Don Boudreaux, at Cafe Hayek, recently took issue with President-Elect Donald Trump on the question of trade. While there’s much about which to argue with Trump about his potential trade policies, here I must take issue with Boudreaux. Boudreaux argued that a Trump remark in a PBS interview about the EU beating [his emphasis] the US in trade demonstrates Trump’s ignorance of trade matters.
I suggest that Boudreaux has demonstrated his lack of understanding of what Trump believes it means to be beaten in trade. Boudreaux based his argument on a free market environment in which I have bags of peanuts, you have pears, the two of us agree on an exchange, and thus
If I accept, then we trade. You gain; I gain. We both gain. No one “beat” the other.
Of course. There’s no reason to believe Trump doesn’t understand that; he’s too successful a businessman.
Boudreaux then threw in a complication: Jones, who’s now nearby with his own supply of bags of peanuts. You are then able to do a better (in some sense) deal with me to get more of my peanuts for the same number of your pears or to get the same number of my peanuts for fewer of your pears.
[B]oth you and I gain. No one gets “beat.” Each of us, to use Trumpian language, is “a winner.”
Again, of course. We’re both still better off than had we not done the deal; competition just changed the degree of “better off.” Again, there’s no reason to believe Trump doesn’t understand that; he’s too successful a businessman.
But this isn’t the sort of thing Trump is talking about when he decries existing trade deals (not trade, and not multi-party trade).
Here’s another scenario that Boudreaux omitted from his vignettes. You and I have our supplies of peanuts and pears for trade, and Jones has his peanut supply to trade, just as before. This time, though, Jones offers his peanuts below his cost of getting them. Further, he does this, not because he’s offering a temporary loss leader to introduce himself to a new customer or to a new market, but because he has a Sugar Momma who’ll make good his losses for as long as it suits her and for her own reasons. Now you do your deal with Jones, or you divide your custom between Jones and me, for many fewer pears or for many more peanuts than would be the case without this nonmarket intervention. Instead, the terms are driven by Jones’ artificially low, subsidized price.
You and I both are beaten in this arrangement. I lose immediately because I don’t get the price for my peanuts I might have gotten in a fair negotiation; the price I am able to get—if I can trade at all—is governed by Jones’ subsidized price. You lose later because after you’ve become accustomed to those low prices, something changes in Jones’ environment (perhaps his Sugar Momma no longer can afford her subsidizing Jones), his price suddenly rises, and you must deal with that price shock to your trading.
Given Trump’s repeated (if under-reported) emphasis on fair trade deals, good trade deals, this would seem to be what Trump means by being beaten by the EU, by China, etc.
It’s puzzling that Boudreaux doesn’t understand that. He’s too good an economist.