566566 Chapter 15 | Economic Policyin selected markets. For example, in September 2009, President Obama imposed a
35 percent tariff on Chinese tires. The chapter opener discussed the steel and aluminum
tariffs imposed by President Trump in 2017 and tensions with Mexico and Canada over
renegotiating NAFTA. The latter was successfully resolved with a new United States
Mexico Canada Agreement (USMCA) that received some concessions from Mexico
and Canada (especially for the auto and dairy industries) and was generally viewed as
a pro–free trade deal. However, the trade war with China deepened in 2018, with three
new rounds of tariffs on $250 billion of goods from China and promises of tariffs on
$279 billion more if China continues to retaliate against our exports. There is no end in
sight to this trade war, and late in 2018, some were speculating that China may detonate
the “nuclear option” in the trade war, which would be to stop buying our debt, or worse,
dumping the $1 trillion in treasuries that they own. This would dramatically drive up
interest rates in the United States and probably cause a recession.
In general, Congress and the president have supported free trade much more than
protectionism. Economists have long touted the virtues of exploiting “comparative
advantage” through free trade. In 1817 David Ricardo was the first to develop this
notion with the example of the production of wine and cloth in Portugal and Britain.^66
According to the argument, Portugal should produce excess wine and export it to
Britain because that is where their greatest relative advantage lay. Even if it seems
counterintuitive, Britain should produce excess cloth and export it in exchange for
the wine, even if Portugal could produce cloth more cheaply than Britain. By focusing
on this comparative advantage, free trade maximizes wealth in both countries.^67
Congress has pursued free-trade policies through NAFTA (1993), the Uruguay round
of the General Agreement on Tariffs and Trade (1994), fast-track authorization for the
USTR to negotiate trade agreements with minimal congressional interference (2002),
most-favored-nation trading status for China (2000), and the Central American Free
Trade Agreement (CAFTA, 2005), which reduced barriers and opened markets. The
Trans-Pacific Partnership (TPP) with 11 nations in the Asia-Pacific region was signed on
February 4, 2016, but President Trump pulled out of TPP early in 2017. As noted in the
chapter opener, he also has vowed to renegotiate NAFTA. Critics of the laws say that they
do not provide adequate protections for workers and the environment, promoting a “race
to the bottom” to cut costs while putting additional pressure on American jobs and wages.
The impact of free-trade agreements on American jobs and wages varies widely,
with estimates ranging from 1 to 4 million jobs lost in the past 20 years. Supporters of
the law point out that even when some jobs have been lost, the overall economy has
benefited; one study found that for every job lost because of NAFTA, $450,000 was
added to the economy in the form of higher productivity and lower consumer prices.^68
Also, some of these jobs would have been lost even without the trade agreements,
even in areas thought to be the United States’ comparative advantage, such as
computer programming. When programmers or computer customer support staff
in India earn about one-tenth of what they make in the United States, it is difficult
for American firms to compete in international markets unless they employ cheaper
labor.^69 This downward pressure on wages has contributed to income inequality in the
United States, and competitive pressures have led to the virtual extinction of some
U.S. industries, such as the manufacturing of consumer electronics, textiles, shoes,
and, increasingly, clothing. Thus, while free trade generally enhances worldwide
economic growth, there can be significant consequences for specific industries.The Politics of Trade Policy With stakes this high, it is not surprising that politics
often plays a central role in trade policy. There are two main explanations for the nature
of political influence on trade policy: constituency and ideology.^70 The constituency
explanation sees the two major parties as representing different groups—DemocratsFull_16_APT_64431_ch15_530-571.indd 566 15/11/18 2:35 PM