Must-Read: Barry Eichengreen: What’s the Problem With Protectionism?

Must-Read: Barry Eichengreen: What’s the Problem With Protectionism?:

The next president will not be a committed free trader.

The presumptive Democratic nominee, Hillary Clinton, is at best a lukewarm supporter of freer trade, and of the Trans-Pacific Partnership in particular. Her Republican counterpart, Donald Trump, is downright hostile to trade deals that would throw open US markets. Breaking with modern Republican tradition, Trump envisages a 35% tariff on imported cars and parts produced by Ford plants in Mexico and a 45% tariff on imports from China. Economists are all but unanimous in arguing that the macroeconomic effects of Trump’s plan would be disastrous….

Consider the following thought experiment. President Trump signs a bill slapping a tariff on imports from China. This shifts US spending toward goods produced by domestic firms. It puts upward pressure on US prices, which is helpful when there is a risk of deflation.
But then President Xi Jinping retaliates with a Chinese tariff, which shifts demand away from US goods. From the standpoint of American consumers, the only effect is that imports from China (now subject to tax) and their US-produced substitutes are both more costly than before. Under normal circumstances, this would be an undesirable outcome. But when deflation looms, upward pressure on prices is just what the doctor ordered…. I want to be clear: there are other, better ways of raising prices and stimulating economic activity in liquidity-trap conditions. The obvious alternative to import tariffs is plain-vanilla fiscal policy–tax cuts and increases in public spending. Still, the point… is important…. Those seeking a cure for the current malaise of ‘secular stagnation’–slow growth and sub-2% inflation–shouldn’t claim too much for the beneficial macroeconomic effects of trade agreements. And they shouldn’t invoke the old saw that Smoot-Hawley caused the Great Depression, because it didn’t. False claims, even when made in pursuit of good causes, do no one any good…