U.S. Trade interests

04/10/2018

Brady Gambone

Shirk

U.S. Trade Interests

Lately, the United States policy on trade, and the overall strategy regarding trade has been blurred by the actions of President Trump. The current trade war between the United States and China has skewed our economic mission throughout the world. The United States interests in trade is not to 'win' trade, to serve interest groups, or to build a U.S. lead world order. The sole propose of trade between two countries is to decrease the price of goods or services that country, by receiving them from overseas, and to distribute new goods or services to a country for a profit.

Trade between two countries, even if one country is considerably smaller and/or poorer than the other, benefits both countries. The concept of absolute and comparative advantage explains this quite simply. Simply enough it is surprising even today, countries still impose tariffs.

Absolute and comparative advantage can be explained with just two goods and two countries. Say the United States trades apples, and China trades pears. If the U.S. has 12 apples and 4 pears, and China has 6 apples and 3 pears, the United State has an absolute advantage in both goods. They can produce more of each good than China if they maximize production for that specific good. However, China has the comparative advantage in producing pears, while the U.S. has comparative advantage in producing apples. When the United States produces apples, and China produces pears, both countries will receive more product. Therefore, the United States will trade apples to China, for pears. It is never the case where a country can have comparative advantage in both goods. Regardless of the country’s overall GDP. This should be the United States strategy and policy on trade. To trade any goods, it has comparative advantage in between any country, to maximize the amount of the product produced in the world, effectively raising the supply, and ultimately lowering the cost.

However, this is not the case in the world today. Recently, there has been debate about who will 'win' a trade war between the United States and China. More appropriately, the question should be who will 'lose less'. When the United States imposes tariffs on China, it hurts both economies. If the United States charges a tariff of 1 dollar on each pear produced by China, the cost of that tariff is not paid 100% by China. The price of production just went up 1 dollar. This results in a decrease in demand in the United States for pears, causing China to lower the price, but not as low as the original price without a tariff. Instead, it is likely 50% of the tariff (50 cents) will be added to the price of each pear, and cuts in pay, (50 cents), for employees in China, in order to be as well off as they were before, will be instituted. Now, both countries must pay a proportion of the tariff, resulting in losses for everyone.

United States trade policy is currently flawed. The solution is simple, free and open markets, that allow for substantial trade of comparatively advantageous goods. Over time, tariffs will only hurt the economies of both the receiver and the imposer of the tariffs.