Recent reports out of the G20 forum indicate countries are giving way to President Trump’s trade agenda. Reuters claims that language about resisting protectionism was dropped from the conference’s pledge.
This is very alarming, particularly coming from the G20.
First, some background. The G20 was established in 1999 to promote policy discussions on the global economy among the countries with the largest economies. Members include the United States, Mexico, China, the European Union and Brazil, among others. The goal was to grow the global economy while promoting fiscal stability.
It is ironic then that an organization devoted to applying economic thought to policy would be walking back pledges against protectionism, a theory almost universally maligned by economists.
Economists arguing against protectionism began with the original capitalist, the author of "Wealth of Nations", Adam Smith. He assaulted the mercantilist attitudes of his era, where countries were skeptical of allowing imports to drain their stores of gold. Smith argued imports are a net gain for all involved since they expand the options of consumers.
Proponents of the Trump trade agenda are quick to point out that our trade deficit, the difference between the value of all we import against the value of total exports, is massive. To them, this shows that dollars are flowing out of the U.S., enriching other countries at our expense.
But this is only half the story. As Smith would point out, those dollars have to come back somehow. The American Enterprise Institute, a Washington, D.C. think tank, shows that countries that receive more U.S. dollars than they spend trading with America reinvest that money in the U.S. This is known as a capital account surplus.
When money leaves due to trade deficits, it comes back as investment. Look at the trade deficit plotted against the capital account surplus. It is amazing how closely they mirror each other against the X axis. Surely G20 members know this.
The editorial board is all for fair trade. Trade deals should not privilege one nation at the expense of another. Tariffs and barriers should be universally eliminated. If the U.S. is to lower ours, then our partners should as well.
But embracing 18th century style protectionism is not the way to go about this. Trade makes us all wealthier. While there are certain individuals that lose out — manufacturers come to mind — the country as a whole is better off.
If we want to protect these people, better to do it with some of the excess wealth generated from trade than to hamstring the whole economy. Arbitrarily, if trade generates $100 of extra wealth, we can spend some amount of that helping displaced workers get back on their feet. That way the country can reap the benefits of trade while protecting the vulnerable.
The G20 should not walk back free trade rhetoric. Now more than ever it is important to stand against economic illiteracy. Trade makes the world rich.