation. Manipulation sounds shady, underhanded, somewhat vaguely dishonest. But manipulation is nothing other than—let’s take China as an example because they’ve been accused of currency quote “manipulation”—isn’t that nothing other than the Chinese government dictating that every Chinese manufacturer must sell their product for less? Which means every time China manipulates their currency downward vis-a-vis the dollar, all of the stuff we buy from China gets cheaper. So help us understand the concept of currency manipulation and why, if it happens, it’s a good thing for Americans, unless I am missing something.
Don Boudreau: No, you’re not missing anything at all. Let’s begin with the fact that, for better or worse, we live in a world that is unavoidably one of currency manipulation. Almost all currency—putting aside cryptocurrencies and things like that—almost all currencies used today are issued by central banks. And the whole purpose of a central bank is to manipulate the money supply of that country or region. So the Federal Reserve, by its very nature, for example, is a currency manipulator. Its whole purpose, or its main purpose, is to consciously decide what the supply of money should be, which is to say what the value of the dollar should be. Same is true for the European Central Bank, same is true for the central bank in China. And so for one government to accuse another government of currency manipulation is kind of hypocritical, since all governments necessarily engage in currency manipulation as a matter of fact.
Now, of course, what people like Trump who complain about currency manipulation mean—and you referred to it—is that somehow these foreign governments are keeping their money supplies too high, and so the value of their currency is too low relative to the dollar. And they somehow think this is bad for Americans. But Bob, as you point out, it’s exactly backwards. If it’s the case that by some means the Chinese government manages to keep the value of Chinese currency artificially low—whatever that means—compared to the dollar, then that means Americans get more for our dollars than we would otherwise get. That’s good! I like it when I go to the store and the prices are low. I get more for my dollars when I go to the supermarket, when I go to the department store, when I shop on Amazon.com. I’m not made worse off by getting more for my money; I’m made better off. And the same is true if the seller happens to be someone in China. If we can get more for our dollars, we’re made better off, not made worse off by that fact. There are obviously a handful of merchants in America who are made worse off, but the same is true, as I alluded to earlier, domestically. If my supermarket sells at lower prices than some competing supermarket, that competing supermarket is made worse off because it’s less likely to get my business. But that’s good for me; it’s good for the consumer. So to the extent that foreign governments manipulate their currency in ways designed to promote those countries’ exports, that is good for us. It is not bad for us. That means we get more for our dollars. We should thank and applaud them for doing that rather than criticize them and begrudge the fact.
Bob Zadek: Don, I’m smiling because of two things you said. Number one, you talked about the accusation that foreign governments are causing their currencies to be artificially low. How can you use the concept of artificial when it’s all arbitrary to begin with? There is no natural order of things of one currency to another. We’ve left the fixed exchange rates back in 1944 or whenever. So there’s no such thing as artificially low when it comes to a currency; it is what it is. And number two, when China manipulates their currency downward vis-a-vis the dollar, imagine how we smile when we walk into the mall and we see a sign: “Storewide Sale! Every product 10% off.” This is a country-wide sale. It’s like China saying, “We are having a sale on everything made in China. Every product 10% off.” It’s a country-wide sale. We should be yelling “Whoopee! Let’s run to the store and buy Chinese goods before they change their mind.”
And Don, we have a minute left, so just respond briefly if you can and then tell our friends how they can follow your writing at Cafe Hayek.
Don Boudreau: So I blog every day at Cafe Hayek. It’s www.cafehayek.com. It’s named after the great late Austrian economist Friedrich Hayek. And it’s a lot of trade, but I try to write for a non-professional economic audience. I try to avoid jargon, I certainly don’t do any math. I try to write for ordinary people to help them as best as I can understand basic facts about economics that everyone should know but that are typically overlooked and discarded in public policy discussions.
Bob Zadek: And Don, I will just advise our listeners in the 30 seconds we have left that your blog should have a Surgeon General’s warning that it is addictive. When you start giving us links, I start to click the links, and before I know it, the calls are backing up, my clients are angry at me because I’m sucked into all of your links. So to our friends out there, it is addictive. I invite you to read Cafe Hayek every single morning. Don, thanks again for being on my show this morning and for sharing your wisdom. Please have a nice Sunday.
Don Boudreau: My pleasure, Bob. Thanks.
Bob Zadek: Thank you. Bye.