Donald Trump’s trade policies are facing criticism, with many arguing that they inflict economic harm. The Tax Foundation estimates that the average American could see a $1,300 drop in after-tax income this year if the proposed tariffs are implemented. Moreover, GDP is projected to shrink by about 0.8% to 1% this year, contingent on the reactions of other countries. Federal Reserve Chairman Jerome Powell has cautioned that we might soon grapple with the dual threats of rising inflation and unemployment. However, the portrayal of Trump as a champion of tariffs against a nation traditionally committed to free trade is misleading.
At the Bridwell Institute for Economic Freedom, we immerse ourselves in understanding how varying degrees of economic freedom influence broader social and economic phenomena. The Economic Freedom of the World Annual Report (EFW), co-authored by my colleagues Robert Lawson and Ryan Murphy, provides a range of metrics that elucidate what it means to be economically free. The fourth area out of five specifically assesses indicators related to international trade freedom. Back in 1970, the US proudly held the 4th position globally for trade freedom. Fast forward to today, and we find ourselves languishing at 53rd. Out of 165 countries in the latest index, we no longer even make the top quartile when it comes to trading freedom.
It’s crucial to recognize that our data is released with a two-year delay, meaning our most recent economic freedom statistics pertain to 2022. If Trump’s trade policies gain any traction, we could see our international trade ranking slip even further.
The “Freedom to Trade Internationally” section of the EFW comprises ten variables divided across four subcomponents: (1) tariffs, (2) regulatory trade barriers, (3) black market exchange rates, and (4) restrictions on the movement of capital and people. Despite having held relatively steady since the early 2010s, both tariffs and non-tariff barriers have risen since the early 2000s. Presently, we rank 62nd for tariffs and 31st for regulatory trade barriers. Notably, we don’t face significant black market exchange rates that would influence our ranking. The most marked decline since 2000 is seen in the fourth subcomponent concerning controls on the movement of capital and people.
It’s worth mentioning that the term “movement of people” here does not pertain to immigration, although Trump’s policies in that area are equally problematic. This refers instead to how easily foreigners can visit the US for business or leisure. Here, we make the process cumbersome, ranking a dismal 44th in this category.
Additionally, we impose stringent regulations on the flow of capital into and out of the US, landing us at 66th in the capital controls category. These restrictions, which affect non-residents’ ability to invest in the US, carry several adverse consequences, such as distorting resource allocation, limiting access to foreign capital, discouraging foreign investment, and increasing costs due to the administrative burden of enforcement.
The EFW rankings are relative, meaning we can slip due to a deterioration in our trade terms or because other countries improve. As Douglas Irwin articulated in a recent WSJ article, “The U.S. shouldn’t adopt foolish tariff policies just because other countries are.” We currently find ourselves in a global landscape where other nations are reciprocating with misguided policies in response to Trump’s flawed trade agenda. Even if our relative rankings improve, actual scores will likely decline both domestically and internationally.
At a fundamental level, President Trump operates under the misconception that positive-sum games do not exist. In his worldview, the economy is a zero-sum game. However, statistics reveal that the average global citizen is now 4.4 times wealthier than in 1950, despite a population surge of 5.5 billion people. This surge in prosperity has been catalyzed by international alliances forged over the decades. Nations like South Korea, Taiwan, and Singapore, which embraced comprehensive international trade, have seen their wealth expand over 30-fold since 1950. Trade embodies the ultimate positive-sum game.
Two and a half centuries ago, Adam Smith articulated that the pathway to prosperity lies not in mercantilism but in fostering opportunities for trade and exchange. Currently, however, President Trump’s policies are stifling these engines of growth. In doing so, he is setting the stage for a significant decline in economic freedom, which will inevitably undermine the myriad benefits that freedom offers.
Meg Tuszynski is the Managing Director of the Bridwell Institute for Economic Freedom at the Cox School of Business, Southern Methodist University. She also serves as a Research Assistant Professor in the Cox School.
