The sand is shifting again in relation to allegiances between global powers in an effort to secure free trade and point tariffs in one direction; China. President Trump’s recent swing through Europe left many wondering whether relations with Europe were dinged, as Trump launched his financial attack on NATO countries not holding up their monetary weight. Other than Larry Kudlow, the President’s chief economic advisor, you would be hard pressed to find support for any kind of tariff initiative.
We have seen how small business has rejected such tariffs, alluding to higher costs of goods sold. At the other end of the spectrum, large automakers are crying foul at how much damage tariffs would cost, which ultimately would be passed on to the consumer in the form of much higher car prices. Academics will tell you that applying tariffs on trade has never resulted in positive economic growth for the levying nation. Politicians as well feel the sting from their constituents who understand that tariffs will have deleterious effects on them.
The economics of free trade denotes that the economies in both the EU and the U.S can experience faster growth rates. Free trade enables companies to concentrate on manufacturing goods and services where they have a distinct comparative advantage, a benefit widely popularized by economist David Ricardo in 1917 in “On the Principles of Political Economy and Taxation.” By expanding the economy’s diversity of products, knowledge and skills, free trade also encourages specialization and the division of labor.
Economist Milton Friedman stated, “The economics profession has been almost unanimous on the subject of the desirability of free trade.” Despite this, experts have largely been unsuccessful in efforts to promote free trade policies. One reason behind this perhaps is the rhetoric from President Trump on currency manipulation. He has been critical of the Chinese central bank and its role in reducing the value of the yuan. In theory the Ricardian and Friedman principles will work, but the invisible hand of laissez-faire economics is not always transparent, thus a perfect real-world economy free of all barriers can hardly exist.
In an effort to make America great again, President Trump has brought to the forefront difficult issues that have been suppressed by previous policy makers. President Trump and his administration are trying to emphasize that their trade policies, using tariffs and other measures to pressure countries to make concessions, will soon yield gains beyond the pain. “I think we’re well on our way to resolving a lot of these trade issues,” Treasury Secretary Steven Mnuchin told CNBC in a recent interview. The pendulum of trade is still swinging, but moving closer to that of advantage America.