Yes, free trade is good.
On Thursday, The Journal of American Greatness, an outlet devoted to President Trump’s purported philosophy, printed an article by Spencer Morrison, a law student and editor-in-chief of the National Economics Editorial. The article is an attempt to rebut the chief conceits of free trade, and in particular, knock down my objections to President Trump’s fondness for tariffs. It’s titled “Why Ben Shapiro is Wrong on Free Trade.”
The reality is that my arguments on free trade have been supported by every major free market economist in history, but I do appreciate the central billing.
Morrison’s argument in favor of tariffs begins with an analysis of a three-minute segment of video from my daily podcast in which I talk about the flaws in tariff-based economics. As I’ve actually done full episodes on tariffs, and written extensively about them, I wouldn’t say that the video is my fulsome argument against them, but it’s sufficient for purposes of discussion. Morrison first misrepresents my argument in the video: he says that I’m pro-trade deficit, when in reality, I merely explain in the video that trade deficits are an irrelevant economic statistic (neither good per se nor bad per se) and that some countries that run trade deficits do just fine, while some that run trade surpluses don’t. Morrison takes that to be me stumping for the beauty of trade deficits — which, again, I don’t do, since I think that statistic is irrelevant. As does economist Thomas Sowell:
In general, international deficits and surpluses have had virtually no correlation with the performance of most nations’ economies. Germany and France have had international trade surpluses while their unemployment rates were in double digits. Japan’s postwar rise to economic prominence on the world stage included years when it ran deficits, as well as years when it ran surpluses. The United States was the biggest debtor nation in the world during its rise to industrial supremacy, became a creditor as a result of lending money to its European allies during the First World War, and has been both a debtor and a creditor at various times since. Through it all, the American standard of living has remained the highest in the world, unaffected by whether it was a creditor or a debtor nation.
Morrison also claims that I’ve called Trump a flip-flopper on free trade. I have assuredly never done that — it’s perhaps the one policy Trump has been most consistent on throughout his career. Consistently wrong, that is.
Finally, Morrison gets to his central argument: comparative advantage doesn’t work when capital is mobile. Here’s Morrison:
Comparative advantage is an elegant theory, but it too is domain-specific—it only works when certain preconditions are met. For example, capital must be immobile for the theory to apply. Shapiro ignores this crucial limiting factor, and applies comparative advantage to just about everything. This is his root error. … For example, comparative advantage suggests that the key to getting rich is to specialize production, regardless of what you produce. That is, a country with a comparative advantage in growing soybeans should focus on growing more soybeans, while a country with a comparative advantage in manufacturing semiconductors should focus on manufacturing more semiconductors. In either case, this supposes, their relative wealth will correlate with the degree of specialization, as opposed to the complexity of their production. This is objectively wrong.
To support the contention that it is objectively wrong to embrace comparative advantage, Morrison cites two studies. First, he cites a paper from economists Ricardo Hausmann, Jason Hwang, and Dani Rodrik, claiming that countries that manufacture automobiles develop faster than those that grow bananas, and another from Stephen Redding of the London School of Economics stating that economic growth is path-dependent — that if you develop a particular industry that is more sophisticated, other industries grow up around that industry, making for a more powerful economy. The result, Morrison claims, is that the United States should enforce tariffs on behalf of its most technologically advanced/important industries, to prevent other countries from undercutting those industries and reducing us to comparative advantage in nail-clipper manufacturing. Morrison argues:
America’s advanced industries—those most likely to generate new technologies, and drive long-run economic growth—are waning. Detroit is moving to Mexico City, Boston is moving to Bangalore. Data from the Brookings Institute confirm this: some 36 percent of America’s advanced industries have already moved abroad, and that the number of “innovation capitals” located in America has dropped by two-thirds since 1980. Bottom line: more and more key technological advances will be made abroad, rather than here at home. Without high tariffs to level the playing field and reverse this process, America will soon be on the outside-looking-in, buying the future we should have been building.
There are several points to be made here. The first is the most important: the argument Morrison makes is for total state control of the economy. If we can simply pick the best industries and subsidize them, we should obviously do that. Why not just embrace mercantilism?
This doesn’t work for a few reasons.
First, of course countries that develop higher-profit sectors will have higher growth rates than those that rely on low-profit sectors. And of course the decisions you make now have impact on the future development of industry. But this has nothing to do with tariffs. The Hausmann, Hwang, and Rodrick paper doesn’t mention tariffs once. Neither does the London School of Economics paper.
Again, there’s a reason for that. There are two problems with tariffs: first, you cannot tell which sectors will be the most profitable, because you cannot tell the future, which means that government is far more likely to “lock-in” particular pathways than to spur future growth; second, most market “lock-in” is self-correcting — we develop new products on a routine basis that are different in kind than the products that preceded them. Horses and buggies dominated the market, and we built roads in a certain way to accommodate them, and we built houses near those roads. Then cars came along and blew all of that out of the water.
If we could see the future, we could have simply picked which industry upon which to focus. We couldn’t. And in 1947, the smart money would have been in using government to tax all other industries to dump money into manufacturing, for example. That would have been totally wrong. In 1947, according to the Bureau of Economic Analysis, manufacturing represented 25.4% of GDP production in the United States; finance represented 10.3%; agriculture 8%. If we had been creating tariffs to protect the “most important” industries, we’d have put our money on manufacturing, finance, and agriculture. But we’d have been wrong. By 2016, manufacturing represented 11.7% of GDP; finance represented 20.9%; agriculture represented 1.0%.
That’s why central planning generally fails. As Paul David of Stanford University writes:
From the foregoing it may be seen that a proper understanding of path-dependence, and of the possibilities of externalities leading to market failure, is not without interesting implications for economic policy. But those are not at all the sorts of glib conclusions that some critics have alleged must follow if one believes that history really matters – namely, that government should try to pick winners rather than let markets make mistakes. Quite the contrary, as I began trying to make clear more than a decade ago. One thing that public policy could do is to try to delay the market from committing to the future inextricably, before enough information has been obtained about the likely technical or organizational and legal implications, of an early, precedent-setting decision.
And this is the point. Impoverishing your profit sectors through tariffs in order to dump money into non-competitive industries impoverishes your country as a whole. Economic flexibility requires that the government not impede the free flow of capital within industries. That’s true when capital is mobile as well — if we invest our money in Chinese tech because it’s cheaper and better (even if they’re subsidizing that industry!), that money comes back to the United States in the form of capital account surplus.
What about the idea that if you’re a banana-producing economy, you’ll never become a software-producing economy? There’s no proof of that. Private lenders pay the freight for the development of new industries. If your government picks and chooses which industries to prop up, you’re now suggesting that centralized knowledge of the economy is better than decentralized knowledge, which is the very basis of a socialized economy as a whole. Why not dump the pretense and just suggest that the American taxpayer subsidize specialized industries to the tunes of billions? Tariffs is merely a dishonest way to achieve the same goal.
But according to Morrison, path-dependency is inevitable — we have to choose one industry or another, and if we don’t choose the right one, we’re screwed. That’s simply not the case.
Professors Stan Liebowitz and Stephen Margolis have demolished the myth of path-dependency as a serious market failure in virtually all circumstances. The argument that you made a mistake by investing in bananas and now nobody can overcome that mistake even though your country has a veritable cornucopia of Bill Gates types is unsupportable. In a free economy, cash finds skill, and investors find investment opportunities.
According to the same Brookings Institute Morrison quotes, America’s advanced industries sector “continued to expand between 2013 and 2015 despite global headwinds.” They also note that out of 14 nations with competitive sectors and development in 2010, the U.S. ranks second behind Norway, and Norway is only ahead because of its energy development. According to Brookings, “The average American advanced industry worker was about 2.5 times more productive than workers in Hungary and between 50 and 70 percent more productive than advanced industry workers in Italy, Sweden, and Germany.” While Brookings mentions that certain advanced industries are outsourcing, there’s no evidence that the losses in the advanced industrial sectors are happening because of America’s trade policy rather than because of our own tax and regulatory policy at home. The report cited by Morrison doesn’t mention trade or tariffs once.
Morrison’s central argument is flawed: immobility of capital isn’t a make-or-break for comparative advantage. In fact, Morrison is parroting an argument made by Chuck Schumer and Paul Craig Roberts in 2004. They argued that factor mobility — meaning the free movement of capital and labor — mean that some countries win and others lose, rather than everyone gaining through free trade. But as Robert Murphy of the Mises Institute points out:
The per capita consumption of a group of individuals will be lower if an external penalty (e.g. a tariff) is placed on their ability to trade with people outside of the group. This is true whether or not the tools with which these people work, or the people themselves, are allowed to leave an arbitrary geographical region.
Tariffs are taxes. Taxes reduce consumption and make life worse for consumers, who are also producers in other industries. The government is not a magical god with the capacity to correctly predict which industries are worth preserving. To believe otherwise is to embrace the chief fallacy of central planning. Which is why literally every economist outside of Trump’s defense orbit opposes tariffs and sees them as rotten policy.