IS TRADE WORTH IT?
Donald Trump decided the solution to the negative effect of trade was tariffs. He welcomed a trade war. It started in the first few months of 2018, with new tariffs on aluminum and steel.
Trump then talked about $50 billion in tariffs on Chinese goods, and then when China retaliated, suggested another $100 billion.The stock market tumbled on the announcement, but the basic instinct that we should close our economy and, in particular, defend it against China is shared by many Americans on both sides of the aisle.
Meanwhile, economists were jumping up and down. They evoked the specter of the “worst ever tariff,” the Smoot-Hawley Tariff Act, which precipitated a global trade war in 1930 by imposing tariffs on twenty thousand goods imported into the United States. The Smoot-Hawley bill coincided with the onset of the Great Depression, and although it may or may not have caused it, it certainly gave sweeping tariffs a bad rep.
The idea that more trade is good (on balance) is deeply engrained in anybody who went to graduate school in economics. In May 1930, over a thousand economists had written a letter encouraging President Hoover to veto the Smoot-Hawley bill. And yet there is something else economists do know but tend to keep closely to themselves: the aggregate gains from trade, for a large economy like the United States, are actually quantitatively quite small. The truth is, if the US were to go back to complete autarky, not trading with anybody, it would be poorer. But not that much poorer.
Arnaud Costinot and his longtime collaborator Andres Rodriguez-Clare managed to make themselves infamous in the community of trade economists for making that point. In March 2018, they released a timely new article, “The US Gains from Trade,” with the following prescient first paragraph:
About 8 cents out of every dollar spent in the United States is spent on imports.
What if, because of a wall or some other extreme policy intervention, these goods were to remain on the other side of the US border? How much would US consumers be willing to pay to prevent this hypothetical policy change from taking place? The answer to this question represents the welfare cost from autarky or, equivalently, the welfare gains from trade.59
This article builds on a line of research they developed over several years, both together and with others, and on decades of research in trade. The key idea is that the gains from trade depend primarily on two things: how much we import and the extent to which these imports are influenced by tariff, transportation costs, and the other costs of trading internationally. If we import nothing, clearly it does not matter if we erect a wall and stop importing. Second, even if we import a lot, if we stop doing so when import prices increase even a little bit, because it becomes a little more expensive to bring the goods here, it must mean we have many available substitutes at home, so the value of imports is not that high.