Free trade has become a very naughty concept for the run-of-the-mill Republican voter in the Trump era. But free trade is an important component to a free economy. Why is that so complicated to understand?
Ever since the Trump administration announced scores of protectionist tariffs and new border taxes on everything from washing machines and solar panels to steel and aluminum, many Americans have been on edge. The next round of trade tariffs is planned to target various imports from China, risking a seemingly inevitable trade war between the world’s two largest economies as well.
Domestically, the majority of Americans also disagree with the administration’s sentiment that free trade will harm our country’s economy. In particular, millennials are the only living generation that openly welcomes the concepts of economic globalization and international free trade. During the 2016 election, for example, 48 percent of millennials viewed that free trade agreements, like the pre-Trump North American Free Trade Agreement, were generally positive for the United States – only 12 percent disagreed.
Now that millennials are set to become the largest consumer group in 2019, adopting trade policies that appeal to the interests of the majority of the American people should be a focus of the Trump administration. But, as we’ve seen with Trump’s protectionist moves, that sentiment is being ignored.
The craft beer industry, for example, is one of the multibillion dollar industries in the United States that require several raw materials and byproducts upon input (e.g., hops, grain, yeast, aluminum cans, glass bottles, etc.). Tariffs on these raw materials, like the aluminum levies, then directly force craft brewers and bottlers to pay more.
Millennials, the most prominent consumer group of craft beers in the United States, now must face higher prices for a product they love. This is because the higher costs that brewers and bottlers are subject to will be shared with customers through a trickle-down effect.
These higher prices invite fewer purchases and consumption, thus less revenue and profit. Less revenue and profit then translates to smaller payrolls, cost-cutting, and ultimately, higher unemployment.
If you amplify these tariffs beyond the craft beer industry to larger scales across dozens of industries, the economic impact could be dire. In fact, these matters boil down to the basics of macroeconomics. Tariffs, like taxes, are negative multipliers. When a duty or tax is artificially increased, aggregate consumer demand decreases, and lower tariffs result in increased aggregate consumer demand.
The Trump administration has done some good things for the American economy. Lower domestic taxes and removal of regulations are some of the highlights of the Trump domestic agenda to note. Yet with all of this said, Trump’s xenophobic approach to trade misses a key point: the American economy is already globalized, and that can’t be retracted.
