The Flawed Criticism of Trump’s Tariffs

President Trump wants to put America back on track. Throughout the nation’s successful history, the free trade idea has fallen on deaf ears as Americans took their fate into their own hands. This was what the struggle for independence was all about. The spirit that made America great is still vital to keeping America great. Since the classical liberals and the transnational corporations that use their theories for cover reject the nation as the standard for policy, we should reject their criticism out-of-hand as irrelevant and dangerous.

By William R. Hawkins l March 19, 2018

Joined by steel workers, President Trump signed orders imposing new tariffs on imported steel and aluminum

The knee-jerk response from some quarters in opposition to President Donald Trump’s placement of tariffs on steel and aluminum imports has died down somewhat, though the liberal media delighted in reporting dissent from Republican sources. A look at the arguments advanced by trade policy critics reveals how weak and shallow is the “thinking” behind such protests. These arguments for “free trade” have been made since the end of the 18th century by supposedly “enlightened” thinkers whose visions for the future have been made into hash by events in the real world. Yet, their sophistries continue to lure the naive into fantasy land.

One of the most prominent critics was Sen. Orrin Hatch (R-UT) who issued a statement which read in part “This is a tax hike on American manufacturers, workers and consumers. Slapping aluminum and steel imports with tariffs of this magnitude is misguided. It undermines the benefits that the new tax law provides and runs counter to our goal of advancing pro-growth trade policies that will keep America competitive in the 21st century global economy.” The appeal to consumers to join the “free trade” movement is an old one. Democrats used it in the 19th century to oppose tariffs that helped domestic capitalists; only later did it dawn on them tariffs also protected the jobs of those employed by the capitalists. The tariffs imposed by President Trump were actually quite modest: 25% on steel and 10% on aluminum. They are, hopefully, enough to change the location of production back to the U.S. where there is unused capacity. A number of plants have announced they are reopening production lines.

By focusing on “cheap” consumption over robust production, Sen. Hatch’s analysis is completely backwards. No person, firm or nation has ever gotten rich by consuming. You get rich by producing and selling, which generates the income used for consumption (among other things, like investing). To consume without producing is to live on debt, which is not tenable in the long-run. Yet, this is what America has been trying to do, running up huge trade deficits ($796 billion just last year). The deficit measures how much American money is going to support economic activity and job creation overseas rather than here at home.

Tariffs and Tax Cuts Support Growth — Trade Deficits Undermine It

Economic theory argues for trade to balance in order for all “partners” to benefit. But foreign governments have no desire to balance trade with America, since the surpluses they run by capturing part of our market expands the foundation of their economies. It also gives them the capital to buy up American assets, giving them even more sources of wealth. That is how one progresses; build, sell, reinvest the profits to expand – and one declines by falling victim to the reverse process; close factories, buy imports and liquidate assets to pay the bills. Spendthrifts do not prosper in the long run even if they think they are getting a bargain.

Hatch’s claim that “free trade” is a pro-growth strategy for America is false. It does not make us competitive; it makes us vulnerable to the competitive strategies of rivals. We do not have a global economy; we have a global battlefield, where nations vie for the largest share of wealth and power they can acquire. Laissez-faire only means others will make the decisions that will determine the outcome of this competition. With President Trump giving priority to expanding the military and modernizing America’s infrastructure, both of which will require lots of metal inputs; it is important that spending on these projects stimulate the U.S. economy and not be diverted overseas.

The crisis in steel and aluminum is the result of the construction of excess capacity in a number of foreign countries (e.g. China, Brazil, India, Korea, Turkey, and Vietnam) and the desire in the European Union to keep their capacity. The battle for export markets is about who will have to adjust and cut back their capacity. President Trump’s action is to protect the American industries from being the ones that have to cut back. President Trump is not starting a trade war; he is reacting to one that was already being waged in markets across the globe.

Sen. Hatch’s reference to the recent tax cuts fails to consider that the motive for the most important element in the Republican plan was the cut in the corporate tax rate. This cut was made for international competitive purposes. A rate of 35% was much higher than that of America’s trade rivals. Reducing the rate to 21% did not make the U.S. tax the lowest, but it put America back in the running as a more attractive place to set up shop. The corporate tax cut and the tariffs on steel, aluminum and earlier on solar panels are consistent. Their aim is to shift the location of economic activity in favor of America.

The International Economy Runs on a Competitive Model

The Heritage Foundation opposes tariffs or even the thought of international economic rivalry by arguing that the aim of “Trade policy should not be about tipping the scale toward one U.S. industry or interest group over another—it should focus on lowering trade barriers.” This is a reflection of the transnational interests that fund this supposedly conservative think tank which, in this regard, is not interested in conserving national economic strength. Instead, it favors setting transnational corporations “free” to pursue their interests regardless of the consequences to any national interest. This is the heart of the larger philosophical dispute set off by the classical thinkers over two centuries ago.

As historian Roy Porter has written, “The philosophes mocked narrow-minded nationalism…. They liked to view themselves as men of the world….an international republic of letters.” They pontificated a number of bizarre notions. Thomas Paine, finding that “war is the system of Government on the old construction…. Man is not the enemy of Man” listed among his revolutionary proposals that all warships be converted into merchant vessels. Writing in 1821, John Stuart Mill claimed, “There is, in the present advanced state of the civilized world, in any country having a good government and a con¬siderable population, so little chance of civil war or foreign invasion, that, in contriving the means of national felicity, but little allowance can be rationally required of it.” Prominent free trade advocates like the French economist J.B. Say and the British radical Richard Cobden also dismissed any need to worry about national security because ties formed by commerce between individuals without regard to borders or allegiance would eliminate international conflict.

Despite the nearly two centuries since Mill predicted a world peace that has never materialized, the dismissal of competition between nations – in which differences in economic capacity plays a vital role in determining the balance of power, continues to be heard. Consider the National Foreign Trade Council (NFTC), which represents transnational corporations run by those who think of themselves not as a republic of letters, but of personal avarice. The NFTC has objected to President Trump’s tariffs, arguing, “The use of a sweeping national security justification will lead many countries to retaliate against our most competitive exporters and will undermine our legitimacy in the WTO, NATO, and other global alliances.” NFTC has never shown regard for our global alliances or any other elements of geopolitics. It has opposed sanctions on Iran to deter its nuclear weapons program and on Russia for its covert war in Ukraine. Trading with the enemy is considered a right by the NFTC, because it doesn’t consider anyone an enemy whose checks clear. What they do not want is national security to be placed above their business plans and in any way constrain their pursuit of profit.

Free Trade and Appeasement: From Nazi Germany to Communist China

This is not new. In the 1930s, there were British business leaders who thought trading with Nazi Germany would ensure peace. As a Federation of British Industries memo stated at the time, “Captains of industry had long recommended that meetings of businessmen . . . might perhaps be a suitable means of bringing about a return to common sense.” An Anglo-German Society was founded in 1935 backed by such major firms as Dunlop, Unilever, British Petroleum, and the British Steel Export Association. A 1936 memo from a London banking house quoted in The Appeasers, by Martin Gilbert and Richard Gott, speaks of “Nazi moderates” – Germans with whom the bankers thought it possible to “come to an understanding and co-operate” so as to avoid another war. This kind of arrogance leads corporate executives to believe they are not only outside society, but above it. Yet, no statesman who takes his duty to defend the security and prosperity of his country can accept the advice of such corporate “men without a country.” Tragically, having worked on Capitol Hill for many years, I can attest to the sad fact that too many members of Congress, mainly Republicans, accept as gospel whatever a business lobbyist-donor tells them.

The competitive nature of trade is shown, ironically, by what the critics believe is one of their strongest arguments; that other countries will retaliate, if we impose tariffs and start a “trade war.” This argument only carries weight if one believes our foreign “partners” have escalation dominance; which they do not. Global Times, the hardline voice of the Chinese Communist Party, said on March 15, “China has to brace for trade wars both in strategy and mentality. Beijing needs to give Washington head-on blows in a similar manner and must not be soft.” Tough talk, but China is in a weak position. Its $375.2 billion trade surplus with the U.S. presents a “target rich” environment for additional tariffs, if Beijing escalates by retaliating. Trade is a much more important element in China’s smaller economy. The movement of industry back to the U.S., or even to third party countries, will improve the balance of economic strength between Washington and Beijing.

Beijing claims it can outlast President Trump because American democracy is so unstable. The Communist Party just removed term limits from President Xi Jinping and endowed China’s strongman with the status of “core thinker” on a par with Mao Zedong. President Xi can now pursue his aggressive, expansionist agenda on a long-term basis. Perhaps the Chinese are right. If they can maintain the mercantilist policies that have promoted high growth while Americans forget that they once used the same tactics to build the most advanced industrial economy in the world, then the U.S. will continue to lose ground as free traders disarm the nation’s trade policies and let rivals run rampant.

Beijing can count on the elite of the American business community for support. The U.S. Chamber of Commerce has come out against any further tariffs against Chinese-made goods. Chamber President Tom Donahue pays lip-service to China’s unfair trade practices, especially those that limit American access to the Chinese market, but he does not want to disrupt the importing of “cheap” Chinese goods by his member companies. The Heritage Foundation has long taken a soft line on Beijing, opposing “using broad trade measures to target the actions of one country.” Yet, China poses a growing military threat to America and its allies. Beijing has been helped immensely by the money and technology given to it by Western capitalists; fools who thought they could profit from helping Beijing become a great power.

Learning from History to Protect Our Future

The Economist, long a voice for classical liberalism and free trade, did a mea culpa earlier this month regarding the application of its pet theory to China. Its column “How the West Got China Wrong” retraced how “Western leaders believed that giving China a stake in institutions such as the World Trade Organisation (WTO) would bind it into the rules-based system.” Wealth would lead to democracy. But the magazine had to admit, “Today the illusion has been shattered. In reality, Mr. Xi has steered politics and economics towards repression, state control and confrontation.” There is “strong evidence that the West’s 25-year bet on China has failed” argues the editorial, which warns, “The longer the West grudgingly accommodates China’s abuses, the more dangerous it will be to challenge them later.” Unfortunately, those firms which have staked billions on the liberal theory are not ready to write off their wagers. They will play the role Xi hopes, working to undermine White House policy to protect their red chips.

President Trump has quoted President Abraham Lincoln’s warning, “abandonment of the protective policy by the American government [will] produce want and ruin among our people.” Anyone who has seen the empty factories and blighted communities in a Middle America plundered by the “outsourcing” of production overseas has seen the proof that Lincoln was right. President Trump wants to put America back on track. Throughout the nation’s successful history, the free trade idea has fallen on deaf ears as Americans took their fate into their own hands. This was what the struggle for independence was all about. The spirit that made America great is still vital to keeping America great. Since the classical liberals and the transnational corporations that use their theories for cover reject the nation as the standard for policy, we should reject their criticism out-of-hand as irrelevant and dangerous

William R. Hawkins, a former economics professor and Congressional staffer, is a consultant specializing in international economics and national security issues. He is a contributor to SFPPR News & Analysis, of the Conservative-Online-Journalism center at the Washington-based Selous Foundation for Public Policy Research.