Category: free trade

An Open Letter to President Trump

Eighty-eight years ago on the third of May, 1,028 economists signed an open letter to Congress to oppose the Smoot-Hawley Tariff Act, explaining that protectionist tariffs are harmful to the U.S. economy. On May 3, 2018, over 1,100 economists (including yours truly) signed an open letter to President Trump and Congress expressing concern about the President’s threatened (and enacted) trade tariffs–using substantially the exact same letter that was sent 88 years before. That is because–and to illustrate that–the basic economic principles have not changed. Protectionist tariffs harm consumers, harm a large majority of producers, and harm the economy overall .

The letter has been covered by a variety of news sites, including:

The Smoot-Hawley Act is generally viewed as having contributed to the severity of the Great Depression, despite Congress’s (misguided) intent. While the modern economic environment is not necessarily in as fragile a state as it may have been in 1930, and the extent of the implications may not be as severe, the current administration’s threats of trade restrictions nonetheless risk a dampening of economic activity and reduced social well-being.

This is the kind of thing that happens when people don’t pay attention to history.

Or even pop culture…

A Tilted Level Playing Field For Farmers

Yesterday, the World Trade Organization ruled in favor of the United States on claims that India had violated trade rules by prohibiting imports of US poultry, meat, eggs, and live pigs on “phytosanitary” (i.e., food safety) grounds. The WTO ruling is available here.

US farmer organizations were predictably thrilled by the ruling, since it may force India to open up it’s market to the tune of $300 million a year. I was particularly taken by this quote in the Des Moines Register by David Miller, director of research and commodity services for the Iowa Farm Bureau Federation:

“Iowa and U.S. farmers want a level playing field for international trade and we are confident that the WTO dispute resolution process provides an avenue for that to happen.”

I can only assume, then, that the Iowa Farm Bureau will also support removing the protectionist US sugar program, which restricts sugar imports and causes the price of sugar in the US to be 2 to 3 times higher than the world price of sugar. A recent study by Beghin and Elobeid published in the journal Applied Economic Perspectives and Policy suggests that eliminating the sugar quota would make US consumers better off to the tune of $2.9 to $3.5 billion per year and create as many as 20,000 new jobs.

Of course, that would come at a cost to Iowa corn farmers, who benefit greatly from inflated sugar prices that create a market opportunity for high-fructose corn syrup. Or perhaps what Mr. Miller meant is that Iowa and US farmers want a level playing field for international trade, as long as it tilts in their favor.

Free Trade and Democracy

Xuepeng Lui and Emanual Ornelas have a rather interesting paper in the current issue of American Economic Journal: Macroeconomics (Vol 6, No 2) examining the relation between participation in free trade agreements (FTAs) and the sustainability of democracy. Using hazard and duration models, and accounting for endogeneity of the dynamics, they find that participation in FTAs is positively related to democratic stability. The authors’ findings suggest the bi-lateral nature of FTAs, rather than just a unilateral free-trade regime, make credible the rent-dissipating effects of free trade and reduce incentives to subvert the democratic regime. The authors further show that the adoption of FTAs does not appear to be influenced by how democratic trading partners are, but FTAs do appear to be used as defensive measures by less stable democracies. It’s a thoughtfully done piece that illustrates the interactions of socio-political and economic institutions. The abstract follows:

We study the relationship between participation in free trade agreements (FTAs) and the sustainability of democracy. Our model shows that FTAs can critically reduce the incentive of authoritarian groups to seek power by destroying protectionist rents, thus making democracies last longer. This gives governments in unstable democracies an extra motive to form FTAs. Hence, greater democratic instability induces governments to boost their FTA commitments. In a dataset with 116 countries over 1960-2007, we find robust support for these predictions. They help to rationalize the rapid simultaneous growth of regionalism and of worldwide democratization since the late 1980s.