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Opinion Protectionism will backfire

Having become the know-nothing party, the GOP probably is not inclined to listen to the arguments of Milton Friedman (its nominee in all likelihood has no idea who he is). Nevertheless, for lawmakers and voters it is important to understand how economically backward is Donald Trump’s conception of trade.

The American Enterprise Institute brings up a timely Friedman admonition:

In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports, and if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad, we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, with automobiles we can drive, with all sorts of nice things for us to use.
The gain from foreign trade is what we import. What we export is a cost of getting those imports. And the proper objective for a nation as Adam Smith put it, is to arrange things so that we get as large a volume of imports as possible, for as small a volume of exports as possible . . . Each of you in your private household would know better than that. You don’t regard it as a favorable balance, when you have to send out more goods to get fewer coming in. It’s favorable when you can get more by sending out less.

Tariffs only punish consumers and U.S. businesses that have to pay higher cost for goods, making individuals poorer (with fewer goods to enjoy) and businesses less competitive. Trump would define “success” as China selling us fewer cars at twice the price.

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We have remarked many times that recent losses in manufacturing (which now is rebounding) are not attributable to trade but to automation and our failure to prepare workers for the 21st-century economy. But if you want to see real job losses, try passing tariffs or nixing free-trade deals. Here’s why: The jobs will move to where the international customers are.

Jeffrey Immelt, chief executive of GE, a frequent critic of protectionism, explains:

It is time for a bold pivot. Not away from global engagement—GE has $80 billion of revenue outside the U.S., so global growth is critical to our success. But in the face of a protectionist global environment, we can no longer rely on governments to drive expansion; we must plan to navigate the world on our own.
We will localize.
In the future, sustainable growth will require a local capability within a global footprint. GE will always be a strong American manufacturer, but we have also built 420 factories around the world, giving us tremendous flexibility. We used to have one site to make locomotives; now we have multiple global sites that give us access to multiple markets. We are not pursuing low wages; we are using a manufacturing strategy to open markets. A localization strategy can’t be shut down by protectionist politics.

There’s the irony: A policy of protectionism based on the false premise that free trade means job losses will result in real job losses. Conservatives should know that government interference in the market only begets more distortion — to which the government responds with more regulation.

In this case, Trump would respond, as he has threatened to do, by fining U.S. companies that “send” jobs overseas. But, of course, Immelt is talking about new jobs that will never come to the United States in the first place. Moreover, as we have seen in response to a tax code that double taxes profits overseas when they are repatriated, corporations such as GE, if need be, will maintain corporate structures that keep the U.S. and international companies as stand-alone enterprises. Profits and jobs will stay overseas. Brilliant strategy, huh?

It’s the same with immigration, by the way. If we don’t let the productive workers in, especially highly skilled foreigners with advanced degrees, those workers will remain overseas — as will the wealth and innovation they generate. Maybe they can get jobs with GE’s international divisions.

Trump’s protectionism — which mimics the same Democratic protectionism that conservatives used to mock — is a strategy for losers. He’s saying we cannot train our own workers to win in the 21st-century global market and will not attract other workers who will make life better for Americans. Instead a big-government approach to picking winners and losers will be deployed — with disastrous results. Too bad there is not a major-party candidate who understands this. It may be time to take a second look at the Johnson-Weld Libertarian ticket.