A Black Friday report on tariffs

Free trade makes America wealthier.

But it doesn't make every American wealthier. Some people lose their jobs.

The Upper Midwest turned red again.

College classmate Jim Stodder was dismayed by Trump's victory, but he is clear-eyed that some of Trump's proposed economic policies, including tariffs, have some value in dealing with the socioeconomic problems that have emerged in the past three decades. He sent me his perspective on tariffs, free trade, and the principle of comparative advantage. He taught international economics and securities regulation at Boston University and maintains research affiliations there. He received a Ph.D. from Yale in economics. He has his own website: www.jimstodder.com

Guest Post by Jim Stodder

                         Global Trade in a Post-Liberal World

For over a century, rich countries have pushed the attractive idea that Free Trade leads to Peace and Prosperity: less conflict and better living standards for all. As I will try to show, there is something to this idea. But like most things, it was wrong in its most extreme form.

For an example of how wrong it could be, consider the idea that free trade between countries improves everyone’s welfare. Free trade in cotton and textiles did benefit the U.S. and Britain in the 18th and 19th centuries – but not the slaves who picked that cotton.

Or take the Victorian belief that rapidly growing trade between the world’s richest countries meant war between them had become impossible. This "Pax Brittanica" ended with WWI.

Yet the basic idea behind free trade and its elder brother, the division of labor, is sensible. Take two people: you and your spouse. Let’s say you are married to the greatest basketball player on Earth. Let’s call them Steph Curry or Caitlin Clark, depending on your preferences.

Say you and your spouse must manage sneaker endorsements. Some division of labor is a no-brainer if you are better at, say, the business-accounting side. But what if he or she is better at both? Clearly, they are 1,000,000 times better shooting hoops or making endorsements. But what if they’re also 10 times better at the accounting?

Steph or Caitlin should still leave the accounting to you because their time is limited. Better than earning 10 times more than you in accounting is to have them earn a million times more in endorsements.

Accounting is what economists call your “comparative advantage.” Even a country that is bad at everything can do better by specializing in what it is comparatively less-bad, and trading for what it would be even worse at making itself.

Comparative advantage based free trade has led to huge increases in human well-being. Since the 1970s it has leveraged unskilled labor to pull 800 million people in China and 400 million in India out of poverty. That’s 1.2 out of 3 billion total – more than a third. Never have more lives been so improved in such a short time.

Of course, that same free trade led to closed factories and blighted communities across America. But economists never claimed free trade is good for everyone in each country – just good for each nation as a whole. It’s a potential gain for everyone, but only if each nation redistributes those gains. (Funny how conservative free trade advocates leave out that small detail.)

So that’s the good, bad, and the ugly of free trade. But let’s go back to your superstar spouse. What if they are super-human? What if, instead of an insanely high fixed level of productivity, they get better and better, and are nowhere near full capacity? An hour accounting doesn’t take away from their time on basketball -- they have more than enough time to do both, and they’ll be even better tomorrow. Then it's more efficient to let them do everything – if they’re still willing to support you! (A spouse may be, but a foreign country may not be so willing.)

This is what’s called “Increasing Returns”, the “New Trade Theory” associated with Paul Krugman, who won a Nobel Prize and writes for The New York Times. It can still lead to cooperation.

For example, the U.S. and the EU still sell each other things within the same industry, like different kinds of automobiles or pharmaceuticals. Germany gets better at BMWs while we get better at Teslas.

But it can also lead to greater conflict between countries, as we see with EVs. Both the U.S. and EU now put tariffs on EVs from China. They are way too cheap and too good – we’re not competitive. We think we can build world-class EVs, but not if China captures all the Increasing Returns.

The potential for conflict is even greater with a master-technology like AI, one that leads to dominance in all the others – like early U.S. advances in electricity. You want to be the country furthest up the hill of Increasing Returns. Tariffs against the other guys’ product may be part of this.

Do Increasing Returns mean we are doomed to Increasing Conflicts? No, but the easy optimism from the era of liberal free trade is over. Liberal optimists believed that market forces always right the global ship and made every country better off. This was always overstated. It ignored forces not usually subject to market forces, like pollution.

But free trade is dangerous for crucial technologies of the information age. Like AI, most show Increasing Returns. Most advances in AI have come from massive expansions of scale. Instead of the radical decentralization of a “perfectly competitive” market, master-technologies like money creation, weapons of mass destruction, climate control, and AI can be responsibly governed only if they are radically centralized and subject to democratic controls -- on a global basis.

This is not the message we want to hear, but such master-technologies require some form of world government. This must be much stronger than the weak consensus of the United Nations, as in “We can cooperate, but only if we all agree.”

Donald Trump is right that the old order of liberal free trade is broken, and tariffs may sometimes be needed in a dangerous new world. But we can't build a new order with tariffs on everything, Increasing Returns or not. Trump’s arrogance will only increase chaos and conflict. Recall Teddy Roosevelt’s advice on diplomacy: “Speak softly and carry a big stick.”.Trump seems to prefer the opposite.

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