⤵ Why populist economics is bad: trade protectionism edition

Yeah, I know all about the wildly overstated China trade shock.

Openness and connection are central to pro-growth Up Wing economics (as outlined in this newsletter and my book The Conservative Futurist). This means using public policy to help (or at least not impede) the development of dense networks of humans, institutions, and technologies to generate, share, and process information — all with the goal of creating increasingly complex and valuable products. Picture America's economy as a vast, intricate computer, constantly rearranging matter into "crystals of imagination" — from basic commodities to 21st-century marvels like Nvidia's GPUs and SpaceX's reusable rockets.

Up Wing thinking also embraces (Friedrich) Hayekian humility: Policymakers can't control everything, so let's tread carefully. It cautions against overconfidence in managing complex systems, instead favoring bottom-up innovation in free markets, where decentralized decision-making enables experimentation and self-correction. (This aligns with Hayek's view of dispersed knowledge and spontaneous order.) No central authority can fully control or even understand the future, making entrepreneurial dynamism crucial for progress.

This brings us to my deep opposition to trade protectionism and deep skepticism of industrial policy. These approaches hinder the openness, connection, and decentralized innovation that drive growth. No wonder, then, that I have deep problems with the economic policies of the current and previous presidential administrations. 

Quick reminder: The Trump administration launched a trade war in 2018, imposing tariffs on a wide range of imports, particularly from China, as a form of industrial policy aimed at reviving domestic manufacturing. While Trump didn’t enact large-scale industrial policy legislation, his administration used tariffs, threats of tariffs, and other trade measures as de facto industrial policy to protect and promote specific industries like steel and aluminum. The Biden administration has largely kept these tariffs in place and even expanded them, recently announcing 100 percent tariffs on Chinese electric vehicles. Biden has also pursued more explicit industrial policies, enacting the CHIPS Act to subsidize semiconductor production and the Inflation Reduction Act to promote clean energy manufacturing.

If you’re looking for a deep evaluation of these policies of two presidencies (and it looks like no matter who wins in November, more such policymaking is on its way), I urge you to check out the new analysis “Protectionism is Failing and Wrongheaded: An Evaluation of the Post-2017 Shift toward Trade Wars and Industrial Policy” by economist Michael Strain, my colleague at the American Enterprise Institute. Strain defines industrial policy as deliberate government actions to override market outcomes to promote specific industries chosen by policymakers. It’s a definition that encompasses both tariff regimes and targeted government spending programs.

From the abstract (bold by me):

The Trump-Pence and Biden-Harris administrations enthusiastically embraced protectionism. Each administration explicitly argued for a break from the bipartisan consensus of recent decades that has been generally supportive of free trade and of allowing markets to shape US industrial and employment composition. But the protectionism of the Trump and Biden administrations has not succeeded and likely will not succeed at meeting its goals: they have caused manufacturing employment to decline, not to increase; they have not reduced the overall trade deficit; they have not led to a substantial decoupling of the US and Chinese economies.  More fundamentally, the goals that have not been met are wrongheaded: policymakers should not pay inordinate attention to manufacturing employment, and the trade deficit is a poor guide to economic policy.  Finally, these wrongheaded goals often rest on fundamental economic misperceptions: free trade is not a policy to create good jobs; it is a policy to increase productivity, wages, and consumption. The balance of the evidence suggests that free trade, including trade with China, has not reduced employment. Of course, trade and technological advances have been disruptive. But populist policies adopted in response will hurt workers, not help them.

Let’s briefly run through some of the evidence for Strain’s findings of trade protectionism failure: