Weekly Geopolitical Report – Reflections on Trade: Part I (May 1, 2017)
by Bill O’Grady
Donald Trump ran on a platform opposing free trade. Although Congressional support for free trade has been waning for some time, the general consensus among economists is that free trade makes the economy more efficient and supports global stability.
However, the steady erosion of manufacturing jobs in the U.S. and the shrinking of the middle class have called the consensus view into question. It is clear that President Trump’s anti-trade rhetoric resonated with voters and was one of the factors that led to his election.
Since the election, there have been a number of assertions made about trade, both positive and negative, that appear to us to be only partially true and perhaps designed to support a particular position. Trade can be negative for participants facing competition from abroad; for the overall economy, it does seem to bring more variety and lower prices.
In this multi-part report, we will offer several reflections on trade that we hope can provide some insight into how to use macroeconomics to judge the veracity of certain claims. It is our goal to present a fair reading of economic theory that will help readers make sense of what the media reports. This topic is worthy of a geopolitical report because American trade policy has been a critical element in how the U.S. manages its superpower role. In Part I, we will lay out the basic macroeconomics of trade. In Part II, we will discuss the impact of exchange rates and further examine the two models of economic development. Part III will analyze the reserve currency’s effect on trade. Part IV will look at some real world examples and conclude with market ramifications.