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Protectionism Cannot Trump Basic Principles of Economics

By: Rafael Ruiz Velasco - Jan 23, 2017, 12:48 pm
Donald Trump
Trump’s protectionist measures break with the basic principles of economics, and do not work. (Flickr)

Español Donald Trump’s break with the basic principles of economics is obvious to anyone that’s been paying attention.

“I’m a free trader,” he dared to say back in June 2015, when announcing his candidacy for president. Since then, his double speech and his lack of understanding on basic economic concepts has been evident.

Shortly after his speech, Trump changed the “free market” flag to that of a “fair market.” He stated that his country has been a “victim” rather than a “partner” of countries it trades with, and so he proposed that the US focus less on “globalization” and more on “Americanization.”

Trump believes that a market “from Americans, for Americans” is the best economic equation, and he threatens to tax everything that comes from other countries for domestic consumption. These protectionist measures have little to do with the free-market principles that for some time made his country a benchmark in business, innovation and technology, and whose sustainability seems increasingly weak.

The new US President’s statements already triggered the cancellation of a million-dollar Ford investment in San Luis de Potosí, Mexico. Meanwhile, Trump has threatened other companies such as Toyota, Chrysler and BMW with tariffs of up to 35 percent for all cars assembled outside the country.

Trump, as a business administrator, seems to have missed attending Economics 101 back in college. In particular, it seems that he missed those lessons that discuss David Ricardo’s theory of specialization and comparative advantage.

Producing a car in Mexico is up to 40 percent cheaper than doing so in the US. With a simplistic and protectionist approach like Tump’s, producing cars in Mexico implies that the US would be losing potential jobs and wealth, simply because those cars were not produced in-country.

But this is far from the truth. The economy is not always a zero sum game, and it is ultimately more efficient to produce in a cheaper country. If people buy cars for 40 percent cheaper, for example, the resources saved could be used in other types of industries or investments in the United States, ones in which Americans can actually be more efficient in terms of production.

Moreover, an alternative is to invest in research and development, allowing citizens to access another level of labor specialization, and therefore significantly increase their standard of living.

In addition, offering a cheaper product means that more people can buy it. That allows companies to provide higher incomes, and to continue reinvesting in their business in an efficient way.

If Mexico produces cheaper cars, then the United States is better off buying them than producing them. It’s that simple. Mexico has a comparative advantage in that specific area, and to exploit it is convenient for all involved.

The proposed tariffs will have a negative effect on the economy because they deprive consumers of cheaper cars, and therefore affect their ability to acquire them.

If Trump had paid more attention in his economics classes, he would understand that specialization is an indirect path to production.

The US could certainly manufacture everything in its domestic market, but this would not be the most efficient thing to do. Instead, the country should allow the forces of the free market to act, and promote specialization in branches in which they are more productive, then sell the surplus on the international market. With the resulting profits, the country could purchase other products it needs and that its trading partners produce.

A market with tariffs, taxes, walls and borders is not attractive to anyone. These things seem to have been left in the past, but not for Trump and his followers, who still think they are the solution to economic prosperity.

The measures Trump proposes are equivalent to putting a noose around America’s neck, especially when countries like China are emerging as allies to the principles of specialization and free trade.

While Trump creates tension with the real producers of wealth (companies), Chinese President Xi Jinping proposes to fill the void the United States would leave, having recently presented himself as a “partner of globalization” at the World Economic Forum.

Central planning and protectionism have proven to be an absolute failure on each occasion they have been implemented. True efficiency comes from the sum of the free decisions of millions of individuals, who together form what is known as a “market force” — not through retrograde nationalist laws and speeches like Trump’s.

If the United States follows this type of policy, Mexico’s economic situation may face one of the most challenging times in its modern history. Officials must avoid falling into the temptations that statism, central planning, demagoguery and protectionism offer us. In the end, these measures are dangerous time bombs.

Rafael Ruiz Velasco

Rafael Ruiz Velasco earned a degree in Business Admininistration from the University of Anáhuac in México. He's passionate about development, project management, soccer, economics, and comic books.