Bilateral trade deals a ‘yuge’ waste of time, resources

A recent Financial Times lead headline read, “Trump puts protectionism at heart of U.S. economic policy.” Is this hyperbole?

Perhaps, but then there are the notably blunt lines from the new president’s inaugural speech: “We must protect our border from the ravages of other countries making our products, stealing our companies and destroying our jobs. Protectionism will lead to great prosperity and growth.”  

{mosads}In truth, Trump is reviving policies of the Republican Party that went out with Herbert Hoover. Hoover, along with Calvin Coolidge and Warren Harding, had revived 19^th century Republican doctrine most associated with William McKinley.

McKinley had argued that protective tariffs produced the newly emerging giant industrial companies and higher wages for U.S. workers. The “Full Dinner Pail” was the slogan in his 1896 presidential campaign, and, later, Coolidge echoed this sentiment in the 1920s when he stated that “cheap goods meant cheap wages.” 

Much of this misguided philosophy was blown away during the Great Depression of the 1930s.

Both right-wing and left-wing economists agree, the Great Depression was not caused by the high tariffs around the world, but was deepened and prolonged by the protectionist trade walls implemented by other nations in response to U.S. protection.

By the mid-1930s, the “Rust Belt” was national, not regional, turning McKinley’s slogan on its head: “Tariff-induced expensive goods produced empty dinner pails.”

The postwar world was then infused with two beliefs — that the rampant protectionist policies of the 1920s and 1930s were not only economically disastrous, but also spawned the dictatorships that spread throughout Europe during that time.

Under U.S. leadership, an era of trade liberalization began and grew, first among the developed nations and more recently among less developed countries (particularly in Asia, but now with shoots in Latin America and Africa).

Despite the rhetoric from the left since the 1990s  — and now from the Trump wing of the Republican party — more open trade and competition, fostered in part by the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO), has increased the income of Americans and citizens of other developed countries.

Harvard economist Robert Lawrence calculated that foreign trade and investment added a net $1.00 to wages for U.S. workers in 2008.

There is no doubt, from countless studies, that more open markets and investment have been a powerful factor in decreasing world poverty from 40 percent in the early 1980s to 13 percent in 2013.

It is also true that not every sector or wage earner has benefitted equally and that China’s entrance into world markets did create at least temporary outsized dislocation beginning in 2000.

The multilateral trading system can stall at times, necessitating supplemental trade projects. Beginning with Israel in 1983, the U.S. has negotiated some 14 bilateral and regional free trade agreements (FTAs) with some 20 nations. 

According to the analysis of the Congressional Budget Office, these agreements have resulted in a small, but discernible, positive impact on U.S. productivity, trade and economic growth.

The economic impact has been relatively small because many of the FTAs were with small economies. That was about to change with the completion of the 12-member Trans Pacific Partnership (TPP) agreement.

Economic analysis projected that the TPP would result in an additional $130 billion in wage increases by 2030, along with a 0.5 percent increase in GDP above the baseline projections.

With the TPP, exports would increase $357 billion above projected estimates. These estimates, though larger than those for individual FTAs , are still relatively small.

The estimates would have increased in the future as South Korea, Thailand, Colombia and Indonesia fulfilled their decisions to join the TPP.

All of this demonstrates the serious mistake the Trump administration made when it decided to scrap the TPP, renegotiate the North American Free Trade Agreement (NAFTA) and go forward with only bilateral FTAs. 

As noted above, in economic terms, bilateral agreements have much less payoff to the U.S., though they have filled gaps in the past.

The Trump administration, if it desires to achieve equivalent TPP benefits, will have to slog through bilateral negotiations with a number of additional countries. For a highly (self) reputed “dealmaker” like Donald Trump this is a “yugely” inefficient option.

Finally, the new Trump tactics with regards to American corporations also harken back to the type of ugly, crony capitalism seen in the McKinley-Hoover years.

President Trump’s vows to reward companies for keeping uncompetitive plants and processes in the U.S., while punishing companies for continuing to build highly-competitive, worldwide supply chains, risks devolving the system into one laden with idiosyncratic, random authoritarianism and lawlessness. 

The question remains — will traditional U.S. checks and balances kick in at some point through Congress or the courts? Will the U.S. business community challenge the economic folly of presidential interventionism despite the risk of tweet attacks?

Hopefully, William McKinley and his robber baron cronies will be left to sleep peacefully in their graves; along with the deceptive “Full Dinner Pail” motto. 

Claude Barfield is a resident scholar at the American Enterprise Institute. He is a former consultant to the office of the U.S. Trade Representative. 

The views of contributors are their own and not the views of The Hill.