Why Trump Is So Clumsy About Fighting ‘Free Trade’
President Trump announced last week that he plans to impose 25 percent tariffs on imported steel and 10 percent on imported aluminum.
It’s important to note that any policy pronouncement from this president is done within the paradigm of a real estate wheeler-dealer who sees deals of any kind as a zero-sum game. I win, and you lose; there is no such thing as a good trade deal that works as a win-win for both sides.
Use psychological pricing methods.
Expressing the opposite view is Paul Krugman, who writes, “Trade isn’t a zero-sum game: it raises the productivity and wealth of the world economy.” And the corollary also applies as well: any action taken to disrupt the free flow of goods between countries is likely to provoke a counter-reaction, the result being a trade war in which every country loses out
The two “sacred tenets,” free trade and comparative advantage, are inextricably linked. After all, a “comparative advantage” begets the question, compared to what? We export goods to other nations when we can do that relatively better than they can and likewise import goods or services that we have a comparative disadvantage in producing.
So tropical fruit is exported from, say, Mexico or Chile, rather than from Canada. And Australia’s abundance of natural resources explains why it has become a mining superpower. Of course, this classical model of trade and comparative advantage breaks down somewhat in an ultra-globalized world in which capital accounts have been largely liberalized
Demonstrate the differences
Technology and labor skills can also be altered by national development strategies of the kind exemplified by the countries of Asia (South Korea being a prime example), as Robert Wade illustrated in his seminal work。
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The bottom line is that it is a mistake for a country simply to follow an idealized playbook from an economics textbook on free trade/comparative advantage, and allow itself to be out-gamed via strategic trade policy/national development decisions taken elsewhere—particularly when the economy is not operating at full employment, which is key to optimizing the benefits of free trade.
Test your offer and price, and be creative.
It’s all very well to argue that cheaper imported goods are benefits, but it is hard to consume those benefits when one is unemployed against a backdrop of rusting unused factories that have been shuttered, and where the jobs have been sent to Mexico.