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Economics Viewpoints

Trade restrictions would choke supply lines and drive up prices

James L. Butkiewicz

James L. Butkiewicz
Guest Columnist

President Trump has made bold promises about economic policy, especially regarding international trade, taxes and regulation. What are the likely effects of his policies on economic growth?

There is probably no area of greater agreement among economists than the fact that international trade is mutually beneficial. However, some members of society are disadvantaged by trade. The disadvantaged are the workers and producers displaced by imports. The federal government has had, at times, retraining programs for displaced workers. However, finding new jobs often requires both retraining and relocation, and displaced workers sometimes resist relocation. As a result, retraining programs have met with limited success, requiring new approaches to help those displaced by trade.

The benefits of trade are widespread. Currently, 44 percent of the revenue of the S&P 500 firms is generated abroad. Notable exporters include Boeing and Caterpillar. Studies find that low-priced imports especially benefit low-income households. Of all major categories of consumer expenditure, apparel prices have increased the least over the last 30 years. Everyone benefits from low clothing prices.

Imposing tariffs and other trade restrictions would significantly harm our economy. Complex manufacturing supply chains would be seriously disrupted by trade restrictions. Consumers would pay significantly higher prices, reducing living standards. Exporting firms would lose sales as other nations retaliate with their own trade restrictions, resulting in unemployment for many workers. Also, our trade deficit is funded by financial inflows, including purchases of Treasury debt. Eliminating our trade deficit would end net inflows, requiring either increased domestic saving to fund the federal deficit, or a significant reduction in private investment that would reduce growth and cause a recession.

The current global order promoting free trade and free flows of financial assets is the creation of the United States. During the Great Depression, many nations imposed trade restrictions, restricted financial flows, or devalued their currencies to promote exports and limit imports. These policies were, on net, harmful to the global economy.

Seeking to avoid repeating the errors of the 1930s, the federal government organized a conference of 44 allied nations at the Bretton Woods resort in New Hampshire in 1944. The result of these meetings was the creation of the organizations and policies devoted to an international order of free markets and free trade. The participating countries flourished as a result of this new global economic order. However, not all countries are as committed to free markets and free trade as is the United States. If Trump’s rhetoric is a negotiating strategy aimed at opening other markets rather than closing our own, our country would benefit from greater openness by others.

Our federal corporate income tax rate is the highest in the developed world. Also, the treatment of profits earned abroad discourages bringing these earnings home. Tax reforms addressing these problems would result in repatriation of earnings and increased domestic investment, increasing growth. Also, tax reform that stimulates new business formation, which occurs at only slightly more than half of the rate of the late 1970s, would increase growth, as new businesses are an important source of innovation and productivity growth.

Regulations are often imposed to attain desirable social goals, such as increasing the safety of the financial system or reducing pollution.However, compliance with regulations is costly. Firms employ staff to ensure compliance, or change practices to meet regulatory requirements. Even attaining desirable social goals is costly. Deregulation would reduce or eliminate the costs of compliance, thereby increasing growth.

However, the results of opening more markets to U.S. exports, a reformed tax system, and deregulation are likely to have a one-time benefit of increasing growth. That is, these changes will increase growth in the short run, but not change the long-run trend rate of growth. But, one-time changes do not occur at once, rather, they are spread over several years. Thus, it will appear for a time that these policies, if enacted, have increased growth. Indeed, even a temporary growth spurt would be beneficial. However, increasing the long-run trend rate of growth is far more challenging, and there are no obvious answers.

James L. Butkiewicz is a professor and chair of the Department of Economics at the University of Delaware.

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