This week marks the bicentennial of the publication of one of the most important books in economic history. Judging how he marked the anniversary, I'm guessing Donald Trump hasn't spent the week boning up on it.
On April 19, 1817, David Ricardo – who, like the U.S. President, was a tremendously wealthy businessman who launched a second career in politics – published On the Principles of Political Economy and Taxation. The book introduced the world to the concept of "comparative advantage" – the principle that has endured at the core of the free-trade argument ever since. It's one of the seminal moments in the history of economic thought.
The idea of comparative advantage is that every country is better at producing some things than it is at others; if it exports things it is more efficient at producing, while importing the things it is less good at, and its trading partner does likewise, both countries are better off. By making use of each other's comparative advantages, both end up with more goods for the same amount of inputs of labour and capital than if they had relied solely on domestic production; they allocate their resources more efficiently; they reduce costs. It's the classic win-win.
As Mr. Ricardo put it, international trade "will very powerfully contribute to increase the mass of commodities, and therefore the sum of enjoyments."
While governments haven't always agreed, the idea has dominated world economic thinking for much of the 70-odd years since the end of the Second World War. It is at the root of the massive wave of globalization that has reshaped the world economy. Many credit the growth in global trade flows with spurring the unprecedented economic prosperity and technological advancement seen in the second half of the 20th century. While economists quibble about the extent to which Ricardian economic theory translates into real-world trade decisions, it's taken as pretty much a given that comparative advantage works.
"Ricardo's framework has endured as a workhorse model of international trade because of the malleability of its underlying structure and the timeless insights that it yields," wrote Dartmouth College economics professor Douglas Irwin in a commentary on the London-based Centre for Economic Policy Research's website marking the anniversary.
Apparently, Mr. Trump disagrees.
The day before Mr. Ricardo's notable anniversary, the leader of the world's most powerful economy took another step down the protectionist path he has mapped out for his presidency. His "Buy American, Hire American" executive order will enforce requirements to maximize the use of U.S.-made goods and materials, and U.S.-based contractors, in all contracts with the federal government and federal agencies.
Mr. Trump says his actions will promote more good jobs for middle-class American workers. Narrowly speaking, there's almost certainly some truth in that: Buy more American-made stuff, and you'll need more Americans to make it.
But if it were more efficient and cost-effective to award those supply contracts to U.S. manufacturers, government departments and agencies would have already been doing so – they wouldn't need a Buy American law to order them to. So that's the first problem: Poor, inefficient, expensive use of taxpayers' money.
Devoting those tax dollars to less-efficient output amounts to a substantial misallocation of labour and resources that would otherwise end up in other areas of the U.S. economy that offer superior comparative advantages, artificially starving those sectors of demand and, by extension, jobs. (It doesn't help, from a Canadian perspective, that it also misallocates resources in the Canadian economy, as goods for which Canada has a comparative advantage are thwarted at the border.) The reliance on higher-cost goods and materials is generally inflationary, which is a drag on consumption – which, again, hurts job creation. Push protectionist, America-first policies far enough, and the inefficiencies you promote will stifle economic growth, remove market-based incentives for job creation and innovation, and generally lower living standards.
America-first protectionism is a gross distortion of market forces, and not for the better. Free-market believers in Mr. Trump's own party must be pulling their hair out.
But try telling this to the economic brain trust in the Trump administration, which is convinced that trade is not a win-win proposition, and that the U.S. has been losing. The head of Mr. Trump's White House National Trade Council, economist Peter Navarro, recently argued that "most of our profession, as well as much of the mainstream media, continues to embrace and espouse an antiquated Ricardian view of the world that has little to do with the events or risks of our time."
So the Trump administration is openly challenging 200 years of sound economic wisdom. U.S. taxpayers will be on the hook for it.
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