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Trump is Wrong about China's 'One-Sided Trade'

Jan 10, 2017

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There's something strange about trying to figure out the policy of the next US government via 140 character memos. But that's the world Donald Trump has delivered us to. One of his latest notes caught my eye. It said:

  • China has been taking out massive amounts of money & wealth from the U.S. in totally one-sided trade, but won't help with North Korea. Nice!

Don't worry. This isn't an attack on the stupidity of Trump, Twitter, China or North Korea. It's a defence of the most important - and often misunderstood - idea in the modern world. I think Donald Trump clearly misunderstands it. Today I want to explain why seeing how he's wrong could help Britain negotiate with the EU. More on that in a second.

The idea? Freedom!

What exactly is freedom? It's easy to forget what the root idea is all about. When we talk about democracy, the economy and trade (free or otherwise) the concept of freedom is often lost.

I'll use Milton Friedman's definition of political freedom as my starting point. Freedom is the absence of coercion of a man by his fellow men. To me that's as broad a definition as is possible. I'm free to eat what I want for lunch today (no one will force me to eat something I don't want). I'm not free to avoid paying my taxes (if I do, the government will prosecute me). That's where the idea of libertarianism comes from - you cannot be truly free in your exchanges with the government, because there are certain things that you will be forced to do.

Freedom from government is, alas, too big a topic to cover today. But what about free trade? The freedom to trade with whomever you want, whenever you want and at a price that's mutually agreeable?

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In its purest form, that's what free trade is. It's a noble idea. As a buyer you're free to buy what you want; a seller is free to sell what they want. If both parties are free to choose and can reach an agreement, we discover the price of something. It's the price that's beneficial to both sides. If either buyer or seller wasn't happy they'd be free to walk away and no trade would happen.

Another way of saying this is that free trade only happens when it's beneficial to both sides... otherwise it wouldn't occur. Let's take Trump's tweet as an example of how this idea is misunderstood. China has taken money from the US in "totally one-sided trade".

It's a completely illogical statement. A "one-sided trade" would be me selling my house to myself. Or my left hand trading with my right. Trade by its nature is two sided: a buyer and a seller. No one coerced the US into trading with China. American businesses were free to not buy Chinese-made products. But they bought them anyway. Why?

Because - like all free trade - it was mutually beneficial for both sides of the trade... otherwise it wouldn't have happened!

What Trump really means is that the US is now regretting the long-term consequences of its actions. There were downsides that weren't apparent at the time of the trade. Or perhaps they were apparent, but they were ignored, downplayed or misunderstood.

For instance, Trump has a clothes line. Yes, I know. Quiet down at the back. It's called the Donald J. Trump Collection. Its products are made in China, Bangladesh, Honduras and Vietnam. Why? Because it was beneficial for Trump to make them there. Why else would the labour be outsourced? He did it because it was in his business' interests.

This is an idea that goes all the way back to Adam Smith's The Wealth of Nations and his theory of the benefits of the division of labour. An economy becomes more efficient and grows as people specialise in different skills and become more productive.

The only restraint is the "extent of the market". Trading with other nations - expanding from a domestic market to an international one - helps overcome this. It increases the specialisation and the division of labour possible in the economy. So you get whole nations that effectively specialise in certain industries. In Britain that might be finance. In Bangladesh it might be textiles. We have an international division of labour.

Of course, not everyone likes the results of free trade. That's understandable. The benefits aren't evenly distributed at all. But at least those benefits come about through exchanges free from coercion.

The "solution" if you're Trump, would be to stop people and businesses acting in certain ways - to coerce them, reduce and attack their freedom to act. A ban on Chinese goods, for instance. It may make your voters feel like you're doing something. But really you're just attacking people's freedom of action.

By the way, that was one of the reasons we here at Capital & Conflict argued for Britain to leave the EU. We're not a government agency. We're free to stand up for freedom and economic liberty without worrying about voters.

The European Union isn't a free trade organisation. You're only free to trade with the other 27 nations inside it. You're not free to trade with the rest of the world. You can't easily choose to trade with nations outside that bloc. That's a form of coercion. You're not freely making that choice; it's being imposed on you.

Which puts Britain in an interesting position when negotiations begin. What are our core principles? Are we willing to take a position with economic liberty at its core?

I'm not so sure. As negotiations begin, expect to hear talk of things like allowances, deals, tariffs and so on. The big, bold thing to do would be for Britain to open up for business on a free trade basis with every nation on the planet, EU or not. Tell the other 27 countries in the EU they can sell what they want, when they want and at a price they want to Britain, without fear of tariffs or duties. It's just they'll be competing freely with every other country in the world.

In other words, take a stand for freedom. Attach no strings to the deal. Do not coerce or threaten. Then see what the EU offers. You're at least negotiating from a position of principle.

I doubt that will happen. Politics and process will trump principles. That may be the reality. But standing, looking on, we should remember: there are some things worth standing up for in life. The freedom to live, vote, trade and interact exactly as we please is one of them. It's worth standing up for.

Please note: This article was first published in Capital and Conflict on January 06, 2016.

Nick O'Connor is a writer and editor at Moneyweek. He is also the publisher of Exponential Investor.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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