In his warning about “Trumponomics,” Mr. Romney declared that, “If Donald Trump’s plans were ever implemented, the country would sink into prolonged recession. A few examples: His proposed 35% tarifflike penalties would instigate a trade war, and that would raise prices for consumers, kill our export jobs and lead entrepreneurs and businesses of all stripes to flee America.”
After all, doesn’t everyone know that protectionism causes recessions? Actually, no. There are reasons to be against protectionism, but that’s not one of them.
Think about the arithmetic (which has a well-known liberal bias). Total final spending on domestically produced goods and services is: total domestic spending + exports - imports = gross domestic product.
Now, suppose we have a trade war. This would cut exports, which, other things being equal, would depress the economy. But it would also cut imports, which, other things being equal, would be expansionary. For the world as a whole, the cuts in exports and imports, by definition, would be equal, so as far as global demand is concerned, trade wars are a wash.
At this point, I’m sure that some people will start shouting “Krugman says protectionism does no harm!” No: Protectionism in general should reduce efficiency, and hence the economy’s potential output. But that’s not at all the same as saying that it causes recessions.
Didn’t the 1930 Smoot-Hawley Tariff Act cause the Great Depression? No. There’s no evidence at all that it did. Yes, trade fell significantly between 1929 and 1933, but that was almost entirely a consequence of the Depression, not a cause. (Trade actually fell faster during the early stages of the Great Recession in 2008 than it did after 1929.) And while trade barriers were higher in the 1930s than before, this was partly a response to the Depression, and partly a consequence of deflation, which made specific tariffs loom larger.
Granted, this is not the part of Mr. Romney’s speech that most people will remember. But protectionism was the only reason he gave for believing that Mr. Trump’s policies would cause a recession - which is telling. The G.O.P.’s supposedly well-informed, responsible adult who is trying to save the party can’t even get basic economics right in the one place where economics is central to his argument.
Republicans and Trade Wars
I’m not sure whether anyone but me cares about the Romney-Trump spat over trade policy; it’s much more interesting, for normal human beings anyway, to talk about the size of Mr. Trump’s, er, hands. Still, the trade dispute is a revealing fight.
Establishment Republicans may talk free trade, but they are, if anything, more protectionist than Democrats in practice (although neither party is seriously protectionist these days). Remember, it was President Reagan, not President Carter, who imposed import quotas on Japanese cars in the 1980s.
The reason for this difference is twofold. First, Republicans are much less respectful of international obligations. Second, there’s a level of cynicism - of willingness to play politics with foreign affairs - on one side that isn’t matched on the other.
Which brings me to the latest fight. As I’ve said, when Mr. Romney declared with horror that Mr. Trump would start a trade war, his economics were all wrong, which is the main problem. But it’s also worth noting that Mr. Romney himself argued for exactly the same policies that Mr. Trump is advocating now during a 2012 debate with President Obama. And he blithely dismissed the dangers.
According to a report in The New York Times: “ ‘I’ve watched year in and year out as companies have shut down and people have lost their jobs because China has not played by the same rules, in part by holding down artificially the value of their currency,’ Mr. Romney said. … Asked about the possibility of a trade war at his debate with President Obama, Mr. Romney said one was already underway. ‘It’s a silent one, and they’re winning,’ he said. ‘We can’t just surrender and lose jobs.’ ”
Now, Mr. Romney could argue that the situation has changed - as it has since 2010, when I was arguing for the threat of countervailing duties. Back then, China was, in fact, engaged in harmful currency manipulation. But these days the nation is bleeding reserves in the face of huge capital outflows (a trillion dollars last year!) - that is, it’s intervening to prop the renminbi up, not hold it down. But that’s not the case Mr. Romney is making.
So how do we score this debate? Four Pinocchios on each side. Mr. Romney talks nonsense economics, and condemns as terrible the very policies he himself called for not long ago. But Mr. Trump is stuck in a time warp, making arguments that had some force when China was booming but none in the current situation.
Sorry, but no winners here, just big losers. Sad.