"The U.S. is now basically in a position where we had our horse, the Chinese had their horse -- but our horse has been put out to pasture and is no longer running in the race," said Eric Altbach, vice president at Albright Stonebridge Group in Washington and former deputy assistant U.S. Trade Representative for China affairs. "It’s a giant gift to the Chinese because they now can pitch themselves as the driver of trade liberalization." (...)

NPR featured an unintentionally funny piece this morning on Donald Trump's views toward the EU and free trade. The guest, former US ambassador to the EU Anthony Gardner, rightfully criticized the president's view that "protection will lead to great prosperity and strength," and called for continued global engagement by US companies and consumers. But he revealed, perhaps inadvertently, what political actors mean by "free trade."

Specifically, Gardner expressed great skepticism towards the prospect of the US striking a bilateral free-trade deal with the UK, supposedly one of Trump's top objectives in his upcoming meeting with new Prime Minister Theresa May. Free-trade agreements are complex, Gardner informed us, and negotiating one will be neither easy nor quick.

Why? To economists, free trade means the absence of government interference with trade: no tariffs, quotas, subsidies, or other interventions, explicit or implicit. To politicians, "free-trade" means a complex set of managed trade policies (Gardner even referred to the solemn obligation to "write the rules for global trade," which in his mind is something either our government does or a foreign government does). Which imports will be taxed, and at what rates? Which exports will be subsidized, and at what levels? How will labor, environmental, and social policies be enforced by domestic and foreign governments? For government officials, countries are engaged in "free trade" when they agree on a complex package of explicit and implicit taxes and subsidies such that neither has a special advantage over the other, nor is disadvantaged relative to some other trading partner (however such advantages are defined).

As Murray Rothbard once wrote,

"In truth," as Rothbard noted, "the bipartisan establishment’s trumpeting of 'free trade' since World War II fosters the opposite of genuine freedom of exchange." The Bretton Woods organizations (the World Bank and IMF) and modern trade agreements are based on the mercantilist ideas that exports make a country wealthy, imports make it poorer. (Indeed, Gardner in the interview above worried specifically that a collapse of the EU would make it harder for US manufacturers to sell their goods in Europe, but said nothing about the advantages to US and European consumers of a reduced supra-national government). That's why governments have little interest in genuine free trade.

About fifteen years ago I was part of a delegation of US officials on a fact-finding mission to Singapore, in advance of a potential US-Singapore bilateral free-trade agreement. (We all have skeletons in our closets.) One of our tasks was to interview US businesspeople operating in Singapore to see if they thought the Singaporean government was unfairly subsidizing local companies at their expense. The idea was to use this as a bargaining chip: "If you don't stop subsidizing your domestic manufacturers, we won't stop subsidizing ours." (Turns out the Singaporean government wasn't doing much to help its own companies, so the point became moot.) It didn't seem to occur to anyone that, even if the Singaporean government were protecting its own firms, at the expense of its own consumers, the US would not be better off by subsidizing its own exports to Singapore, as mercantilist theory claims. The idea that the US should simply refrain from interfering in peaceful exchanges between US-based and Singapore-based entrepreneurs, investors, and consumers — i.e., support for free trade — was simply too crazy to contemplate.

hen the U.S. imposed a tariff on magazine paper from Canada in 2015, workers at a financially troubled paper mill in Maine cheered. Less than two years later, their jobs are gone and the mill is closed.

It wasn’t supposed to happen that way. Tariffs, protectionists tell us, help the domestic economy, or at least certain industries. The truth is that restrictions on imports almost always backfire. By suppressing competition, they make domestic industries less efficient; they raise prices both on imports and the competing domestic products; they don’t spur us to fix our own problems or products but instead, they make us sloppy; and they hurt consumers who face higher prices and often fewer choices.

With so many people calling for tariffs or quotas or other protectionist restrictions on trade these days, perhaps we’re overdue to re-learn some important lessons.

The Importance of Trade

Why trade at all? If we really wanted to, we could behave like a national Robinson Crusoe—keeping foreign goods out and making everything ourselves. But people trade because they want to acquire things that are cheaper or better or even unavailable at home. The fundamental principle of trade is that both sides to the transaction benefit or they wouldn’t have traded in the first place.

The most painful lesson in America’s trade history came in 1930. To combat rising unemployment at the start of the Great Depression, Congress and the President imposed the highest tariffs in a century. The thought was that if we made those foreign imports more expensive, then Americans would buy more domestic-made goods and thereby put people back to work. But foreigners retaliated by imposing tariffs on the U.S. A full-scale trade war resulted.

Trade is a two-way street. Closing the door to imports closes the door to exports. If foreigners can’t sell here, they can’t earn the dollars they need to buy here. When the 1930 tariff caused Americans to buy fewer imports, foreign sellers stopped buying American goods. As a result, American agriculture, dependent then as now on exporting farm produce, suffered plummeting prices and huge losses in the 1930s.

Americans last year imported about $2.3 trillion in physical merchandise. More than half of the total were not finished goods. Rather, they were raw materials, capital goods, industrial supplies and component parts for things like automobiles. Make all those things costlier through tariffs and you simultaneously hurt American industries that buy them. A tariff on foreign goods should be regarded as a consumption tax on Americans citizens and companies.

What About Fair Trade?

China has manipulated its currency to help its exports but does anybody think America’s central bank doesn’t manipulate the dollar?

Foreign governments don’t play fair, you say! Yes, others from time to time do impose tariffs on us. But retaliating in kind is liking cutting off your nose to spite your face. It just makes things more expensive to us.

Yes, China has manipulated its currency to help its exports but does anybody think America’s central bank doesn’t manipulate the dollar, as well as interest rates? And when China reduces its currency’s value to help its exports, the flip side is that we get a lot of stuff from China at cut-rate prices that we can use to both save money and make our own industries more competitive. American automakers may not like cars coming from Japan but they sure like cheaper parts coming from China or wherever.

Freer trade causes short-term issues and necessitates adjustments in production and employment, for the same reasons the automobile challenged the buggy industry. But imposing costs and barriers to trade creates problems of its own. Trade is, and always has been, a vitally important way to strengthen an economy and give choice to consumers.