A Reality Check on U.S. Trade Policy and National Economic Welfare

What is the economic justification for the Trump Administration’s use of tariffs against China and other economic blocs and countries in trade negotiations? Not simply that tariffs bring in revenue and add jobs for Americans as the current administration states.

In the 18th and early 19th centuries, Great Britain supported free trade because its industry was the lowest cost in the world. Adam Smith’s 1776 “Wealth of Nations” is the classic work supporting Great Britain’s free trade policy. The tariffs and other trade restrictions against Great Britain worked in the USA and Germany because their domestic industries flourished by greatly improving their productivity and bringing down costs. These were the necessary conditions for the tariffs and other trade restrictions to be justified on economic grounds. The current trade war, so far, lacks the conditions necessary to justify a prolonged period of tariff protection.

If the United States cannot within 5-10 years, offset lower labor costs in areas like Asia, Mexico, Latin America, Eastern Europe etc. with much higher labor productivity (or automation) here at home, it cannot justify the current trade wars marked by rounds of tariff escalations and retaliatory tariffs. Such a tariff policy will leave Americans worse off. It may be doing so in some cases already.

The current wage differentials between China (India and other less developed countries) and the United States are so enormous, that no level of tariffs would allow the manufacturing of goods in the United States to be commercially successful here or globally at current U.S. wages and levels of labor productivity. The United States needs to radically improve its overall infrastructure and raise labor productivity across all manufacturing and not simply escalate tariffs if it is to succeed commercially in its own and global markets. Automation is without question the major way to do this.

Signs are developing that the current trade wars are a double-edged sword. There are no private or public sector efforts visibly underway to offset today’s superior competitiveness of other countries in most manufacturing areas. We have the tariffs, but the protection is not being used to strengthen American competitiveness in the areas needing improved cost competitiveness. The case for free trade is unassailable on economic and mathematical grounds. With gridlock between the Congress and the Administration, we are rapidly squandering the remaining time available for a restrictive trade policy to work today the way it did when our new nation’s industries were infant industries, not increasingly obsolete ones.