Donald Trump: Time to Rethink Free Trade (and the Ghost of Smoot-Hawley)
Donald Trump’s candidacy raises more urgent issues than the Donald’s sometimes poor choice of words: Trump has sparked a less-noticed but far more important debate about the future of our nation’s economy, the sustainability of American life, jobs, and a decent salary for Americans. This ultimately fuels the economic strength of the United States that makes it possible to defend our nation and its people.
It’s about Smoot-Hawley. I am talking about the myth, the ghost, the coat hanging on the back of the door that looks like a monster in the dark, the nightmare that makes uninformed and gutless politicians wake up with the sweats at 3:00 AM. It’s not the Smoot-Hawley Tariff Act of 1930 which is our problem at hand. It is the fairy tale, the fantasy, the primitive superstition of Smoot-Hawley that is driving our nation’s horrible, self-destructive decisions on economics.
Donald Trump, Mike Huckabee, and other GOP candidates want to create jobs, raise family incomes, and strengthen the U.S. economy by keeping jobs and factories here at home. Remember all that moaning and groaning about out-sourcing, the loss of manufacturing jobs, jobs going overseas, and that “giant sucking sound” (Ross Perot)? Well, Trump actually wants to do something about these problems and expand jobs here in the United States.
But that is protectionism! Blasphemy! Economic giants Larry Kudlow and Arthur Laffer are blasting Trump in columns and on radio. Critics are shouting that Trump’s protectionist policies will drive the country into another depression. It is a deep-seated belief in official Washington, and especially among Republican elites, that favoring U.S. workers, controlling the borders, and enforcing immigration laws damages economic growth. So the elites give lip service to what voters want while actually pushing for free trade and open borders. Trump isn’t playing the establishment’s game.
Washington’s elites are traumatized by a fairy tale. In 1930, after the crash on Wall Street, Congress raised tariffs (taxes or duty) on products traded internationally by the protectionist Smoot-Hawley Act. And then the Great Recession got worse.
So that’s like millions of people who take aspirin die. They take aspirin. And then they die. But Smoot-Hawley did not cause the Great Depression any more than aspirin causes people to die. In fact, both aspirin and protectionism actually help, not hurt. No, washing your car really does not make it rain.
Actually, even those who sit around the campfire telling Smoot-Hawley ghost stories do not claim that high import tariffs or policies favoring U.S. workers cause a recession. Instead, the economists’ catechism is that Smoot-Hawley sparked a vicious trade war. It was, so they say, the furious international exchange of recriminations that contributed to the Great Depression. But Trump’s whole point is that U.S. Government negotiators are just stupid when it comes to handling our international trade relations. Trump’s argument is that we don’t handle those issues very well.
It is well-documented by now that the Federal Reserve turned the 1929 stock market crash after a speculative bubble into the Great Recession. The newly-created Federal Reserve incompetently and dramatically shrank the nation’s money supply, starving the economy and collapsing banks. The enduring myth that protectionism causes a recession or depression has been the boogeyman hiding under politicians’ beds for decades. America’s economic policy, especially internationally, has been corrupted, poisoned, and twisted by the irrational fear that protectionism causes depressions.
Economic conservatives insist that all trade is good. All trade? Always? So do conservatives believe in selling $100,000 luxury cars for $500? You could sell a whole lot of $100,000 cars at $500. Business would be brisk and the customers would surely appear happy. But is that what conservatives mean by trade is good, business is good? Is that what we mean by free trade? Losing money in most international transactions? One of my favorite business jokes is sure we are losing money, but don’t worry, we’ll make it up on volume.
Trump proposes reining in the sheer stupidity of the U.S. Government in international trade deals. The U.S.A. is bleeding from a thousand cuts because our trading partners extract lop-sided deals that benefit those other countries and harm the United States. Trump lambasts U.S. officials who are lousy negotiators and let other countries walk all over us.
The U.S. Department of State and the U.S. Trade Representative have sold out the country for decades. Trump correctly diagnoses the real problem: the United States government is simply stupid. Foreign countries are ripping us off and playing us for suckers And one reason we fall for it is our fear that economic growth requires giving benefits in trade to other countries that they do not give to us in return.
We need to consider some things: First, the original U.S. Constitution was written so that tariffs (taxes or duties on imported products) and excise taxes were the only source of income to finance the entire U.S. Government. Our Constitution is premised on tariffs imposed on trade and other excise taxes. Washington politicians cannot seriously argue that high import tariffs are a bad idea, when they are a part of our Constitution’s foundation.
Second, developing a product in the U.S.A and then transplanting the manufacturing line to another country is not free trade. That is theft of intellectual property and proprietary trade secrets. Innovation in the U.S.A. births an American product using American know-how and engineering. Then the factory is simply relocated after the design is perfected in the U.S.A. That is not what economic theory means by free trade. The U.S.A. bears the costs of development while the foreign country reaps the profits but escapes the costs. The profits are shifted to the other country without the corresponding costs. A product invented and developed in the U.S.A. should not be considered like a product invented in another country.
Putting a high tariff on U.S. products that have been transplanted matches economic theory that the company’s private costs must equal the costs to society as a fundamental assumption of economic theory. If a private company can shift its costs to American society as a whole, then the marketplace is distorted and economic theory fails (by its own terms). Even the most conservative, Austrian School, economist holds that a private business must shoulder the full societal costs of its own activities for economic theory to be valid.
A note in full disclosure: time permitting, your author will be collecting petition signatures for Ted Cruz to get Cruz on Virginia’s primary election ballot. Donald Trump is a wrecking ball to a corrupt political system that sorely needs a wrecking ball. But my analysis is about what is best for our country, not because I am in the tank for any candidate. (Published with permission from the author, “Trump vs. Smoot-Hawley’s Ghost”, originally appeared HERE)
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