The American people have now voted Donald Trump for their president-elect on a promise that he will make America prosperous—by restricting trade and making it “fair”. Among other things, he threatened to “trash” NAFTA, the North American Free Trade agreement. While freedom of trade is not the only thing that affects prosperity (and is only one of the many things about which Trump is wrong), it is among one of the most important and has significant implications for business and prosperity.
Why is free trade so fundamental to successful business and to our prosperity? The two functions of business are production and trade of goods and services, such as energy, cars, computers and medicines, insurance policies, and restaurant meals, among many others. For companies to maximize profits—to create wealth—from producing such material values, they must be free to trade with whomever they want. They must be free to produce goods and services wherever they can do it at the lowest cost (of labor and other inputs) and sell them wherever there is demand (ability and willingness to pay) and where they can obtain the best price the market is willing to pay.
What happens when governments increase protectionism and restrict freedom of trade, as Trump has promised to do? Companies move their operations elsewhere (as many American companies, including Apple, have done, to avoid the high corporate taxes in the United States), to escape the higher costs and curtailed demand in the United States. To bar them from leaving, which Trump also threatened to do during the election campaign, would be unconstitutional, as it violates the right to liberty. And if companies stay and have restricted access to markets outside of the country, their profits and even survivability are reduced. The prosperity of Americans will decline, hurting the poorest people the most.
In an excellent informative column, Mark Milke gives the factual evidence of the harms of protectionism and benefits of free trade. Presenting the evidence against protectionism, he cites the Smoot-Hawley Act of 1930, which imposed higher tariffs on 20,000 imported goods. The bill increased consumer prices in an economy that was already shrinking after the government-caused stock market crash of 1929. Other countries retaliated with tariffs of their own, decreasing demand for American goods. Unemployment went up significantly.Protectionism is not a recipe for prosperity–free trade is.
Protectionism is not a recipe for prosperity—free trade is.
Consider the evidence Milke cites: “…in the past 20 years, in inflation-adjusted terms, U.S. manufacturing output has increased by 40 per cent. Also, the U.S. economy now produces twice as many products as it has in any year dating back to 1984” (according to research by the Foundation for Economic Education in Atlanta). This increased productivity, thanks to technology and free trade, has translated into fewer American manufacturing jobs but has increased prosperity nevertheless, meaning more opportunities to those willing to retrain and work in other industries.
On a global scale, free trade has reduced poverty in an unprecedented scale—an continues to do so, as the poor become productive, increasingly prosperous consumers for global goods in open markets. Writes Milke, citing recent research: “… moving from more restricted trade to more open trade benefits all consumers, but some more than others. …higher-income consumers around the planet gain 28 per cent in their purchasing power when free trade expands. … for the bottom 10th of consumers: a 63-per-cent increase in real purchasing power.”
If Donald Trump truly thinks that he will ‘create’ jobs and increase prosperity by closing American borders to trade (and to immigrants), he is wrong. It is the global free trade that creates opportunities for prosperity, through a division of labor and free flow of capital and labor. Companies will invest where the costs are the most advantageous and workers have the requisite skills, and sell globally. This will mean job opportunities but also require retraining and upgrading of skills, as new innovations and business models—think robotics applications, 3D printing, Amazon, Apple, Netflix, PayPal, Uber—emerge, fueled by freedom to trade. (Manufacturing jobs everywhere will shrink as labor costs go up and robotics will be used increasingly).
Far better prosperity-enhancing action would be to increase the freedom of markets in all the ways the President can, with a likely supportive Congress: by cutting the corporate income tax, dismantling business regulations, and freeing—not restricing—trade. By doing that, Trump would be well on his way to deliver on his election promise to “make America great again.”