Seven trade myths both parties repeat, tested against the record

The perfect political speech can be delivered without knowing anything. "We are being ripped off." "Trade makes everybody richer." Pick your applause line, pick your crowd, and sit down to a standing ovation. The speaker never has to explain a single number.

I want to spoil the party for both sides. Over the past generation the loudest free-traders and the loudest tariff hawks have each built a political identity on a handful of slogans, and the slogans are not the same as the facts. A conservative has no reason to flinch at that. We say we believe in checking the work. So let's check it.

Seven claims, each stated at its strongest, each tested against the record, each with a verdict. Where the evidence is mixed, I will say so, because a verdict that cannot say "it depends" is not a verdict. It is a bumper sticker.

Myth one: "The trade deficit is the amount America loses"

The claim: when we buy more from the world than we sell to it, the difference is a loss, a debt, a transfer of wealth. Politicians of both parties have talked this way for decades.

The test starts with an accounting identity. The balance of payments has to balance. If foreigners send us more goods than we send them, they end up holding dollars they did not spend on American products. Those dollars do not vanish. They come back as purchases of Treasury securities, stocks, bonds, real estate and whole companies. Economists call the first side the current account and the second side the capital account, or the financial account in more recent usage. A deficit on one side is matched by a surplus on the other. The two sides are the same coin.

That does not make the deficit meaningless. Here is the fair version: a trade deficit means the country is consuming and investing more than it produces, and the gap is financed by borrowing from abroad or selling assets. That can be perfectly healthy for a fast-growing country with good investment opportunities, which was America's position for much of the nineteenth century. It can also be a warning sign if the borrowing pays for consumption and the government debt that goes with it. The deficit is a symptom, and you have to ask what it is a symptom of.

Verdict: mostly myth. A deficit is not a bill America owes to China or anyone else on a given day. It is also not nothing. Both sides who claim it is either a catastrophe or an irrelevance are wrong.

Myth two: "Foreigners pay the tariff"

The claim: a tariff is a bill sent to somebody else.

The test is the one we ran in who really pays a tariff, following the dollar from dock to shelf. The legal payer is the importer of record, an American company writing a check to Customs and Border Protection. Whether the foreign seller shares the burden depends on how much pricing power each side has. Sometimes the foreign supplier cuts its price and absorbs part of the duty. Often the importer, or its customer, absorbs most of it. Research on the 2018 and 2019 tariffs found that most of the cost showed up in prices American buyers paid.

Verdict: false as a rule, sometimes true at the margin. If someone says foreigners pay, ask for the price data. The slogan has to survive contact with a price tag.

Myth three: "Tariffs never help anybody"

The claim, from the opposite corner: a tariff is a pure loss, and any economist will tell you so.

The test: a tariff creates winners and losers, and both are real. The sheltered producer sells more at a higher price and its workers keep jobs they might have lost. The buyer pays more and the downstream user pays more. The Treasury collects revenue. Economists mostly agree that the losses to buyers exceed the gains to producers, but "exceed" is not "zero." When a free-trader says nobody benefits, the steelworker in a protected mill knows better, and so does the Republican Party that built its early program on the tariff, as Why the Protective Tariff Was Republican Gospel From Morrill to McKinley explains.

There is also the national-security case. Section 232 of the Trade Expansion Act of 1962 allows the President to restrict imports that threaten national security. A country that cannot make steel or ammunition in a crisis has a problem no price chart will fix.

Verdict: myth. Tariffs help someone, and the real argument is about whether the help is worth the cost and who pays it. That is a question of judgment, not a question of fact.

Myth four: "America stopped making things"

The claim: our factories went overseas, and what is left is a country of baristas and consultants.

The test has two numbers that tell different stories. Manufacturing employment in the United States peaked at about 19.6 million jobs in 1979, according to the Bureau of Labor Statistics, and has fallen a long way since. That is the number behind the slogan, and it is real. But the value of what American factories produce, adjusted for inflation, is well above its 1979 level. We make far more with far fewer people. Automation did it, and so did better machinery, better logistics and better management.

Both facts matter. A factory town that lost its plant does not care that national output is up. The lost job was a real loss, a paycheck and a pension and a place in the community. But the policy lesson differs depending on which number you stress. If output is up and employment is down, then tariffs cannot bring back the old jobs, because the old jobs were lost to machines as much as to imports. If employment is down in particular regions and industries, then the problem is concentrated and needs a concentrated answer.

Verdict: half myth. America still makes an enormous amount of stuff. It just does not employ as many people to do it, and the people it did employ were not spread evenly.

Myth five: "The China shock didn't hurt anybody" and "the China shock explains everything"

This is two myths wearing one coat. The free-trade version says import competition was a net gain and the complaints are nostalgia. The tariff-hawk version says China's rise explains every vanished factory job.

The test is a well-known body of research by economists David Autor, David Dorn and Gordon Hanson, beginning with a paper published in the American Economic Review in 2013. They compared local labor markets exposed to Chinese import competition with those that were not. They found that exposed communities saw persistent job losses, lower participation in the labor force, and heavier reliance on public benefits, and that the adjustment was far slower than textbook models predicted. They estimated that Chinese import competition accounts for roughly a quarter of the decline in American manufacturing employment between 1990 and 2007. A quarter is a big number. It is also not the whole.

Read it fairly. The free-traders' claim that workers simply move to new jobs fails: many did not, and whole towns suffered. The hawks' claim that China is the whole story fails too, since the other three-quarters came from technology, productivity and other forces. And, for the record, consumers did gain from cheaper goods. That gain was spread thin, while the loss was concentrated and painful.

I wrote about the foreign-policy side of this bet in We Bet That Trade Would Make China Free and the Bet Did Not Pay, and the lesson holds: gains and losses from trade are real, and so is the duty of a government to be honest about both.

Verdict: both versions are myths. The loss was real and concentrated, and it was a share of the story, not the entire story.

Myth six: "Permanent normal trade relations in 2000 and WTO entry in 2001 slashed our tariffs on China"

The claim: Washington opened its markets to China in 2000 and 2001, and that is how the flood began.

The test needs a little history. For years before 2000, Chinese goods already entered the United States at normal, low tariff rates, but under an annual renewal. Each year Congress and the President had to renew the waiver that kept those rates, and if the renewal had ever failed, Chinese goods would have fallen back to the much higher rates of the 1930 tariff schedule, the old "column 2." In October 2000 Congress passed, and President Clinton signed, legislation granting China permanent normal trade relations, with votes from both parties. China then joined the World Trade Organization on December 11, 2001.

So what changed? The American tariff rates did not drop. What changed was certainty. Permanent status removed the annual risk of a tariff snapback, and companies could invest in Chinese production and supply chains knowing the rate would hold. Economists Justin Pierce and Peter Schott have argued that this removal of uncertainty is a large part of why manufacturing employment fell as quickly as it did after 2001. China, for its part, made commitments in joining the WTO, and the record on how well it kept them is a fair argument for another day.

Verdict: mostly myth, with a kernel. Our tariff rates on China did not fall in 2000 and 2001. The permanence of low rates did the work, and that was a decision Congress made in the open with both parties on board.

Myth seven: "Smoot-Hawley caused the Great Depression"

The claim: the 1930 tariff triggered the Depression, and every tariff since is a step toward the cliff.

The test: the Tariff Act of 1930, signed by Herbert Hoover on June 17, was a bad law. More than a thousand economists signed a petition urging him to veto it, and he signed anyway. It raised duties on a vast range of goods. Other countries retaliated, Canada among them, and world trade shrank sharply in the early 1930s.

But the Depression had started before the tariff. The stock market crashed in October 1929. The money supply contracted, and banks failed in waves. Most economic historians put monetary collapse and bank failures at the center of the story, and see the tariff as an aggravating factor that deepened the damage and spread it abroad, not the cause. The detailed account is in Smoot-Hawley, 1930, what the tariff did and what it did not do, and the party's own reckoning with it is in Smoot-Hawley in 1930 and the Tariff Lesson Republicans Should Know Well.

Verdict: myth, though the tariff was a mistake. Blaming Smoot-Hawley for everything lets the real culprits off the hook. Excusing it lets a bad law off the hook. The accurate answer is in the middle: it made a disaster worse.

What the seven have in common

Look at the pattern. Each myth takes a true fact and stretches it past what it can support. A deficit is a real accounting entry, but not a debt to be paid. A tariff does raise revenue, but not from foreigners alone. Factory employment did fall, but output did not. Import competition did hurt, but it was not the whole explanation. A law was a blunder, but it was not the whole Depression.

Here is the argument in compact form.

1. Trade has winners and losers. Free-trade slogans erase the losers. Tariff slogans erase the winners.
2. The gains are broad and thin; the losses are narrow and deep. That is why the politics are so lopsided. A shopper saves a few cents and never notices. A town loses its main employer and never forgets.
3. Therefore the honest position admits both. A policy that ignores the losers invites a backlash, and a policy that ignores the gains makes everyone poorer.

Where conservatives land inside that frame is a real debate. I side with open markets as the default, because prices carry knowledge no committee has and because I think the case that voluntary exchange has lifted more people out of poverty than any program is a strong one, as argued in The Best Antipoverty Program Ever Tried Was Letting People Trade. But I will not pretend the default has no exceptions. National security, unfair subsidies, and the plight of communities hit hard by sudden change are legitimate concerns.

The three big theories, free trade, tariffs and managed trade, are lined up side by side in free trade, tariffs or managed trade, three theories side by side. If you want to see the party's own history of changing its mind, start with Ronald Reagan was no free-trade purist, and his record proves it.

The bottom line

• A trade deficit is balanced by a matching inflow of capital. It is a symptom to understand, not a bill to be paid.
• The importer pays the tariff to the government. Who ends up bearing the cost depends on bargaining power, and research on recent tariffs points mostly to American buyers.
• Manufacturing output is far above its 1979 level while manufacturing jobs are far below it. Both facts are true, and a good policy has to account for both.
• The China shock was real, concentrated and large, about a quarter of the manufacturing job decline in one major study. It was not the entire story.
• When a politician hands you a slogan, ask for the number behind it. Check Congress.gov for the law, the Bureau of Labor Statistics for jobs, and the Bureau of Economic Analysis for trade data.