Peter Morici Blog | Benefits Of Free Trade Versus Team Biden’s Protectionism | TalkMarkets
Professor Emeritus, Robert H. Smith School of Business, University of Maryland
Professor Peter Morici is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in ...more

Benefits Of Free Trade Versus Team Biden’s Protectionism

Date: Wednesday, October 20, 2021 9:56 AM EDT

President Biden’s protectionism is a sure path to the poor house.

Free trade is no different than California, specializing in high tech, and New York in finance. It permits nations to focus on what they do best. Raising productivity, trade deals dating back to the Reciprocal Trade Agreements Act (1934) increase U.S. GDP by about $280 billion each year.

person using macbook pro on black table

Image Source: Unsplash

Free trade enables larger sales and bigger R&D budgets for technology leaders like Intel, Microsoft, and Apple. Those create dynamic gains that are the difference between GDP growing at 2.5 percent—as it did during the Trump expansion—and perhaps only 1.5 percent, and that dividend dwarfs the more immediate, visible gains noted above.

President Biden’s Middle-Class First trade policy keeps in place the Trump tariffs on Chinese goods. He wants tax incentives to purchase electric vehicles biased toward American-made cars, the federal government to only procure union-made E.V.s, and many other Buy America policies.

Washington’s coddling of Detroit and the UAW is an American case study in the pitfalls of protectionism. Tiny Tesla sets the pace globally for E.V.s, but G.M. can’t make a Bolt that does not threaten to set fire to your garage.

Now Mr. Biden wants to promote equity, address climate change and appease organized labor when setting goals and evaluating new trade agreements. That poses the danger of creating more industrial cripples like G.M., throwing all our trading partners in the same hamper as China.

U.S. policy has failed too many Americans by not creating enough good jobs in export industries and not adequately preparing enough young people in the skills required by those industries.

The benefits of free trade taught in economics classrooms since David Ricardo’s Theory of Comparative Advantage assumes balanced trade. The $700 billion trade deficit robs American workers of opportunities to move from low-wage jobs in industries like apparel to higher-value employment in activities like microprocessors, factory automation equipment, and artificial intelligence.

The United States has a chronic trade deficit thanks to the dollar’s status as the primary reserve currency. As the world requires more dollar-denominated assets, the Treasury prints bonds that ultimately pay for imports.

More important are China’s mercantilist practices and the inability of high schools and universities to recognize the demands of globalization.

The Chinese Communist Party makes no pretense of running a western market economy. It’s pouring massive subsidies and imposing market access barriers to accomplish self-sufficiency in semiconductors, artificial intelligence, and other cutting-edge industries—and where it can, dominate global markets too.

Our high schools overemphasize college preparation at the expense of vocational and enrollment in government-sponsored industry apprenticeship programs. Each year about half of the freshman class at U.S. colleges acquire debt but little else—they either drop out or take a useless major.

Critical race theory, other ideological obsessions, and simple lethargy are turning American universities into exploitation machines—preparing too many students for little more than serving coffee at Starbucks.

Terribly expensive and corrupt, we cannot solve America’s trade problems without reforming and un-“woking” higher education.

Without confronting China’s mercantilism, the world will devolve into competitive national industrial policies to foster high tech. And the sad news for the acolytes of protectionism and industrial policy that populate the Biden economic brain thrust is that China’s authoritarian-capitalism is better at that game than we are.

Regarding China, the essence of President Trump’s America First policy was to use tariffs and whatever other cudgels he could find to open the Chinese market. U.S. Trade Representative Tai’s review of our China policy offers little new and makes apparent Biden’s Middle-Class First policy concedes China will never change. It keeps Trump’s tariffs in place and promises negotiations that have failed in the past.

Trade policy should run on two tracks.

Foster closer ties with allies by rejoining the Trans-Pacific Partnership and negotiating a trade pact with the U.K., and use those as a wedge to finally complete a free trade agreement with the E.U.

Regarding China, tariffs—big ones—can have a purpose. Require licenses to import goods and services from China, issue those licenses to U.S. exporters for each dollar of goods sold in the Middle Kingdom, and let the exporters sell those licenses to U.S. importers.

That could be phased in by initially issuing import licenses greater than one dollar for each dollar of exports to China and gradually approach balanced trade over three to five years.

That would fix the bilateral trade deficit by law. If the Chinese can manage trade, so can we, and they need some lessons in the rule of law anyway.

Disclaimer: This and other personal blog posts are not reviewed, monitored or endorsed by TalkMarkets. The content is solely the view of the author and TalkMarkets is not responsible for the content of this post in any way. Our curated content which is handpicked by our editorial team may be viewed here.


Leave a comment to automatically be entered into our contest to win a free Echo Show.
Moon Kil Woong 2 years ago Contributor's comment

Trump by far was worse. The trade war was started by him and what hurts the most is taxes on consumer goods. Taxes and regulations on militzry and could be used as military goods on China has thumbs up by the general public and for good reason. 

Leslie Miriam 2 years ago Member's comment

You mean the general public supports taxing military goods?