Great Antidote Extras: Christine McDaniel on Trade: A Tale of Two Presidents

international trade tariffs presidents

Kevin Lavery for AdamSmithWorks

It seems as though America goes through cycles of economic liberalization where the free market is glorified and allowed to grow, and illiberalism where globalization is labeled as the enemy of the American economy and working class. Is this current moment just a part of that cycle? Lavey reflects on McDaniel's Great Antidote episode. 
Is President Joe Biden’s trade policy different from President Donald Trump’s? Does free trade harm Americans or does it drive competition, innovation, and economic progress? Christine McDaniel joins The Great Antidote host Juliette Sellgren to discuss the effect of tariffs on American consumers, the rent seeking within protectionism, and how trade liberalization contributes to a more prosperous world. You can listen to the episode here.

Christine McDaniel is a Senior Research Fellow at the Mercatus Center. Her research is centered on international trade, globalization, and economic modeling. McDaniel has previously held many positions in the U.S. government, including Deputy Assistant Secretary at the Treasury Department and senior trade economist in the White House Council of Economic Advisers.

A theme of their discussion is the way political concerns of leaders often take precedence over sound economic policy. Politicians of both political parties’ benefit from demonizing free trade. Republicans make nationalistic arguments for protectionism such as framing the outsourcing of ‘traditional American jobs’ as other nations taking advantage of the U.S. Democrats focus on the impact of climate change or worsening economic inequality due to globalization. McDaniel warns people to be aware of politicians trying to “protect” people from competition through free trade.
…the net benefits of the government trying to protect domestic workers and producers from import competition are much smaller than the net costs of doing that. While it might sound great to anybody on the street to say, “you know the government's going to  help protect you from import competition,” the net effects are negative. It might help a small group of people but the cost on everybody else is so much greater.
McDaniel uses the Trump administration as an example. Former President Trump rode into office on the back of anti-globalization rhetoric. On the campaign trail he attacked free trade agreements like NAFTA (North American Free Trade Agreement) for hollowing out the Midwest and destroying America’s manufacturing economy. Sellgren and McDaniel go over how, when elected, Trump fulfilled his rhetoric. The Trump administration contributed to the restructuring of NAFTA into the USMCA (United States-Mexico-Canada Agreement), pulling out of the Trans-Pacific Partnership, and placing sky high tariffs on China, especially on productive inputs like steel. Contrary to the label of protectionism, these measures were destructive. Higher tariffs raise production costs which raise prices. McDaniel cites research that shows each steel job saved through tariffs cost Americans about $650,000.
One way to think about U.S. tariffs is death by a thousand cuts right because every time there's a new tariff on U.S imports it either hits you at the checkout aisle or it hurts the U.S. economy in terms of U.S companies now having to pay higher prices to purchase inputs. So those import taxes make U.S manufacturers less competitive both here and abroad and they either will lose sales, or they'll take the hits and the markup. We do see this in the sectors that have been hit more by tariffs…we also see the effects in terms of U.S jobs because as firms take the hit-end markup they will pull back in other areas like employment. The U.S companies that got hit by retaliatory tariffs shrank their employment base.
McDaniel takes this to mean that taking the intentions of legislators at face value can be dangerous.
The devil’s in the details and what really that meant was just a whole bunch of tariffs that placed more taxes on U.S. imports. Then other countries retaliated and of course that meant that U.S. exporters were faced with those tariffs on their goods when they were trying to sell abroad, so the tariffs just boomeranged right back into the U.S. economy.
However, Democrats shouldn’t get too excited hearing this. McDaniel and Sellgren make sure to note that President Biden hasn’t changed much of anything regarding trade policy. McDaniel states that the policies are the same, but the marketing has changed. To her, President Biden focuses r on national security and foreign policy. National security, particularly involving China, is a perennial topic.  Another issue likely to influence voters in 2024 is inflation. Tariffs have a noticeable impact on inflation and McDaniel mentions that trade liberalization is part of a package of policies that can help stem the tide of inflation.
So, if you look at the price index for U.S goods and you break it down by tradable goods and non-tradable goods you see this huge difference. In terms of U.S tradable goods, they have experienced stark deflation over the years while the non-tradable goods in the U.S have experienced a steady march of upward price movement. So, what the tariffs do is you know they reverse a little bit of that and now they're putting a little bit more upward pressure on those prices of tradable goods. Reducing these tariffs will not solve the inflation issue at all but it certainly wouldn't hurt. I've seen some studies that show it might shave between a half and one and a half percentage points. But just because it wouldn't solve it doesn’t mean we shouldn't do it, there's usually never just one solution to any problem.
McDaniel acknowledges that free trade has costs, just like all forms of creative destruction. Yes, a significant number of workers in vulnerable sectors such as manufacturing are at risk of losing their jobs due to globalization. But McDaniel also expresses that seeking to protect every single worker in a job that’s competing with lower cost alternatives is an impossible aim and is not worth sacrificing the economic well-being of the nation. This reminds me of Frederic Bastiat’s famous satirical essay, “Petition of the Manufacturers of Candles,” in which candlemakers pleading for the state to them from the unfair competition of the sun. If this was possible, yes candlestick makers would be better off, but at the expense of everyone else.
The alternative to free trade is protectionism and favoritism. You just end up with this activist trade policy where companies and trade associations are encouraged to try and seek special treatment. It's called rent seeking when interest groups try to create favor. Even if we can't do the redistribution ideally because there are going to be some winners and losers from trade and technology, you still need to look at the counterfactual. We ultimately cannot protect every single American worker from global competition, all we can do though is help write the rules that we believe in and then let people run the race.
The main boogeyman for protectionist activists is China. McDaniel argues that a U.S.-China trade deal would be incredibly beneficial to both nations. The differences between the two nations  makes the potential for gains from trade extremely high. But McDaniel doesn’t think a landmark deal to end the trade war between two of the world’s superpowers is likely due to the attitudes of Americans towards the Chinese government. Because of these views a free trade deal with China might hurt a president. 
I don't really see a U.S China trade deal in our future anytime soon because the American public just does not have the stomach to freely open up their market to a huge economy that is state run and will subsidize companies for their own reasons that do not comport with the principles of reciprocity.
The episode mostly tackles the downsides of protectionism; however, McDaniel does also bring arguments in favor of free trade to the discussion. With her last point she lays out why free trade isn’t just the lesser of two evils, but a clear benefit to humanity.
Over time each generation gets a chance to mold its skills to the dynamism of an economy that has trade that's open to the world. If you don't do that you get people stuck into these stagnant situations but when you're open to goods and services and ideas and people from around the world it encourages innovation and human flourishing. It's true that at any point in time there will be people that struggle, whether that be from free trade or technology, it’s inevitable. But their children in the next generation are going to be better off.


1. Economic illiberalism pushed by figures on the right and left has become increasingly popular, evidenced by the rise of figures such as Donald Trump and Elizabeth Warren. How can  liberalizing trade arguments be phrased in a personal way that connects with everyday people?

2. McDaniel states that instead of prioritizing infrastructure and industrial policy, there should be more of a focus on investing in education as well as research and development. This is vague, what does McDaniel’s vision of investment look like? How can this economic re-calibration be accomplished without falling into the same trap of rent-seeking that that industrial policy creates?

3. One of McDaniel’s points is that the rhetoric around trade policy has changed from the Trump to the Biden administration while the policies have largely stayed the same. However, Trump and Biden both appealed to national security and national pride. Is it the absence of the nationalistic rhetoric with Biden that makes McDaniel state this?

4. McDaniel repeatedly makes the point that free trade will inevitably harm some people. Some have suggested re-training by the government as a viable option for those who have lost their jobs due to outsourcing. Is there a more libertarian solution than government jobs training?

5. It seems as though America goes through cycles of economic liberalization where the free market is glorified and allowed to grow, and illiberalism where globalization is labeled as the enemy of the American economy and working class. Is this current moment just a part of that cycle?

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