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A view from an economist: Trade war

Dr. Jackie Brux

"People have no idea how badly our country has been treated by other countries . They've destroyed the steel industry, they've destroyed the aluminum industry, and other industries .... trade wars are good and easy to win."—President Donald Trump, March 2018.

Oh my gosh ~ Did Trump really say that stuff? Trade wars are good and easy to win!? Did you hear a collective head bang among economists and business leaders? Granted, it's so easy to be ignorant on a Twitter account ~ there's no one to proofread it. BUT THIS ONE BOGGLES THE COLLECTIVE MIND.

Let's be constructive and review what every student who has taken Economics 101 knows: you cannot create jobs through trade restrictions. I'm talking about Trump's planned tariffs on steel and aluminum; his threats of tariffs on automobile imports; his rambles about tariffs on solar parts and dishwashers. But mostly, I'm talking about one of the stupidest things anyone (including Trump) has ever said about trade: trade wars are good and easy to win.

No, they're not. There are no winners. In a nutshell, you may save a few jobs in the U.S. steel, aluminum, and even the dishwasher industry, but you will lose jobs elsewhere that will by far surpass any job gains. Here are the reasons:

First, the major economies agreed decades ago to allow our currencies to be determined by market forces, i.e. demand and supply. It was assumed this would make it obvious to world leaders that there is nothing to be gained from trade restrictions and trade wars. Suppose we place a tariff on steel imports from Mexico. This means our demand for Mexican steel falls, as does the demand for Mexican currency with which to pay for it. This decreased demand for pesos pushes down the value of the peso relative to the U.S. dollar. A drop in the value of the peso relative to the dollar also means a rise in the value of the dollar relative to the peso.

When the value of the U.S. dollar rises relative to other currencies, U.S. exports become more "expensive" to foreigners, and they buy fewer of them. This means production and employment in the U.S. export sectors fall.

Secondly, the more obvious reason for U.S. job loss is that foreign countries will retaliate by placing tariffs on their imports of U.S. goods. We've already heard the astonishment and outrage of global leaders as they threaten retaliation.

So — besides job loss in our export sectors (in the Midwest, think farming), our consumers will pay higher prices, not just for the imported product, but also for domestically produced counter-parts (think cars and solar panels). Furthermore, our industries that use steel and aluminum as part of their production process will suffer. For example, the Wisconsin beer industry will face higher prices for aluminum, reducing their profits, causing their production to fall, and lay-offs in the Wisconsin beer industry to result.

Two other cautions: First, free trade is based on international competitiveness (a.k.a. comparative advantage). A country benefits by producing goods in which it has a comparative advantage and importing products in which it does not. For example, if the U.S. has a comparative advantage in corn production and Mexico in sugar cane production, specialization and exchange (trade) creates efficiencies in both counties. This is the beauty of free trade: it creates greater efficiencies among trading countries, thereby expanding production, consumption, and jobs in each trading country.

Secondly, the U.S. steel, aluminum, and automobile industries are highly concentrated, and even more so with trade protections. They use this to their advantage by coordinating decreased industry production levels that drive up their prices and profits. Employment falls. [In the 1970's, the U.S. used trade restrictions in the automobile industry to "save American jobs". With fewer competitors, the U.S. automobile industry became even more concentrated, enabling automakers to restrict production (and jobs) to drive up prices and profits. The U.S. automakers benefited, but U.S autoworkers lost!]

Overall conclusion: All economists, liberal and conservative, agree that Trump's views on trade are, sorry, stupid. They would create serious harm to the U.S. economy, including its producers, consumers, and workers.

This column will address the economics of current policy issues. Writer Dr. Jackie Brux is an emeritus professor of economics and founder/director of the Center for International Development at UW-River Falls; and author of the college textbook, “Economic Issues and Policy.”