Sometime tomorrow, or perhaps today depending on when I get this post completed, President Trump will announce tariffs on imported steel and aluminum. Rather than engage in a knee jerk response that free trade is always the best approach I think it would pay to be a little more circumspect about the outcomes. First, is free trade beneficial to all parties? Well yes and no.
In general it is the case that free trade is beneficial to the participants to the trade, and we know this because the exchange occurred. Does this guarantee that all industries in the two countries will benefit? Absolutely not. In all likelihood the total gains from trade are beneficial to both countries, but some industries may suffer from the introduction of competition from abroad. This absolutely creates the opportunity for problematic adjustments and even regional economic problems going forward.
One problem with this is that it usually represents an ex post change in evaluation criteria. Cost-benefit calculations are an important part of this type of policy discussion, but not all policies are meant to benefit, nor can they benefit, all industries or groups. Whether you are talking about trade, or subsidizing milk, mandatory vaccinations it is not the case that every group benefits from every policy. That option does not generally exist in the real world. Does allowing foreign steel or aluminum into the country drive domestic producers out of business or adjust scale operations? Almost assuredly. Does this lower price benefit manufacturers using these products as inputs? Again, almost assuredly.
The basic explanations of the gains from trade do in fact hold, but the public relations mistake has been to sell these gains as universal, or near universal. The oversell on the part of the President’s administration is that it is easy to win a trade war, and that there are clearly better deals to be had. We can be strategic with trade relationships, but this is a complicated game theory problem and not one the administration is clearly mapping out in terms of all the possible outcomes.
As an example, if you look at the exports from North Dakota a large percentage of them go to Canada and Mexico. If we back out of NAFTA this potentially disadvantages North Dakota producers for the sake of different industries in other parts of the United States. Why is this not a part of the larger discussion? If we impose tariffs on steel and aluminum, this will give cover to domestic producers to raise price that may improve their sustainability, but likely mean we pay more as consumers. Is this an unimportant part of the discussion? As someone asked me many years ago, why were they supposed to be upset that China made lower cost products and sold them in the U.S.?
My response was that as a consumer they should not be upset. If we changed that frame of reference the answer might change. That choice of frame drives an understanding of who benefits and we loses from any policy decision. Maybe the Trump administration should provide general guidance so we can understand exactly where they feel the benefits and costs occur and we can understand the rationale for the action.