Donald Trump and The Debate Between Free Trade and Protectionism

Trump signs executive order to formally withdraw from PPT.

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.

Pun intended.

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.

 

Works Cited:

 

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.

3 thoughts on “Donald Trump and The Debate Between Free Trade and Protectionism

  1. Well, written, nicely explained. I’m wondering, in this particular situation, if you come down on one side over another. You seem to understand the positions on each side (GREAT!), but does one have more merit at this point in time?

    • Sorry, if I seem a little wishy-washy with my stance here. When I was writing this I thought the goal was to strictly inform the readers about both sides of the argument, not necessarily take a side and defend it. I guess I got a little confused with your wording of “intervene” and “sounding off” back in the guidelines for writing these blogs. With that being said, I’m definitely a free trade guy. As a student of economics, I love to see when markets can act freely. Protectionism might only work with those specific set pre-existing conditions (extremely low interest rates and job loss). Because protectionism only works in in this one scenario, I’m definitely a fan of free trade.

  2. Somehow, I managed to comment on your “Hello World” post instead of this one, so I’ll paste it back in here.

    To start things off, very well done. Your article was both informative and easy to read. You picked generally reliable sources and used them effectively without extrapolating too much. As well, I didn’t feel like I was reading a textbook so much as a conversational piece of literature meant to stir conversation, so I believe you fulfilled the assignment quite well.

    While I think you did a good job explaining the differences between free trade and protectionism, as well as the historical pros and cons (though I must say The Great Depression reference was somewhat misleading, as that was caused by runaway spending on credit rather than a trade issue), the subject of your article was initially the TPP. As it was negotiated, the TPP was not a free trade deal. While it did lower tariffs and taxes on trade, it also engaged several countries who artificially manipulate the value of their currency and interfere in the markets of their countries in a way the United States almost never does. This means that the United States could end up undercut not by market efficiency, but by other signatory governments subsidizing industries to get ahead in the market.

    Another issue with the TPP is that it was never really about free trade. It was presented as such because in theory it does allow for freer markets, but as The Daily Wire’s Robert Kraychik noted in September of 2016, “in [an] interview with left-wing CNN’s Fareed Zakaria, President Barack Obama inadvertently acknowledged that the proposed Trans-Pacific Partnership (TPP) serves to consolidate increased economic regulation of its signatory states. Rather than lower economic barriers to commerce and trade, TPP will increase and consolidate regulations.” Obama went on to explain that “The answer [to inequality] rather, is to make sure [all signatories have] high labor standards. That all countries are accountable to their citizens in terms of things like minimum wages, worker standards, making sure that there is an education system that people can access.” To paraphrase, the goal of the TPP was not actually to create free trade, but to use it as a tool to spread liberal progressive ideals about labor to other nations in the Pacific.

    While on the surface that may not seem like an issue to those with the same ideals, it again comes down to what would actually happen in the TPP. While lower tariffs would suggest freer trade, there are major differences in ethics and tradition between signatories like the United States of America and, for example, China. American companies can rarely expect to be subsidized simply for the sake of making American goods cheaper in a global competitive market. China, on the other hand, has no problem subsidizing their steel industry if it will help put American steel companies out of business and take Chinese steel one step closer to a monopoly.
    Given the circumstances and the reputation of various signatory states in this deal, I would have to agree with President Donald Trump’s decision to withdraw from the deal.

    Source:
    http://www.dailywire.com/news/8895/obama-admits-tpp-isnt-about-free-trade-robert-kraychik

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