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Under what conditions does “Trade Is war but by another means” make sense?

Summary:
That’s a comment made by an Econbrowser reader. Initially, I thought this was the stupidest thing that had been written since Don Luskin decried recession doomsayers in September of 2008. Upon reflection, I still think it’s pretty stupid, but the statement could be better re-written as “Trade can be war by other means.” Why does the Trade as war metaphor not make sense? It’s important to say, trade when conducted under non-coercive means, benefits both sides, or at a minimum, in the aggregate does not make any country worse off, relative to autarky. Certain groups within each country can be made worse off, and if one uses some exotic social welfare metric (weight producers 99%, consumers 1%), a country might be made worse off. But excluding those possibilities, trade as war doesn’t make

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That’s a comment made by an reader. Initially, I thought this was the stupidest thing that had been written since Don Luskin decried recession doomsayers in September of 2008. Upon reflection, I still think it’s pretty stupid, but the statement could be better re-written as “Trade can be war by other means.”

Why does the Trade as war metaphor not make sense? It’s important to say, trade when conducted under non-coercive means, benefits both sides, or at a minimum, in the aggregate does not make any country worse off, relative to autarky. Certain groups within each country can be made worse off, and if one uses some exotic social welfare metric (weight producers 99%, consumers 1%), a country might be made worse off. But excluding those possibilities, trade as war doesn’t make sense.

Do some countries gain more than others from free trade relative to autarky? Sure, it’s possible that one country gets 75% of total gain, and another gets 25%. They’re both better off.

Do some countries lose over time relative to some pre-shock level? Sure, if you’re a natural rubber producer and there’s a discovery of how to make synthetic rubber, you lose relative to pre-discovery, but not lose relative to autarky.

Can a country gain by imposing a tariff on a imports if it’s a large country. For instance, in principle, China could gain by imposing tariffs on US soybeans if China is a large purchaser or soybeans. That is because it forces US producers to sell at a lower price than it would otherwise, i.e., it causes a terms of trade gain. There is a tariff rate that maximizes this gain assuming no retaliation. It’s called an “optimal tariff”. Of course, if the other (large) country retaliates, well, it’s likely both countries are facing higher costs, and maybe not necessarily much improved terms of trade…

Can trade be used to maximize national power? That’s a different question, and the answer is yes. But even here, Mr. Trump’s policies are out and out stoopid.

Over 70 years ago, A.O. Hirschman wrote National Power and the Structure of Foreign Trade, in which he outlined two main effects of trade in affecting national power (as opposed to welfare). The first is the “supply effect”, the second the “influence effect”.

The supply effect is fairly obvious — you want to make your country resilient to supply interruptions. One key way is to make sure you are sourcing heavily from reliable allies. In my view, Canada and the EU countries are reliable allies — but Mr. Trump is hurriedly alienating them, while cozying up to Russia, hardly a reliable supplier.

The influence effect is more subtle. It makes potential adversaries dependent on trade. Well, the US had made China quite dependent, in a manner not quite perceived by the Chinese, by selling semiconductors etc. to Chinese assembler/manufacturer ZTE. China is dependent on feedgrains like soybeans. In applying tariffs, the US alerts the Chinese to their dependence, and forces their hand to develop their own indigenous supplies, and/or increase their trade with higher cost producers.

So, yes, trade could be used a weapon in international rivalries. But if this is the intent (and I don’t think we should be thinking in this vein with respect to Canada or the UK or France or Japan or South Korea…), the Trump administration is pursuing this objective in just about the most counterproductive fashion possible.

Menzie Chinn
He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

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