"Dealmaker" Trump to China: "Stop or we'll shoot ourselves!"

Donald Trump campaigned - in part - on his reputation as a deal-maker. While some have disputed his acumen for making business deals, and others have questioned the ethics of his tactics, he made a convincing case to some loyal supporters that he would make good trade deals. 

The key to it all has been trade with China. At first, it seemed Trump wanted a hard line and hoped to ensure that China would reciprocate our openness with more openness on their own part, and by stopping its alleged "currency manipulation" (an allegation with dubious support). Now, the goal is to coerce China into cooperating with sanctions against North Korea.
Tying US trade policy with China to China's own reciprocity, or to other factors ignores one important aspect of trade theory: When the US remains open to trade, it is US citizens who gain the most, and those gains are mostly independent of whether individual trade partners choose to reciprocate. This is the basic idea of the mutual gains from trade. Hence, threatening sanctions against China to try to get them to cooperate is a threat on a similar plane as telling the police, "Stop or I'll shoot myself!"

Protectionism and the Great Depression

Many fear that the current economic and political climate is pushing countries - especially the United States and many parts of Europe - towards protectionism. There are many reasons this might be a bad thing in general, but first, a little history. A recent episode of NPR's Planet Money discusses the debate in the US over the Smoot-Hawley Tariff Act. Aside from several hilarious reference to comical-economist-and-actor-turned-Fox-News-commentator Ben Stein's (also straight man to host Jimmy Kimmel on Win Ben Stein's Money) character in Ferris Bueller's Day Off, the article documents many similarities in the protectionist view between that time and today. The sentiments documented even includes a snide remark about academic economists, (or, "college professors who never earned a dollar" - ZING!).

The article is a good start towards understanding two big points in the course: 1. That trade is good overall; and 2. some groups are hurt by it. Here is a chart documenting world exports from 1900-1960 (using data from the IMF):

The drop from about 3,500 to about 1,500 occurs between 1929 and 1932, the beginning of the Great Depression in the US, and economic downturns throughout Europe. While correlation does not guarantee causation, most economic historians credit the drop in trade (which was largely caused by bad and protectionist policies) as one of the key factors in precipitating the global depression.

It also documents the political economy of trade policy: that the gains from trade are diffuse and unseen, whereas the gains from policy interventions are usually more concentrated and visible. 

So, so basic reasons not to be protectionist: 1. to avoid retaliation; 2. to make consumers of imports better off (and consumers in general better off); and 3. to make exporters better off. The third reason is generally the hardest to grasp, and one which has fallen out of discussion over the last 20 years or so, but one that policy makers understood pretty well in the aftermath of WWII. We can only see this impact on exporters by developing general equilibrium into our understanding of trade theory.