Donald Trump, via Wiki­media Commons

Within the current climate of trade talks, there are many common mis­con­cep­tions that arise to justify pro­tec­tionist policies. It has long been accepted that NAFTA — the North American Free Trade Agreement — is the gold standard for free trade deals. And though it’s not perfect, Pres­ident Trump should not dis­mantle it.

Trump and his base rely on several catchy talking points when arguing for pro­tec­tionism. And without an under­standing of eco­nomics, they might seem rea­sonable. At his rallies, Trump often repeats sta­tistics about the U.S.’s trade deficit and uses rhetoric that leads voters to believe trade can be harmful to our country. He also reg­u­larly refers to the U.S.’s indus­trial base as a hol­lowed out artifact. This is why the U.S. is better off without NAFTA, according to Trump. He said he’s dis­man­tling it in pursuit of a “better deal” — one that just so happens to attack indi­vidual liberty and undermine the economy. 

The trade deficit is often the first talking point pro­tec­tionists refer to when arguing for tariffs, or other bar­riers to trade. Running a deficit is not a bad thing. As an example: Just about every Hillsdale student has a trade deficit with the college. Each student imports one four year edu­cation from the college. Assuming the stu­dents don’t work for the college, the stu­dents export nothing to the college. This means that by the end of each school year, stu­dents who pay full tuition are left with a trade deficit of $38,578 with the college. Stu­dents often fund this by taking on per­sonal debt. Despite this, stu­dents decide that the investment in the edu­cation we receive is more ben­e­ficial than the debt we take on to fund it. We do this because we hope to work for a company that we can export our labor to in the future. 

Sim­i­larly, American indi­viduals make the decision to spend money abroad on imports. The dif­ference is the money spent abroad must return to the United States. This is the case because people only accept dollars because they expect to be able to spend them in the U.S. For­eigners spend these dollars on one of two things. U.S. exports, or U.S. invest­ments. The exports are sub­tracted from the deficit, the invest­ments are not. This means every dollar in the deficit is a foreign dollar invested in our capital. By having a deficit more people are investing in the U.S. than the U.S. is investing abroad. This is ben­e­ficial to the United States. People abroad are putting more money into U.S. capital because we are a safe investment. This shows sta­bility in our economy, rather than under­mining it. 

Trump would also have voters believe trade is ben­e­ficial to one side and harmful to the other. This isn’t true. Since Adam Smith’s “Wealth of Nations,” the eco­nomic com­munity has accepted that spe­cial­ization and trade create wealth for the trading parties. The founders under­stood this, ensuring that the states could freely trade with each other without tariffs.  The founders did, however, create national laws that were pro­tec­tionist in nature.  This is one of the biggest logical incon­sis­tencies of the founding. Since each state has its own economy, some states will run a deficit with others. Using pro­tec­tionists’ logic, states should place tariffs on the other states they run a deficit with to build up their domestic industry. But this would never work. Instead, states take their com­par­ative advantage and spe­cialize in indus­tries that cost them the least and then trade for goods other states have an advantage in. In doing this, everyone becomes wealthier. America is better off when its cit­izens are free to trade with others without gov­ernment inter­ference. This is true whether or not the people we trade with are in our country or not.

Pro­tec­tionists also argue the U.S.’s indus­trial base is being com­pletely hol­lowed out and wages are decreasing. A quick look at the numbers show this to be false. According to data from the St. Louis Federal Reserve, the total indus­trial pro­duction index of the U.S. has increased by 58 percent and the American real median household income has increased by more than 14 percent since NAFTA was enacted. More numbers from the Cato Institute reveal that man­u­fac­turing within the U.S. increased to a record $2.24 trillion in 2017, reflecting a 1,936 percent increase in man­u­fac­turing pro­duction since 1953. Tech­no­logical improve­ments have con­tributed to this radical increase in the pro­duc­tivity of labor, to be sure, but foreign investment has helped that, allowing for more capital and tech­no­logical inno­vation.

Rene­go­ti­ating NAFTA to balance the trade deficit is not nec­es­sarily ben­e­ficial to the U.S. If Trump con­tinues his pro­tec­tionist policies, more harm than help could come to domestic pro­ducers and con­sumers. Free trade may only be a policy, but it is a policy built on indi­vidual freedom and self-interest. When properly directed, these two things lead to better out­comes for all Amer­icans and for the world. That is to say: I’m not buying what Donald Trump is selling.

Aaron Houtari is a senior studying eco­nomics and applied math­e­matics.

  • Alexan­derYp­si­lantis

    NAFTA was orig­i­nally passed in January, 1994. In the 24 years since then trade products and indus­tries have changed dra­mat­i­cally. Any rea­sonable person can con­clude that NAFTA is in need of updating and revision. Surely you’re not sug­gesting Trade Policy is cast in stone and never needs updating? This is all the nego­ti­a­tions with Canada and Mexico are attempting to achieve.

    As for the Tariffs, as a free trader I’m opposed them in prin­ciple. But in the special case of China what is the USA to do regarding their MASSIVE intel­lectual property theft? Our com­panies rely on inno­vation to maintain their com­pet­itive edge, what are we to do with nations who won’t protect copy­rights and patents?

    The last 3 Pres­i­dents-Obama, Bush and Clinton-all tried and failed to get China to reign-in intel­lectual property theft. We used the insti­tu­tions and processes of the WTO to accom­plish that and the Chinese laughed it off. Trump chooses to use Tariffs where dis­cussion and trade insti­tu­tions have failed. I wish him the best and hope­fully he’ll succeed-and it’ll end up a win-win for both Chinese and US con­sumers.

    I have a great deal of money tied up in mutual funds, stocks and bonds. That’s my nest egg for retirement. There isn’t a doubt in my mind that the stock markets indexes would be 10 – 15% higher right now if not for the con­tinual drumbeat of Trade Wars and Tariff threats. But even so, I’ve put up with the reduced per­for­mance in our markets on the basis we’ll resolve long-standing trade problems with China. And that the markets will make up for that, sooner or later. Let’s all hope the tariffs can end, sooner rather than later.

    • Aaron Houtari

      My point is less that NAFTA is an untouchable policy, but rather that it is a very good one, and the reasons Trump is trying to rene­go­tiate it as well as the goals of his rene­go­ti­ation are faulty. Beyond this com­pletely leaving Canada out of the nego­ti­a­tions and poten­tially demol­ishing the rela­tionship we have with them is not ben­e­ficial.

      I agree that intel­lectual property theft is an issue, but it is a law enforcement issue, and I can guar­antee the cost of our stolen intel­lectual property is less than that of the tariffs. If there is con­clusive econo­metric data to say that tariffs will help with the issue I would be more than willing to agree, but i don’t think hurting people who import heavily from China within the United States is the way to deal with it. We need to use the courts that the country and the world has set up in order to deal with this issue and not start a trade war.

      Overall, I don’t think Trump is a bad pres­ident, but rather that he has good policies and some bad. I also wish him luck with the policies he does pursue, but I am not afraid to crit­icize him when I think his actions are too imme­diate.

      I am glad to share an agreement that even­tually all the tariffs should go away, I just think that little by little they are going to get worse espe­cially as the upcoming elec­tions come into play. If Trump doesn’t win in 2020 then we are going to be in a very rough position in the nego­ti­a­tions.

      Thank-you for reading my article. I appre­ciate the time that you spent with your reply as well.

      • Alexan­derYp­si­lantis

        1. America did not leave Canada out of the NAFTA nego­ti­a­tions, they them­selves backed away and let Mexico nego­tiate with us. Why? They’ll have to answer that, I’m not too impressed with Justin Trudeau, frankly he’s in WAY over his head.

        2. Intel­lectual property theft may be a ‘law enforcement issue’, but the insti­tution which has been tasked with resolving those dis­putes is the WTO. Unfor­tu­nately, while they Chinese belong to the WTO they ignore it’s rulings when it doesn’t suit their interests. Clinton/Bush/Obama attempted to use the WTO to ‘police’ the Chinese on IP theft, to no avail. Trump is, instead, using punitive tariffs. I wish him luck, nothing else has worked.

        3. I agree Trump is a mixed bag thus far. His tax reform bill was absolutely nec­essary and an excellent accom­plishment. His emphasis on uti­lizing the law on illegal immi­gration policy is also well done. He’s done great things on Energy policy, including the Key­stone Pipeline. The economy is booming, unem­ployment is way down and wages are growing. No question Trump is FAR more respected than Barack Obama by many-if not all-foreign leaders. He has had one excellent SC Judge appointed and another nom­i­nated-and soon to be appointed. On the downside, he has been rather unpleas­antly vin­dictive in some of his per­sonal battles. I some­times cringe when I read his tweets in the morning, he needs to cool it on those. He has been aggressive in his denun­ci­ation of the Press, but then again-they are almost com­pletely opposed to him and never give him fair treatment.

        4. Tariffs hurt everyone, including US con­sumers. Trump is gam­bling that at this point in time they will hurt China a lot more than us. I hope he is right, we’ll never be in a better position to con­front the Chinese than we are right now. If we delay, we lose all our leverage. Let’s hope the tariff war does not last long and we reach an equi­table res­o­lution soon.