How Trump’s protectionism could increase free trade

Free trade is in trouble. That's hardly startling news when the US has an avowed protectionist in the White House, but the problem runs deeper than it may at first appear.

Start with the distinction between trade in goods and trade in services. When a US manufacturer sells tractors overseas, that's goods. When a US software firm creates an AI medical diagnostic tool and sells access via the internet to foreigners, that's services.

It is much easier to keep trade "free" for the first category than for the second. The tractor crosses a border at a specific place and time. It may face additional regulation once inside the foreign country, but the transaction is relatively clean.

An online medical service, by contrast, could "cross the border" — that is, be used by someone outside the US — hundreds or thousands of times per day. It  may also face licensing requirements, foreign liability law, extensive testing and, if the country has multiple jurisdictions, layers of regulation. In the European Union, the website itself would be subject to extensive regulation through laws regarding data, privacy and AI. Even within the EU, a supposed free-trade area, there are restrictions on trade in legal, medical and notary services, to name a few examples.

The wisdom or foolishness of these regulations is not the point. They exist, and most are not going away anytime soon. In fact, they will become only more important as the provision of services expands as a share of the global economy.

In the US, much of this growth occurs in education, health care and, especially, technology. Nvidia, for instance, depending on fluctuations in share prices that day, is often worth more than the entire German and Italian stock markets combined. Efforts to "harmonise" (i.e., increase) corporate taxation thus are more harmful to US interests than would have been the case a decade ago.

Any world trading order that broadly stays put is thus weighted against the exporting interests of the US. That is essential background for understanding the debate over trade prompted by President Donald Trump's various proposals.

Here's a simple way to put it: If you thought the world trading order was fair five years ago, you should not think it is equally fair today. And the US should not be seen as a bully for pointing that out.

Trump is threatening to double rates of taxation for foreign nationals and foreign companies in the US. This is an unusual threat, and it has not gone over well in Europe. But it is at the very least a rhetorical response to the threat of digital-services taxes on US tech companies and a move negotiated in the OECD toward a minimum corporate tax system. Both of those policies would transfer income from US companies to the EU as well as other polities such as Canada.

As is typical in such disputes, insults and accusations are flying back and forth about who started it. Ultimately, that is beside the point. If the EU has its way, on net, protectionism will increase — it will be using its tax system to make it harder for US companies to compete in Europe. If Trump gets his way, net protectionism will either rise or fall, depending on how other countries respond to his threats, and he to their responses.

At the very least, this is not obviously a state of affairs where advocates for free trade should be firmly against Trump. Especially when the other side of the debate confesses that the justification for its position is national self-interest. "The democratically elected governments of our member countries represent the interests of their countries as they see fit," said the secretary general of the OECD.

You may think Trump is going too far with his rhetoric and threats; it would hardly be the first time, and is unlikely to be the last. But you should also realize that the less seriously you take Trump, the more outlandish he will become as he tries to get your attention.

Sketch: TBS

Tyler Cowen is a Bloomberg Opinion columnist, a professor of economics at George Mason University and host of the Marginal Revolution blog.

Disclaimer: This article first appeared on Bloomberg, and is published under a special syndication arrangement