The Emotional Lure of Trade Wars

I've made a claim several times over of the course of this blog, including recently: that we are not nearly as rational as we think we are. This is not only a philosophical claim, it is actually at the center of my current research agenda with my good friend and award-winning blogger Pete Trumbore (whose stuff you should go read).

What Pete and I are exploring, in the particular context of violent conflict, is essentially the notion that our general understanding of human behavior is wrong. In the social sciences (political science and economics in particular), we have built a lot of explanations on the foundation that people are fundamentally rational - that is, that we weigh costs and benefits and choose the course of action that maximizes our gains and minimizes our costs.

To actually do this well requires a lot of thinking and analysis, which is why over the years folks (Simon, Kahneman & Tversky) have pointed out that we can't really be completely rational, because we don't have the brainpower. We can't consider all of the possible alternatives, we don't do probability math well in our head, we take shortcuts. But at heart, we think we're still basically rational, in that we try to make decisions cognitively - we look at information and select among the options that we think are the best.

There is probably some truth to this, more so in some contexts than others. But for too long we have ignored the role of emotions. Life is filled with examples of people making decisions, not because they thought it was the best option, but because they felt like it. Feelings are very often (maybe almost always) in the driver's seat.

This doesn't just apply to emotionally-charged arenas like civil war. The brewing conflict with China over trade is an excellent example. President Trump's core argument is that the current status of trade with China is "unfair" and "losing" and "out of control". His argument isn't an "argument" at all (an argument, after all, is a connected series of statements intended to establish a proposition). It's just a bunch of emotional assertions claiming that things are bad.

Most economists - people who spend their time studying economics as rationally and scientifically as possible - don't agree. But that doesn't matter, because for the administration this isn't about who is right in the sense of facts and truth. It's about what feels right. And Donald Trump has long made his feelings on China known.

The spiral of actions and counter-actions, threats and counter-threats, that have emerged in the last few weeks fall into this pattern. If you feel that the trade deficit with China is bad, then it feels right to "punish" China with tariffs. This is not an option chosen out of a menu of options because it is most likely to reduce the trade deficit at the lowest cost. There are many other options, most of which will cost the US economy less and many of which have a higher chance of success. But "punishment" feels right, and so that's the course we take.

China, of course, responds in kind. There has been much talk about China needing to "save face", which is really a different cultural framing of the role of emotion. You can construct an argument for why "saving face" is the rational thing to do, but it's a bit like modeling the solar system with the earth at the center - it's possible, but the math gets really messy, really fast.

Some time ago, Pete Trumbore blogged about a conversation he had with a Trump supporter. The foundation of this man's support for Trump was entirely, 100% emotional. It wasn't about policy positions, or Supreme Court picks, or anything else. The man supported Trump because it felt right. And because the things Trump does feel right.

The brewing trade war with China is very much a part of this larger puzzle. I would contend that our policy choices - including international policy, long thought to be the rationalist haven of "hawks, doves, and owls" - has always been more driven by emotion than we would care to admit. The present administration has stripped away any presence to rationality and laid bare the emotive foundations of what's really driving decisions.

If we think this is problematic - and I certainly do - the answer isn't to reject emotions and become Vulcan (as if we could). Instead, we need to think about our emotional responses. We can choose how we feel about things, and find more positive emotional paths. Being angry with the Chinese, or afraid of their economy, is probably a bad choice. It's certainly going to lead to bad policy. But if we want to change that policy, we need to get beyond trying to argue with facts. Facts don't matter here. How we feel does. That's the discussion we need to be having.

Trade and the Presidential Race

Much to the surprise of many policy wonks, international trade has emerged as a major issue in this year's Presidential campaign. The surprise comes partly because at this point, it's amazing that any issues can grab attention from the mud-fest that Presidential campaigns have become. But it's also surprising because for at least two generations there has been broad bipartisan consensus on trade policy. We argue over details, as we did during the Cold War, but in general we have understood the broad thrust of strategy: more and freer trade.

Donald Trump has broken that consensus by convincing a group of voters that their troubles (real, perceived, or some of both) are because leaders in Washington have been signing "bad deals" in international trade. "Free Trade", which used to stand beside mom and apple pie as inherently good things, is now used as an epithet. In short, trade has become a real political issue.

This is unfortunate, because both sides are at least partly wrong on this issue - although one is more wrong than the other.

Trump's position on trade is almost completely wrong. He frames international trade deals as zero-sum exercises in which one side always wins and the other side always loses. Apparently he slept through the classes at Wharton in which he would have learned that every economist going back to Ricardo and Adam Smith agrees that international trade increases wealth for both sides. Indeed, economic exchange - whether across or within borders - is how the human race has managed to create as much wealth as we have, which is a pretty impressive amount. If all economics were as Mr. Trump describes, we'd still be bartering with rocks and hunting our dinner daily with sharp sticks.

Moreover, government trade deals are not business deals - they create the conditions under which business deals are made, which is not the same thing. This is not to say that governments can't agree to bad terms - that's certainly possible. But it's relatively rare. And the overall effect of increased trade - backed up by every shred of international economic evidence we have - is that more trade increases wealth. Less trade means less wealth. This isn't debatable, and it doesn't get more true just because Mr. Trump gets louder and angrier when he says it.

What is true is that the benefits of that wealth can be unevenly spread - and this is where the "establishment" (Democrats plus what used to be the internationalist Republican party) drops the ball. All changes create differential effects - in Mr. Trump's terms, winners and losers. NAFTA may create more jobs net in the United States (most evidence says this is true), but that doesn't mean that some people in the US won't lose their jobs to competition in the neighboring countries - just as some Ohio jobs may get destroyed because we have "free trade" with Indiana and Alabama.

The consensus approach, the one championed by Bill Clinton when he pushed for a NAFTA negotiated by his Republican predecessor, was that government would step in and help those displaced by change. Put more bluntly, government's role would be to redistribute some of the wealth created by trade to make sure that those hurt by shifts in the economy could recover and get back to where they where, maybe even be better off. Clinton sold this as part of his "Bridge to the 21st Century" argument, and for the most part people bought it.

This is the piece missing, so far as I've heard to date, from Hillary Clinton's rhetoric. The internationalist establishment is right that trade creates more wealth. But they need to acknowledge that it also causes pain for some people, pain that needs to be mitigated by making sure that the benefits of the new wealth are shared around.

Over the last 20 years, freer trade has created vast amounts of wealth in the United States. Unfortunately, at the macro level that wealth has been concentrated in the hands of the few - largely, New York financiers, most of them well-known to Mr. Trump. As someone who claims to "understand the system," Mr. Trump should understand all of this. His rhetoric to date suggests that he doesn't.

Abandoning trade is not the answer - we will ALL be worse off for it, and Mr. Trump is not going to "bring jobs roaring back to America" by tearing up trade deals. Right now, the Clinton campaign doesn't have the whole answer either. Secretary Clinton needs to reach back into her husband's toolkit and bring back the "bridge". Because in the end, the election isn't about whether you're right or wrong in reality. It's about whether people think you can solve their problems.