President Trump’s sudden announcement of tariffs on steel and aluminum is by no means unprecedented – Presidents Reagan and George W. Bush took similar actions. Yet it emphasizes a reality first pointed out in these columns in 2010 and in a presentation later that year: the globalization project, beloved of Whig economists and big-government types everywhere, is falling apart. De-globalization is here to stay and, contrary to Whig belief, it will be good for the world economy and for our living standards.
The theoretical case for free trade, and to a lesser extent free movement of labor, is simple and clear-cut, first expounded by Adam Smith and David Ricardo. By reducing barriers to the movement of goods and people, production is globally optimized, so that every product is produced in the location with the greatest comparative advantage, while workers move to where they are most valuable. In this way, global output is optimized. Mathematically, it is a very simple model, full of linear equations, which are the ones economists are capable of solving.
Like all economic models, it rests on several assumptions, not all of which are valid in the real world. It ignores the fact that tariffs yield revenues to the governments imposing them, so a free trade policy imposes additional costs on that country’s citizens in the form of higher income and other direct taxes. It assumes a Gold Standard world, in which the “optimal” global production structure, once found, is stable – in our world of fluctuating fiat currencies, comparative advantage is forever shifting, so the optimal structure is valid only for a nanosecond.
Most important, it assumes no government interference at any point in the process. Producers trade with each other between a large number of independent countries, each of which is free to impose regulations and restrictions if it wants, but damages its competitiveness, its export potential and generally its economic well-being by doing so. Just as tariffs are economically damaging in this system, so too are regulations limiting imports; a prohibition against an import makes its price infinite and is thus more damaging than even the largest tariff. In the theoretical model, all goods and services are freely traded and there are no non-tariff barriers blocking them, or international organizations adding costs to the system.