Anti-free trader Donald Trump is on a collision course with economic reality

 
Graeme Leach
Trump kisses Ivanka
Protectionist policies will hurt Donald Trump's voters (Source: Getty)

US presidential elections have always been imbued with protectionist rhetoric, most notably in the Democratic party primaries. What’s different in 2016 is the scale of it and the fact that it comes from the other side of the political aisle. The election of Donald Trump pitches political rhetoric against economic history.

Those who know their economic history will remember the protectionist Smoot-Hawley Tariff Act of 1930. The more things change, the more they stay the same. Whether it is yesterday or today, the same old myths are wheeled out, with the assertion that trade will destroy jobs, leading to higher unemployment and lower wages.

But these are the assertions of politicians. Economists see them as fallacies, refuted time and time again. Indeed, it is legitimate to argue that there is no example in history of trade liberalisation failing to increase prosperity.

Whether it is the case for unilateralism by the UK in the wake of Brexit, or the Abolition of the Corn Laws in the nineteenth century, the case for free trade is compelling. Let’s examine why.

Adam Smith argued that free trade is an important component of natural liberty, and that it would increase competition in the domestic market and thereby protect consumers from being exploited by higher prices.

Building on Smith’s work, David Ricardo advanced the Theory of Comparative Advantage, whereby he showed that it would be advantageous to a country to import some goods, even if it could produce them more efficiently. This profound insight has held for two centuries.

Read more: How free trade died in the US – and the same could happen in Britain too

Ricardo argued that international trade is driven by the opportunity cost of production, not the absolute cost. This is best illustrated by substituting the individual for a country. Hypothetically, I could be the best cleaner in the world, but I can produce greater overall income by focusing my time and energy on economics.

And let us be quite clear. There is overwhelming evidence that free trade improves economic performance by increasing competition in the domestic market. Trade disciplines domestic firms with market power, and simultaneously promotes productivity growth. Research also shows that a 10 per cent increase in trade leads to a 5 per cent increase in per capita income. More open trade policies are associated with higher per capita incomes.

One of the world’s leading academics on international trade is professor Douglas Irwin at Dartmouth College in the US. Irwin states that, “while there is no guarantee that trade liberalisation will increase the level of income or the rate of economic growth under all circumstances, the repeated finding of a positive relationship between them is more than just coincidence.” In other words countries with more open trade outperform those with more restrictive trade policies.

Read more: Repeat after me: Post-Brexit tariffs would primarily hurt UK consumers

President-elect Trump is on a collision course with economic reality. The protectionist policies he espouses will very likely result in lower not higher incomes for his supporters.

Free trade is under fire, with potentially grave consequences. Much will depend on the extent to which Republicans in the Senate and House of Representative oppose a Republican President. We live in interesting times.

On this side of the Atlantic, pursuing unilateral free-trade (zero tariffs on imports) in the wake of Brexit provides an opportunity for the UK to lead the world on trade liberalisation. The Special Relationship just got complicated.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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