Fight Protectionism, Promote Prosperity

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World News /24 Feb 2018

Fight Protectionism, Promote Prosperity

The Trump administration is imposing new tariffs on solar panels. Since China is the major exporter of solar panels to the United States, perhaps President Trump is realizing his “America First” strategy. Yet he is also destroying the liberal free trade order. The U.S. needs pro-trade policies for its future prosperity.

This setback to free trade may turn out to be a gain. The U.S. will face serious economic challenges when it withdraws from a multilateral trade framework. Deepened retaliation by its trading partners, including China, will force the U.S. to recalculate. No unilateral retaliation can ameliorate the current trade dilemma between these two giant economies. Only mutually reciprocal negotiations and agreements can solve trade problems. Such an agreement will do a number of things.

Maximize global welfare. Liberal trade facilitates the international free flow and optimization of production factors: capital, labor, and technology. Every country can attain scarce goods or services at a comparatively low price because of trade creation. However, trade protectionism reduces the total welfare due to trade diversion, increasing costs.

Strengthen the dollar. A stable and open trade policy promotes U.S. dollar appreciation and capital inflow. Yet, trade protectionism undermines investors’ confidence in holding U.S. dollar denominated assets. The U.S. dollar index DXY has reached its lowest level (88.43) since 2015. The market reaction tells us that President Trump’s policy will not make America great again.

Promote Peace. Close and strong economic ties between countries raise the costs of disrupting relations. Trade is not a zero-sum game. Trade makes participants more interdependent. When market power substitutes for military power to achieve national interests and goals, wars are avoided. Peace is preserved. China and the U.S. should play exemplary roles in pursue of trade agreements.

President Trump states that his policy aims to protect the interests of American workers, farmers, and industry against unfair trade. However, his protectionist measures limit product diversity and force domestic consumers to purchase high-cost domestic products instead of competitive foreign goods. Thus, the tariffs imposed on imported Chinese solar panels will make the American people bear the costs of his policy.

Furthermore, the U.S. will lose jobs. Most of the work in the United States related to solar panels is installation, not production. In one of the most dynamic sectors for job growth –up 24% since 2015 —increasing tariffs may cause 48,000 to 63,000 U.S. solar workers to lose their jobs in 2018.

Sino-U.S. trade relations should be mutually beneficial. Both China and the United States, important members of the World Trade Organization, should uphold the authority of its rules and work together to improve the multilateral trade system based on its principles. The darkness before dawn will not last long. The era of liberal trade will eventually come back as the global economy keeps flourishing. We don’t want a trade war. The return of liberal trade will bring us prosperity and peace.

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