by Dr. Roy Cordato
Senior Economist, Emeritas
There is a puzzling term regularly being used by members of the Trump administration that, they argue, is the ultimate goal of their protectionist trade policies. The phrase is “reciprocal trade.”
The expression is troubling because, as an economist, I understand that all trade, by definition, is reciprocal. It is best to think of a trade as simply two parties coming together for mutual gain with each of them giving up something that they possess for something that they want more. It is this symbiotic nature of all trades that distinguishes trade from theft and what makes all trade reciprocal.
Of course, the parties to the trade do not have to be individuals. They can be two companies, an individual and a company, or the product of a long series of trades, which is the case with respect to most products we buy. So long as all the parties engaged in the trade are doing so voluntarily, those trades can be characterized as reciprocal. There is reciprocity with respect to the benefits received by all parties to the trade – both sides are made better off. And this doesn’t change if those making the exchanges reside in different countries; that is, if the products being purchased and the money being used to make those purchases cross international boundaries.
We should also note that if a tariff, quota, or subsidy is thrown into this mix the fundamental nature of this reciprocity does not change. So long as every exchange that is made is voluntary, both parties benefit. If a government is subsidizing cross-border sales, i.e., exports, of a certain product in some way (sometimes called “dumping”), the price to the purchasers of the product are reduced and they receive greater net benefits than they would otherwise receive. Again, if the trades are voluntary, then as far as the traders are concerned the benefits are reciprocal.
It should be pointed out that such subsidies, while helping the subsidized industry and its foreign customers, harm consumers and taxpayers in the country awarding the subsidies. Because the export of a product is subsidized, domestic sales are penalized relative to exports, and domestic prices for the product will be higher. It also means that, in order to pay for the subsidies, taxes in the subsidizing country will have to be higher.
In other words, the country that subsidizes exports of particular industries are in fact coercively transferring wealth from consumers and taxpayer in their country to the favored industry and their customers abroad. It should be pointed out that these coercive subsidies are neither trade nor reciprocal in terms benefits bestowed. They are akin to theft.
A similar analysis applies when tariffs are present. The fact is that tariffs reduce the number of reciprocally beneficial trades because they are a tax on those trades and, if you tax something, you will get less of it. But the trades that continue to be made in spite of the tariffs will still be voluntary, and the benefits will continue to be reciprocal. In contrast to subsidizing exports, those who continue to purchase the taxed product in the importing country will receive, on net, fewer benefits from those trades because they have to pay higher prices. But, the net benefits will still be positive; that is why the trades are made.
Of course, the industries protected by the tariffs will get the benefits of the tax being placed on the domestic consumers. And, once again, what this means is that there is a coercive wealth transfer from the consumer of the product to the producers, similar to what would occur if the consumers were taxed directly and the money was simply given to the protected industry. Again, in terms of reciprocity, it is more like theft than trade. The point here, though, is that the trades that continue to be made are indeed “reciprocal.”
So, what is President Trump referring to when he talks about reciprocal trade? He can’t be referring to the trades that are actually made because all such trades are, in fact, reciprocal. There are a couple possibilities. First, occasionally it appears that he is talking about reciprocity in terms of trade barriers. If American producers are selling a particular product to another country and that country has a certain level tariff on the sale of that product, then reciprocity seems to imply that our government should place a similar tariff on either the sale of the same product or another product as a reciprocal policy measure. If that other country is subsidizing an industry’s sale of a product to American consumers, then reciprocity, in that case, might imply placing a compensating tariff on the sale of that product, thereby raising the price to American consumers. This has been one of his justifications for steel and aluminum tariffs.
The other possibility is that, when the president is referring to “reciprocal trade,” he is taking about the trade deficit. It appears on occasion that, to the president, trade is not reciprocal if the dollar value of goods and services that Americans purchase from another country (imports) is not at least equal to the dollar value of the goods and services that other country purchases from the U.S. (exports). If the dollar value of America’s imports is greater than the dollar value of America’s imports, then the trade is not reciprocal. Trump often points to trade deficits with Mexico, the European Union, or China as examples of a lack of reciprocity. Not only is this a wrongheaded notion of how the word “reciprocal” applies to the concept of trade, but it is also based on a view of trade deficits rooted in medieval European economic thought. It is a view full of myths and misunderstandings that were dispelled by Adam Smith in the Wealth of Nations back in 1776.
The point of this essay is not to argue against this administration’s trade policies. I have done that in a number of other articles (See links below.). The purpose of this article is to help clarify the nature of voluntary trade in light of the obfuscations and profound ignorance on the subject coming from the proclamations of this administration. The fact is that there is no such thing as non-reciprocal trade. If the benefits are not reciprocal in the sense that only one-party benefits, then it is not trade but theft or maybe taxation.