Ever wonder why the United States has been such an economic success since the signing of the Constitution? It is because we have the rule of law; private property rights and we are one giant free trade zone. We don’t have to have a free trade agreement between the states. We don’t need a North American Free Trade Act. Goods, services, capital and people are free to go wherever they are most valued. We don’t need 1,700 pages that detail ‘free trade’ between Canada, Mexico and the United States. Some of those pages are necessary and standardized the rules of the game between the countries. Yet, in other pages, those who are able get their own little cut out which limits for them the extent of ‘free’ in free trade. So, in some sense, we have something less than free (contrived) trade.
Here is a real free trade agreement — “We, the undersigned nations, will not use tariffs, quotas, rules, taxes or regulations to limit the movement of goods, services, capital, and people between the undersigned.” Gee, this could be on a 3x5 postcard and the world would eventually become as amazing as the United States.
President Trump wants to use tariffs to bring back the steel industry. Let’s phrase this a bit differently. Will everyone in Boston raise their hands if they want to use tariffs to bring back the textile mills that so populated the New England countryside in the 1700s and 1800s? I don’t see any. They have moved on to better things like high tech. This is also true of all those folks who worked in the steel mills. The only ones that are left are competitive, specialized producers that are highly automated. Why save the inefficient ones? Tariffs on foreign steel will result in fewer cars coming to the port in Brunswick. Might make sense to the president, but it makes no economic sense to the Golden Isles.
We also hear that the ‘bad trade deals’ have led to large trade deficits. Well, this is wrong too. The ‘balance of trade’ is where trade deficits are recorded. The balance of trade is the accounting measure of the movement of goods and services between countries. Currently, we import a lot more from the rest of the world compared to what we export.
However, the balance of trade is only one part of the accounting of the economic connections between countries. There is also the capital account. This is a measure of the trade in capital, securities and other financial instruments. Here the United States has a tremendous surplus. We export a heck of a lot more securities to the rest of the world compared to what they export to us. The United States remains the best and safest place for foreigners to invest. Yet a large portion of our financial exports are federal government securities of all sorts. Many in the rest of the world take the dollars they get from the trade deficits and use them, not only to invest in our great private economy, to buy federal government securities. In a very real sense, the large trade deficit helps finance the large federal government budget deficits. If they did not, domestic interest rates would a lot higher. In the end, balance of payments (the sum of the balance of trade and the capital account) between countries balances as the balance of trade deficit is offset by the surplus in the capital accounts.
So, now we can come full circle. A significant culprit in all of this is the out-of-control spending of our federal government. Tariffs might not bring back the steel industry, but they will bring back higher interest rates as long as federal spending remains out of control.
Dr. Skip Mounts is the Dean of the School of Business and Public Management at the College of Coastal Georgia. He is also a professor of economics and an affiliate of the Reg Murphy Center of Economic and Policy Studies.