Trade and World Peace -- Economic Nationalism Leads to War

President Trump is a strong economic nationalist.  He believes that this country should source everything domestically - its products and its labor - and any labor or resources that are coming from other countries should either be stopped by a wall or heavily taxed.

Economists and I will spend a lot of time over the next four years trying to explain to our economically-ignorant administration why global trade and the global division of labor increase domestic incomes and production rather than decreasing them.  But I do not want to lose sight of another important benefit of open trade in the global economy - peace.

We often miss the fact because our news is dominated by stories of violence and terror, but we live in times of unprecedented peace around the world.  It is no coincidence that this is occurring at the same time that global trade is at a historic peak.  People and governments can obtain just about anything they want, inexpensively, through voluntary trade.  This has seldom been the case through history -- and when people could not get what they wanted through free trade, they tried to take it by force.

Think about the corollary of Trump's economic nationalism, particularly if everyone followed this same approach.  If one skews all the rules and taxes and prohibitions so everything must be sourced domestically, then if a country does not have some particular resource or skill domestically, it is out of luck.  No domestic rare earth metals?  Sorry.

But governments and powerful people seldom calmly accept that something they critically need is not available.  They will be tempted to go and take it.  The worst, most violent empire building of the last 100-150 years has occurred when countries have pursued economic nationalism.  Think of the colonialism of the late 19th century.  Today we happily trade with South Africa and other countries for valuable resources, but in that time of economic nationalism, if a country wanted access to these resources, it felt it had to control the land and the people.  Hitler in the 1930's wanted to make Germany self-sufficient in agricultural goods and certain other resources, and the only way to do that was to go and grab other people's land and resources.

The best example of all of this phenomenon is, I think, Japan in the 1930's.  Japan felt that it was resource poor and under Trump's theory of economic nationalism, it felt it had to control oil and other resources it did not have domestically.  So it plotted to go take it.  When the US instituted a trade embargo in these very goods to punish Japan's aggressiveness in China, it just accelerated Japan's thinking in this area, convincing it for good it had to control these resources, and it was soon invading the oil-rich islands of what is now Indonesia.  This example is all the more telling because Japan actually found true prosperity after the war when it traded peacefully for these resources.  Unfortunately, it adopted economic nationalism, via MITI, of another form and helped manage themselves into a 20-year recession, but that is another trade-related story for another day.

Postscript:  I have more to say on this when I get my thoughts better organized.  Right now I am hurrying to a plane, for Regina, Canada, where I am speaking on global warming tomorrow.  There is a related issue of what happens when strong protectionism on our part pushes China over into the crash they have been putting off for years -- suddenly a crash largely of their making becomes the fault of the US, with implications for a formation of a new cold war, but that again is another topic for another day.

  • wreckinball

    One theory for free trade would be to not have trade deals. On a recent trip to Canada we purchased some wine. When returning to th eUS (and vice versa) you have to pay import duties?
    Why? I and my Canadian seller had reached a price agreement why do we need third parties involved because I cross the border with a product that is legal in the country of entry.
    Basically no tariff's. If you could get governments to buy into that concept I think all would be well.

  • Mars Jackson

    "President Trump is a strong economic nationalist. He believes that this country should source everything domestically - its products and its labor - and any labor or resources that are coming from other countries should either be stopped by a wall or heavily taxed."

    I have not heard him say this is his position on trade. He has stated that he is for free trade, but what he calls fair trade. While we he has not voiced the specifics of this philosophy, he has pointed out how China has behaved as a bad actor in our trade with them, and how trade with Mexico seems to have left the U.S. worse than before NAFTA. In other words, he believes that the deals that have been made have not maximized the benefit to the U.S., and it is difficult to disagree with this idea.

  • We are at war.
    We also suffer costs of taxes and regulation.

    We have a new President. He doesn't want war. He wants fewer taxes and regulation. He wants to impose a cost of American companies employing Americans. He also seem somewhat friendly to foreign companies willing to invest here.

    It is highly possible we will see a net positive situation, from a cost perspective. It is also possible we may see more growth, since there will be more people working, and work is occasionally productive.

    Yes, there's all kinds of potential for downfall, but the biggest downfall right now has be self-inflicted pundit-cide.

  • Daniel Nylen

    Think Huntington and Clash of Civilization. It is not nationalism that leads to war.

  • Joshua

    Is there any evil worse than war? Sometimes it is necessary, but in all other cases it should be avoided more strongly than any other evil. One way to avoid war is to have as many trading partners as possible. https://phys.org/news/2015-12-partners-wars-nations.html

  • Joshua

    The only way companies are going to invest here is if they have American dollars. The best way for them to get American dollars is for us to buy their stuff.

  • Ike Evans

    He wants fewer taxes and regulation. He wants to impose a cost of American companies employing Americans. He also seem somewhat friendly to foreign companies willing to invest here.

    Interestingly enough, you can't have it both ways. The economics on this are a tad complex, but one thing we need to understand is that a trade imbalance (the thing Trump hates) leads to investment in America (the thing Trump likes). You can't have your cake and eat it too.

    For example, we buy lots of things from China using US dollars. China can only convert a tiny fraction of the USD into Yuan because otherwise it will deflate their currency - making everything Chinese more expensive to foreigners. With all that cash that can't be circulated into their economy, they move the currency back off their shores - usually in the form of investments into American businesses and debt. Hence, America is one of the greatest places on the planet that brings in foreign investment precisely because of the trade imbalance that so many people are worried about.

    This is the argument conservatives and libertarians have been trying to make for decades, and it is the right one. I hope this is a lesson the Donald can somehow capture.

  • Ike Evans

    Bingo.

  • Joshua

    6 hours ago, the president tweeted "I want new plants to be built here for cars sold here!" That seems more like a focus on nationalism than "fair trade" whatever that is. No voluntary trading engaged in by Americans has hurt America as a whole. It has definitely disadvantaged some subpopulations of American workers, but if you want to help them, the best way to do it is to train them and/or move them to less depressed areas, not trade protectionism.

  • ErikTheRed

    Getting government off of any sort of revenue makes breaking a heroin or crystal meth habit looks trivial by comparison. Unfortunately.

  • Joshua

    Unilateral free trade. I think it's the UK's best hope, but I doubt they can sell it to the populace.

  • ErikTheRed

    Moral issues aside, war is about the most uneconomic thing you can imagine. It's pretty much the most extreme form of Keynesianism. I'm frequently reminded of this quote by Thomas Jefferson from a private letter to John Taylor:

    "I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government; I mean an additional article taking from the Federal Government the power of borrowing. I now deny their power of making paper money or anything else a legal tender. I know that to pay all proper expenses within the year would, in case of war, be hard on us. But not so hard as ten wars instead of one. For wars could be reduced in that proportion; besides that the State governments would be free to lend their credit in borrowing quotas."

  • Ike Evans

    It is worth noting that lots of foreign companies (like BMW) build cars in the United States and then export them to other countries. Protectionism threatens this.

  • Mars Jackson

    "...train them and/or move them to less depressed areas, not trade protectionism."

    Wal-Mart is the largest employer in the world. Most Wal-Mart jobs are 30 hour a week jobs and pay close to minimum wage. In other words, this emphasis on free trade and imports is creating an economy where a majority of workers cannot afford to shop at any place but Wal-Mart. What kind of training should we offer? What jobs are there for the unemployed and the underemployed that training will help? Also, why should people have to move from their homes and families? Do we really want massive urban areas with large parts of the U.S. abandoned in favor of larger and larger Wal-Marts in urban areas? That is a frightening future, and all so part of the population can benefit from lower prices for poorly made goods from other countries.

  • They already have dollars. God, this is why the libertarian party is freaking non-viable. Softbank already made a commitment. Jack Ma already had his little talk with Trump. Et cetera already got contracted and put next to dots.

    We have simple Trump statements. We can do math, and notice that something is possible. What something? That the freedom and reduced costs from this administration's reforms COULD far exceed the costs imposed by Trump.

    So, maybe there's a tariff, and more jobs than would otherwise be in America. What matters is whether it's better than what we have now, not an abstract argument that requires one to be foolish enough to imagine that capital goods are made entirely of dollars.

  • You are both wrong and off point.

    If I were living in Chang Mai, and suddenly I wanted to invest in America I would merely be a bit inconvenienced if I didn't immediately have dollars. This is because currency is not a capital good.
    So, this hypothetical Thai me would gather up all my baht and buy stuff that held value. Gold, bitcoin, a rolex watch or two. Maybe even diamonds or whatever. It just must hold value, so that I can reasonably expect to travel over here and sell it. Then I would use the dollars to buy capital goods and set up shop.

    China has been known to build entire cities- I'm sure they could manage a factory or two, possibly without dollars, but I suspect an American banker or two would loan them a little.

    Now, I am pointing out that Trump may manage to provide more cost reduction via reforming taxes and regulation than he imposes via jobs and tariffs. Thus I believe you are also terribly off point.

  • mlouis

    Sounds like we should avoid the conditions that tend to lead to economic nationalism.

  • EL_TED0

    We HAVE BEEN at war, almost ceaselessly during this golden age of passive (free) trade policies.

  • joe

    Economic issues never caused a war - war has always been caused by "Climate Change"

  • mlhouse

    1. Donald Trump has never stated that the country should "source" everything domestically.

    2. WHile I am a partisan Trump supporter that doesnt agree with him 100%, I actually do not think Trump opposes trade.

    3. What Trump and his most ardent supporters do feel is that there are certain things that are made by U.S. companies outside the United States for sale within the United States. Ford automobiles being produced in Mexico and then sold in the United States.

    4. Trump and his ardent supporters also believe that one of the reason, probably the main reason, this manufacturing is done in Mexico/China etc is the unfair trade practices of those countries.

    5. Protective tariffs are just one of the ways Trump plans on using to keep production and taxes in the United States. Eliminating and streamlining regulations, lower taxes, and better government/business relationship are also elements in the plan.

    I am an advocate of teh free market, of which free trade is one of the elements of. But, I also think some of the Trump arguments are valid. There isn't free trade, and certainly the United States does not practice it. For example, if we really wanted to use ethanol as fuel for automobiles we could import sugar ethanol from Brazil. But U.S. sugar producers have political clout to keep sugar based ethanol and sugar imports out.

    I think that overall Trump's approach is going to be successful. Corporate tax reform is going to stop the ridiculous tax avoidance that major corporations do. Why divest your profits outside the United States to avoid a 10-15% corporate tax rate? Why invest in manufacturing overseas when the tax and regulatory changes will make it more profitable in the United States even with higher direct wages? Why defer income in tax shelters and other manuevers that save you money at a 35% corporate rate? And some of these measures do not involve direct government action, just the opposite, it means getting governmetn out of the way like building the Keystone and Dakota pipelines.

    While I disagree with Trump about the impact of NAFTA, I agree with him that the entire 25 year old framework should be revisited and renegotiated. Although I think a Trans-Pacific trade zone is in the United States' interest, I probably (hard to get reliable information on the agreement hence my "probably") think that the agreement negotiated by the Obama Administration is not an acceptable trade agreement. I believe that a President Trump should not hesitate to enter into bilateral trade agreements with England and Taiwan.

    WHile I believe in limited government, I do not oppose Trump's infrastructure concept as long as as much red tape can be eliminated as possible (which a developer like Trump is poised to eliminate) and the most cost effective proposals are done3. I, like Ronald Reagan, do not even oppose job programs and I would not be adverse to creating 500,000 or so jobs for inner city/unemployed people through private/public partnerships with the concept that even if these "jobs" produce 30% efficiency, that is better than 0% efficiency.

    Lastly, no matter what Trump believes huge pieces of the import markets are not going to change. The U.S. is not going to stop importing cheap textiles and shoes, or other low cost consumer goods. Even more advanced technologies like consumer electronics are probably forever gone. Obviously certain commodities and natural resources will always be imported.

    The real measure of Trumpomics will be its impact on the domestic economy. Can supply side tax reform, infrastructure spending, and deregulation activate the economy like it was 1984 again? If it does, the trade impact will be minimal, and overall trade might grow because of increased demand. Another aspect of this is that to get the United States economy growing at rates Trump (and I) envision will require more labor than can be generated by the current labor force!

  • kidmugsy

    "Think of the colonialism of the late 19th century." Why? It had almost nothing to do with resource-grabbing. The Germans wanted "a place in the sun", which seems to have been about prestige, not resources. The British and French seemed mainly to want to deny territory to each other. Otherwise the Royal Navy cruised the oceans, putting down pirates and producing excellent charts.

    The only obvious way that it interfered with free trade was its obnoxious habit of stopping sovereign nations trading slaves with each other. That was contra free trade doctrine, wasn't it?

  • kidmugsy

    I've just noticed that I haven't mentioned US colonialism in the Philippines. I confess ignorance; was that really about resources?

  • JTW

    Correct. Trump is all in favour of trade, he's dead against the US handing over their entire economy to China and Mexico simply because those countries have lower wages and taxes and therefore can produce the same goods cheaper than the US can.
    Doing something about that disparity is what his stance on international commerce boils down to, and I fully agree with that.

    The first, and indeed main, job of a government should be to create an environment in which the citizens of a country can thrive. And if they can do that by promoting job creation through removing economic incentives for companies to produce goods abroad, that's a good thing.

    Unless you're a firm believer in globalism of course, the one world government ideal of the Leninist movement.

  • JTW

    Indeed. That Thai you could just go to a bank and exchange some Bath for Dollars.
    Sure, there'd be a small fee, but nothing like the cost of import duties can be. And you'd need to pay those in Dollars anyway so you'd be paying the fee then too 🙂

  • Even if I couldn't, investment is still possible.

    I mean, it's not like the Puritans had access to Native American dollars...

  • J_W_W

    Stopped really paying attention at .... ."Hitler in the 1930's"

    I mean, C'mon make your economic arguments (and I agree you have economic arguments, I think you're over reacting). Don't jump into the left's "literally Hitler" argument. And No I don't care if the argument has some merit, I'll admit that it does, but the 'Hitler did it' has more merit as virtual signaling to progressives, and that's what I see it as.

    Trump has also talked about lowering taxes and regulations. One of the key drivers of companies doing work else where is because the regulatory cost there is less. Ironically trade agreements like TPP look to enforce on other countries similar regulations to ours (not exactly free trade).

    But joining the left in their but, but, but, Hitler arguments isn't helping you.

    BTW how has China set themselves up for a crash?? By manipulating the playing field for trade. The free trade you argue we should be doing with China only looks good to us because China is manipulating their currency and industry to keep labor cheap....

    As many libertarians have said. Free trade agreements need be only a page long....

  • J_W_W

    Why do you assume the fee and the import duties must be of largely differing magnitudes?

  • Joshua

    I sincerely hope that you are right and I am wrong.

  • TruthisaPeskyThing

    Ike, I think that you are missing something or misunderstand something in your analysis. Yes, China brings dollars to the U.
    S. -- but it is not so much to make wealth-producing investments. Rather, it is to buy existing assets (including debt) which means that China will be the recipient of the future income stream from those assets. When the U.S. has persistent trade deficits, it will get most of those dollars back by losing ownership of assets.

  • TruthisaPeskyThing

    When I read your 1st paragraph, I made a decision to reply and say "YES -- and in addition, reliance on trade and the recognition of that reliance can be a great determent to war." And then I saw your 2nd paragraph; you already covered the issue. Well done.
    Nevertheless, it may be premature to get bent of shape on Trump's trade policies. Although I do not read everything he says -- and people's mental health would likely be enhanced by following my example on that practice -- in what do read of Trump, his focus seems to be that companies should not quit producing here, transfer production out of country, and then import the product into country for our consumption. While I do not agree with the economics of his thesis, his thought process is much, much different than those of Hitler or the Japanese. There may be a lot that he can do in economic policies to make it logical to keep production here without violating the laws of comparative advantage.

  • McThag

    Calling someone who's a billionaire economically ignorant. Wow.

    That's a new one.

  • GoneWithTheWind

    In all fairness you misstated your case. Trump doesn't want foreign goods and services stopped or taxed so excessively that they will stop. He wants a level playing field where imports pay the same taxes as locally produced goods and services do. We tax our own companies as high as 39% what would be so bad about taxing all imported goods and services at 25% of their retail value. Then, import away it will help the treasury.
    It is a fact that most countries we have "free" trade with tax goods and services they import from us. Why hasn't that lead to a war???

  • Ike Evans

    The alternative is protectionism, and history has proven this is not a means for economic progress. We are the to-go place for foreign investment, and I like that position. Trump is offering nothing better.

  • niccolom777

    Best of luck in Regina. Watch out for the jackrabbits!!

  • johnmoore

    Free trade can also lead to war, as a result of the overthrow of democratic governments who let their people be beggared on the altar of raising aggregate global GDP.

    Trump is a mild example of the consequences of being blind to the negative effects of globalism. As long as we have nations, the citizens of those nations will measure their government in part by how its policies affect their economic well being and their security. That is simply human nature, and disregarding it in favor of abstract, over-simplified economic models is a big mistake.

  • johnmoore

    We have a well regarded theory that free trade lifts all boats. It is just that - a theory. When you are dealing with human beings, rather
    than ideal libertarian citizens, such theories tend to fail, and they often fail badly. It especially appeals to libertarians like coyote, and to conservatives like myself, as the theory is one of maximum liberty from government action.

    But, it is still just a theory, a very simple model of human behavior.

    Coyote often, correctly, rails against the use of over-simplified models to predict future climate. It is equally dangerous to rely on over-simplified economic models to predict the behavior of actual human beings.

  • Ike Evans

    Except that free trade has proven itself already, and so has protectionism. NAFTA has, on the whole, been a fantastic success. Smoot-Holley was a horrific blunder. Trump's solution is the liberal one, and it is simply nonsensical.

    The entire idea that we are losing jobs to foreign competition is mostly untrue. Automation is a far larger killer of manufacturing jobs than China or Mexico.

  • Ike Evans

    The single biggest pile of crud Trump is trying to sell us is this idea that the American economy can't compete against the world without his special protection. I worked as an engineer in manufacturing for many years and made it my life's study during that time to understand how we can compete against foreign competition. I am absolutely convinced we can compete against cheap labor, and no, tariffs will never help us.

    Note that in recent years, even China has had a net loss on manufacturing jobs. How so? Automation.

  • marque2

    The government would try to kill you to get more tax revenue. You can buy a gallon of ethanol from your hardware store for about $5, it is basically moonshine. And it it doesn't have beverage taxes. However, because ethanol is very drinkable, the government forces the distillers to put in poisons that could hurt or kill you if you try to drink the hardware stuff. That way the government is guaranteed their alcohol tax when you have to purchase the everclear through the official liqueur store.

  • Gil G

    Now that Trump is finally President he can actually get criticized about his policies.

  • johnmoore

    Except that the clock is still ticking. Effects and responses have a long time span. Trump is a consequence, and we don't know how that will play out.

    I suggest that you cannot make the case for free trade by simply
    ignoring the negative consequences. All policies have negative
    consequences - free trade, protectionism, whatever.

    The issue is not whether free trade exports American jobs. Of course it does. I have watched it happen to colleagues who were replaced by people in India. Other jobs go away when plants move overseas or low cost overseas competition replaces market share from domestic manufacturers.

    NAFTA has been great for the employees of maquiladoras in Mexico who are doing jobs Americans used to have.

  • kidmugsy

    If you think rich men are especially gifted with economic insight then you can't have met many rich men.

  • davesmith001

    That is exactly what they do. Why would you need it or even want it to be gold or something that has "value?" Why not cars.

  • Because these guys were off in the weeds saying you need dollars to invest in America. Now you are off in the weeds. Trump wants the cars built in America. People are doing a lot of hand-waving, and I am saying not to cry about the sky falling until the sky is actually falling. If the overall cost structure is better than what we have now, we will do better than we are doing now.

    Is it really hard to imagine Trump could reduce the cost of doing business versus Obama? EPA, Hiring regulations, health insurance, taxes, regulation, etc..... ALL COSTS. Many very wasteful costs. This is one of the reasons businesses move to automation. Half the time the damn machines suck. I have seen this personally. But the regulations surrounding the machine are nothing compared to the regulations surrounding the human, so it's freaking cheaper to go the machine route- BECAUSE OF THE GOVERNMENT! So what if Trump costs are cheaper than current costs? Did you notice DOW 20,000? The financial people are thinking what I am thinking, because they are damn sure not running up stocks based on current conditions.

  • ColoComment

    Just fyi. I, too, looked into the U.S. sugar and ethanol tariffs, and found that while sugar is still subject to a tariff, which obviously artificially raises the cost of all domestic sugar products, Brazil and the U.S. (the two major ethanol suppliers worldwide) let their respective ethanol subsidy and tariff lapse during 2012. Brazil's ethanol is sugarcane based, which makes it very vulnerable to the world price of sugar. This was interesting: the U.S. has increased its ethanol exports to lead the world in that industry.

    https://www.grains.org/news/20160411/united-states-surpasses-brazil-leading-ethanol-exporter

  • Mercury

    Sugar is dirt cheap to produce in the tropics AND it's a way more efficient feedstock for ethanol as alcohol is the (waste) product of yeast consuming sugar.

    We can't really grow sugar in the US but we can grow lots of corn which isn't sugar but...did I mention that we can grow lots of corn? So, through the miracle of tariffs and all kinds of extra energy inputs, you can produce high-fructose corn syrup (eat up kids!) and alcohol but it's still just easier/better to use sugar for sugar and sugar for fermentation. The US can not "lead the world" in ethanol production without someone overpaying.

  • Mercury

    "The best example of all of this phenomenon is, I think, Japan in the 1930's. Japan felt that it was resource poor and under Trump's theory of economic nationalism, it felt it had to control oil and other resources it did not have domestically. So it plotted to go take it. "
    ---------------------------------------------------------------------------------------------------------------------------------------------------------

    The US isn't resource poor and we have enough oil/gas to meet our own needs - which begs the question as to why we need to spend so many resources over Middle East politics.

    Besides, post-war Japan has been the most insular, foreigner-phobic society on the planet and they've done just fine economically - aside from the stupid central bank policies that the globalists all think we should keep doubling down on.

  • Ron H.

    You have just described exporting goods from Thailand to the US in exchange for dollars, which you then use to buy capital goods from someone in the US. This is consistent with Joshua's statement about international trade.

    You could tell the same story about any good produced outside the US that was sold to someone in the US, or something made in Michigan that was sold in California. Neither the crossing of political borders nor exchanges of one currency for another makes any meaningful difference to the basics of the story.

    You exchanged something you own in one place on the Earth, for something someone else owns in another place on Earth using that wonderful medium of exchange known as "money".

  • GoneWithTheWind

    With all due respect that is wrong and naive. The only way to avoid war is to be stronger than your potential enemies. They will be more than happy to destroy you and take your industries and they don't care at all about free trade.

  • Ron H.

    Because these guys were off in the weeds saying you need dollars to invest in America.

    You may have noticed that when people sell something in the US, whether it's an office building, shares of stock, or a cheeseburger, they expect US dollars in exchange. And I suspect most US banks won't sell you a CD in exchange for bhat or pesos. "These guys" aren't really off in the weeds.