Losing allies, higher prices possible with U.S. protectionism

Americans are beginning to pay more for what we buy, the result of high tariffs levied under a policy meant to protect jobs by making foreign goods more expensive. 

Even without this policy, unemployment is historically low. The U.S. already enjoys a favorable balance in services and receives hundreds of billions of dollars in investment from outside the country. 

But President Trump focuses only on the balance of trade in goods.  If the U.S. buys more from a country than it sells, he wants to even out the balance by reducing imports.  He has launched protectionism, an approach gradually and successfully abandoned by industrialized nations since World War II.

Protectionism has been used to help new countries develop some of their own production before facing competition with long-established economies.  After the American Revolution, the U.S. adopted protectionist policies, which were reduced over time.

In 1929, the U.S. returned to massive protectionism.  High tariffs were a major cause of the Great Depression.  " 'Make America Great Again' shouldn’t mean 'Make America 1929 Again,' " Nebraska GOP Sen. Ben Sasse said last week. About Trump’s policy, he said bluntly, “This is dumb.”

Mark Carney, the Canadian who is Governor of the Bank of England, argued, “This focus on goods trade … is not the right focus in a hyperconnected world where most of the economic activity, most people work … in the service sector.  In other words, Trump should look beyond trade in goods.

Perhaps the most important word Carney used to help understanding of why the 1929 approach won’t work was “hyperconnected.”  National economies are no longer isolated but are linked in thousands of ways.  People care more about the cost and quality of goods and services than about their country of origin.

If you are reading this column in the print edition of a newspaper, you may pay more or get less newspaper thanks to a tariff increase of as much as 32 percent, slapped on the paper from Canada on which it is printed.  U.S. newsprint production is in the West, so newspapers in the eastern U.S. must pay more to keep importing from Canada.

Of course, some trade is unfair.  China should be blocked from stealing trade secrets – called the theft of intellectual property – and using them to produce exports that will be sold in the very countries that were robbed.

Greater care is needed to prevent China from forcing companies to disclose their secrets before being allowed to do business there.  Similarly, Chinese researchers and “students” here must be more carefully monitored. 

Labor unions and environmentalists are justified in objecting to trade deals from countries keeping pay low and causing pollution from which Americans may suffer.  Such problems can be targeted without tossing out entire trade relationships, especially with close allies.

The U.S. is on less solid ground when it targets foreign government subsidies for some industries.  This country is now the world’s largest oil producer, and oil companies get vast government breaks.  Coal is supported, despite its related pollution.

Another problem in levying higher tariffs on trade is that such moves may harm broader American relationships with important allies.  The problem with steel is Chinese overproduction, but higher tariffs hit Canadian steel, because depending on that country supposedly threatens national security.  If that’s true, we are really alone.

Even worse, other countries are retaliating by increasing their tariffs on U.S. exports.  That leads to a trade war in which each round of retaliation leads to another.  American jobs are lost when exports are cut and also when handling imports is reduced.

There’s an alternative to imposing tariffs with the risk of a trade war with friends.  Instead of buying less, sell more. Carney suggested it would be better to lower barriers on trade in services instead of raising them on trade in goods.  And the U.S. could emphasize trade promotion more rather than focusing on tariffs.

At this week’s meeting of top finance officials from the major industrialized countries, other countries expressed their “unanimous concern and disappointment” with U.S. tariff increases on steel and aluminum.  The major decline in trade relations with allies could affect cooperation in other areas. 

American trade policy is pushing other countries into closer alliances and economic relationships with one another as their links to the U.S. decline.  Once that happens, it may be difficult to restore the leading American role, not only in trade.

Continuing current trade policy, like any other government action, will have costs.  The first will be higher prices, but it could cost the U.S. some allies.