Make a bigger pie: Trump's protectionist rhetoric
President Trump’s aggressive protectionist rhetoric has raised concerns all over the world. Many fear that the measures he is advocating could lead to an all-out trade war.
Any sensible person would want to avoid such an escalation. Successfully doing so means challenging the assumption that we live in a zero-sum world in which gains for one side must mean losses for another. Unfortunately, this premise is shared not just by Trump’s supporters but by many of his critics.
Take, for example, Trump’s recent statement in an interview in Germany’s popular Bild newspaper. The then president-elect argued that there are too many German cars and too few American ones to be seen in New York. This statement begs the obvious question of what the natural level of German cars in New York would be. In any event, it clearly came with an implicit threat to take action against a state of affairs that was presented as unfair.
The response by Sigmar Gabriel, Germany’s economy minister, was understandable. He said that the US should build better cars. His clear implication was that if American car makers produced better products, then the proportion of US cars in New York and elsewhere would increase.
No doubt, many IPE readers will sympathise with Gabriel’s riposte but it is important to recognise its limitations. It steers clear of tackling the difficult but crucial point that greater trade can benefit everybody.
Of course Gabriel was simply appealing to his national constituency. He is under no obligation to present the question in a wider context. However, those who want to resist the drive to protectionism need to have a deeper understanding.
The question has been understood for 200 years. It was discussed in On the Principles of Political Economy and Taxation by David Ricardo, the great political economist of the early nineteenth century, and published in 1817.
Ricardo’s doctrine on trade has come to be known as “comparative advantage”. The key word to understand here is the first one.
The benefits of trade are not confined to absolute advantages. In such a scenario, each country could specialise in what it is best at. So conceivably, Germany could stick to manufacturing cars and the US could focus on filmmaking.
Ricardo’s insight was that even if one country is better than another at everything there can still be mutual benefits to trade. For instance, even the poorest African country would gain from trade with Germany or the US.
Say the US is hugely more efficient at producing lumber than the African country but only slightly better at producing apples. It could still make sense for the US to focus all of its efforts on making lumber and let the African nation produce apples. The total global amount of each product could be greater, thanks to the greater specialisation that trade allows.
These are clearly oversimplified examples but the underlying principle is vital to grasp. There are huge gains to be had from promoting international trade. Conversely, the breakdown of trade will make the most people much poorer.
Unfortunately, far too many people are unwilling or unable to argue this point. Protectionism will remain a pervasive and debilitating force until they do.