27 January 2017

Trump clearly doesn’t have a clue about trade


It has been only a week since Donald Trump’s inauguration as America’s 45th president, but it has felt much longer.

Trump is, by all accounts, a workaholic and he has certainly kept himself busy.

Since assuming office, he has rolled back some of Obamacare’s less palatable provisions, frozen the flow of new federal regulations, defunded foreign organisations providing abortions, instituted a federal workforce hiring freeze, expedited environmental reviews of infrastructure projects, sped up approval of oil pipelines, authorised the building of the wall along America’s border with Mexico, as well as the deportation of illegal aliens with criminal records and sanctions against US cities that provide succour to the same.

Trump has also managed to create a diplomatic storm with Mexico, by giving the Mexican president a choice between committing to pay for the border wall with the United States and calling off the US-Mexico summit in Washington. Enrique Peña Nieto chose the latter. This is not going to be a conventional presidency, and I shall write about its successes and failures in the months to come.

Speaking of failures, let’s turn to Trump’s biggest mistake yet: killing the Trans-Pacific Partnership (TPP). In 1817, a 45-year-old British economist, David Ricardo, published a book called “On the Principles of Political Economy and Taxation”. In it, Ricardo described what has come to be known as the “theory of comparative advantage”. The theory states that a country should produce and export only those goods and services which it can produce more efficiently than other goods and services, which it should import.

Consider the following example. Let’s assume a simple economy consisting of two countries (A and B) producing two goods (wine and wheat). Nation A requires 10 and five units of labour to produce one unit of each, while Nation B requires 10 units of labour to do the same. As such, Nation B will have to forego one unit of wine in order to produce an additional unit of wheat, while Nation A will have to forego only half a unit of wine in order to produce an additional unit of wheat.

Since Nation A can produce wheat at a lower opportunity cost, it is best for it to specialise in the production and export of wheat. Conversely, Nation B has to forego one unit of wheat in order to produce an additional unit of wine. Therefore, Nation B should specialise in the production and export of wine.

Sounds complicated? It is, which is why Ricardo’s insight has led to one of the most famous anecdotes in the history of social sciences. The Nobel Prize-winning economist Paul Samuelson was once challenged by the mathematician Stanislaw Ulam to come up with one proposition in social sciences that was both true and non-trivial.

Samuelson pointed to the theory of comparative advantage and noted: “That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”

To the long list of “thousands of important and intelligent men” who have not come to appreciate the theory of comparative advantage and, as a consequence, did not grasp the logic behind free trade, we can now add – exactly two centuries after Ricardo’s insight – the newly minted president of the United States. (To be fair to Trump, Senator Bernie Sanders and Secretary of State Hillary Clinton were both equally clueless about free trade – or worse, pretended to be so.)

The TPP was a draft trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam, and was negotiated under President Barack Obama.

In addition to the gains from trade (ie the benefits that accrue as counties trade together), the TPP was a promising foreign policy initiative, for it tied closer together the United States and other nations of the Pacific Rim. Pointedly, the agreement excluded China.

China, the reasoning went, was lagging behind the TPP participants in terms of good governance (corruption), human rights (forced labour) and protection of intellectual property (pharmaceuticals). If the Middle Kingdom wanted to join the TPP at a future juncture, it would have to rise to the relatively high production standards enshrined in the agreement, thus becoming a more humane country in the process.

Considering that Trump sees China as America’s primary economic adversary, his move to kill the TPP has removed a potent carrot through which the United States could influence the evolution of Chinese domestic policies.

Such, then, has been the last week in America’s capital. I can’t wait to see what week two shall bring.

Marian L. Tupy is the editor of www.humanprogress.org