One of the first actions of the Trump administration was to formally back out of the Asia-Pacific Trade Agreement also known as the Trans-Pacific Partnership. In what is in line with Trump’s protectionist policy, U.S. Trade Representative Maria Pagan stated the United States does not wish to “become a party” for the other nations involved in the economic pact. Though controversial, Trump’s decision is not surprising.
But, to understand what this withdrawal means, first understand the debate free trade and protectionism. At the most basic level, free trade is the idea that countries should be able to trade, well… freely with one another. If you’ve taken Econ 102 or 104 here at Penn State, you’d know that trade can be mutually beneficial when countries specialize in producing only in what they are better at. This allows for the importation of cheaper goods and the ability for a country to consumer more than they can produce. The TPP would’ve helped perpetuate free trade amongst the member countries. Protectionism, on the other hand, is the belief the goods should be produced and consumed within the same country in the hopes that jobs won’t be shipped overseas. The thought is that if a country produces and consumes its own goods, jobs will stay within the country, lowering the unemployment rate and increasing average income. This can be achieved most easily by tariffs, or a tax on traded goods (This is what Trump plans to do in the future.) This would effectively increase the price of foreign goods, making them less desirable to relatively cheaper, home-made goods. This, however, leads to higher overall prices for goods with respective to the cheap, non-taxed foreign goods that could result from free trade. This puts more stress on consumers’ wallets, but the idea they will have more money to spend with higher incomes.
Most modern day economists support free trade, but notable economists have made great arguments for both sides of the argument. In his article, What Do Undergrads Need to Know About Trade? Paul Krugman, esteemed professor and New York Times columnist, supports the notion of free trade reasoning that free trade sits at the very basics of economics, and thusly, should not be tampered with. He cites a parable from a textbook written by James Ingram. The story goes that an entrepreneur is able to convert raw American resources into high-quality, cheap goods with a new secret technology. Though his method is secretive and his company puts many others out of business, he is hailed as a hero of industry for his innovative methods. Then, it’s found that his new “technology” was really him just trading his goods to Asia and buying cheap, foreign goods for a profit, and he is condemned as a robber baron and traitor.
Moral of the story? Trade is an economic function just like advancements in technology, it’s simply the perspective that people have that we are in competition with other countries (which we aren’t, we mutually benefit from trade.) that puts a bad taste in people’s mouths. Think about it this way, are McDonald’s and Samsung competitors? No, they produce two completely different, unrelated products. But, if you sell enough Big Macs you might be able to afford a new cell phone; two people can benefit when trading Big Macs and cellphones. It’s the same concept for
countries, just at a much bigger level.
Protectionism however, has been present in American history and has been quite successful as well. Look at the industrial revolution of the late 19th century and the roaring twenties. Both time periods have bustling economies in which America’s industrial power grew exponentially and high tariffs protected American industry. (This the same thing happening in China over the past few decades.) However, it is important to remember the roaring twenties was followed by the Great Depression.
Today, some economists agree with Trump that protectionism may be an important policy in bolstering spending and keeping jobs. In an article for The Wall Street Journal, Grep Ip explains that in certain economies where the interest rate is already extremely low, (I’m talkin’ about you America.) and jobs are being lost to foreign countries in free trade, central banks may not be able to lower interest rates enough to stimulate consumer spending. Ok, let me back up a little if that was confusing. Central banks, like the federal reserve, can raise or lower interest rates in order to increase or decrease consumer spending. If interest rates are lower, people are more inclined to take out loans, to buy homes, and to purchase more long terms goods that can stimulate economic growth. What Ip is saying is that in special situations where interest rates are extremely low, central banks can’t lower them enough to stimulate spending and make up for the loss of jobs. That’s bad. Protectionism therefore, would help balance out this unemployment to consumer spending ratio to form a healthy, goldilocks economy.
At the end of the day, the debate between free trade and protectionism comes down to jobs versus cheap goods and whether they can balance out the economy to have a healthy amount of unemployment (yes, that’s a thing) and consumer spending.
Needham, Vicki. “Trump Administration Formally Withdraws from Asia-Pacific Trade Deal.”
TheHill. N.p., 30 Jan. 2017. Web. 01 Feb. 2017.
Ip, Greg. “The Case for Free Trade Is Weaker Than You Think.” The Wall Street Journal. Dow
Jones & Company, 12 Apr. 2016. Web. 01 Feb. 2017.
Krugman, Paul R. “What Do Undergrads Need to Know About Trade?” The American Economic
Review, vol. 83, no. 2, 1993, pp. 23–26.