Is free trade synonymous with competitive advantage? Is a country who is positioned itself to trade with another country in the most unilaterally advantageous fashion, merely exercising what in macro economics is referred to as competitive advantage?
Milton Friedman, a staunch advocate for free trade stated in an a column for Newsweek Magazine over 20 years ago, that when imposing preemptive or retaliatory tariffs, “we only increase the hurt to us—and also to them—by imposing additional restrictions in our turn. The wise course for us is precisely the opposite—to move unilaterally toward free trade. If they still choose to impose restrictions, that is too bad but at least we have not added insult to injury.” The message is stay the course on free trade even if the trading partner sets tariffs or trading restrictions on US exports. The goal is always, to paraphrase Adam Smith, ‘in every country, it always is and must be in the interest of the people to buy what ever they want of those who sell it cheapest.’ That is not to say that American industry or labor markets need to be beholden to international economic interest first. Free trade happens when mutually beneficial agreements are reached.
The America First Doctrine
Under President Trump’s administration, competitive advantage practices will always be part of our business practices. But simply maintaining competitive advantage is not synonymous with free trade. American companies, who produce motherboards, for example, can still maintain their competitive advantage, whether it is a highly educated workforce, or proximity to domestic markets etc. Free trade allows those same companies to find markets, in other parts of the globe to trade freely, taking advantage of the competitive advantage they’ve strategically positioned themselves to have in the first place.
Economic theory tells us that maintaining free trade agreements with China is not just advantages to US companies it is the best path forward. Take soy beans for example, China was our biggest trading “partner” and soy bean farmers benefitted from this agreement. Now China has decided not to buy from US farmers in response to our sanctions and those same farmers are feeling the economic impact. Farmer’s loss of revenue is being subsidized by US tax payers to the tune of 4.5 billion dollars. Farmers still employ sophisticated farming methods, vis a vis competitive advantage over other farmers in other international markets, but the competitive advantage is only positively felt when it produces more sales not less.
Under the Trump administration , trade, free trade and fair trade all mean one thing, trade that is above all else beneficial to US economic interests, to achieve a positive sum game. Free trade is viewed as a tool by which leverage can be exercised to strong arm our political and economic partners or foes. Fair trade was to be sought at whatever cost, even if that meant ostracizing current and former trading partners.
Being a US trading partner goes beyond just simply buying and selling of goods, it is maintaining a business climate that is not detrimental to the US economy and multinational companies, such as economic, and social stability which may include things such as Hyperinflation, state intervention in the economy including expropriations, macroeconomic distortions, physical insecurity, corruption, violations of labor rights, and a volatile regulatory framework.
What we have now under the current US administration, for example is competitive advantage practices which will always, be part of our business, irrespective of whose in office, but without trading partners instead of rivals American companies and US consumers will feel the impacts.
A purely isolationist economic policy is obsolete in a globalized economic system. The flood gates of trade and opportunity have been opened to every nation, thanks in part to technology. We can’t afford to turn the clock back to a time when technology didn’t exist, as we run the risk of other developing nations leapfrogging American trade and productivity. The markets must remain open is we are to continue to lead in this new world economy.