Trade Protections Beget Trade Wars… We All Lose

I’m trying to keep politics out of the blog, but it appears the talking heads on TV and Capitol Hill don’t understand basic economics. They’re spouting a lot of hot air about trade and tariffs, things that anyone who stayed awake in Econ 101 would know are incorrect and/or harmful.

Sadly, many classes these days only teach a macroeconomic perspective of international trade, focusing mainly on exchange rates and current account balances. But I’m a micro guy, and from my perspective, all that stuff misses the point of trade. Trade is between individuals, not nations. Both parties come together to make a mutually beneficial transaction… both of them are better off afterward. There is no difference between trading with your neighbor, trading with a guy in another city, or trading with a guy in another state or another country. (Read about the microeconomic view of international trade.)

Don’t get me started on the trade deficit. Trade imbalances are purely academic. There is an exchange: they give us goods, we give them money… worthless paper if they don’t buy something back from us or trade that paper to someone else. Everyone I know has a HUGE trade deficit with their local grocery store. That doesn’t mean we’re somehow in danger of being taken over by the store or that we won’t be able to continue buying groceries.

The only thing trade protection does is harm consumers. Worse, as soon as other countries enact their own protections, the protectionism also harms the original nation’s exporters. You don’t need to look very far. Just last week, Canada imposed restrictions on U.S. dairy products. The U.S. is now talking about a tariff on Canadian lumber.

It only takes about 15 minutes to teach kids the benefits of trade with bags of candy. Why is it so hard for politicians to figure it out? While they’re busy playing to populist sentiments, they’re ignoring the lessons of economics and history (look up the Smoot Hawley Tariff).

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