Proctectonism will weaken the economy

American President-elect Donald Trump’s arguably worst quality is his protectionist trade policy. He has promised to “bring jobs back to America” by slapping punitive tariffs on imports, or at least imports from China and Mexico.

Recently, a few manufacturing companies like Carrier, Ford and Fiat Chrysler, have announced that they would refrain from investments in Mexico or even make new investments in the United States. Trump and his supporters have used this as anecdotal evidence that the trade policies he has pledged to implement works are successful.

Wrong. Such policies will probably reduce the trade deficit, though not by much as Trump supporters think, as the dollar will rise in value. Furthermore, a lower trade deficit means a lower inflow of capital (a rule of national accounting any serious economist is aware of), raising the cost of capital, something which in turn will lower investments in domestic industries.

So while there will be some workers who will benefit from such policies, the nation as a whole won’t benefit. Quite to the contrary, by not benefiting from the benefits of the comparative advantage effect that trade brings, the economy will be weaker.