The problem with America's biggest exports

President Trump's announcement that he would levy tariffs on steel and aluminum is perhaps the least-surprising policy decision to come out of this administration. Trump, after all, complained about "bad trade deals" on the campaign trail almost as much as he did about immigration, and has been obsessed with the subject for far longer. And he packed his economic team specifically with steel industry veterans long focused on the threat of the dominant Chinese steel producers.

Almost as predictable as Trump's decision was the sustained chorus of condemnation, from industry groups that would suffer from the effects of the tariffs to political and ideological opponents, which combined criticisms of the predictably botched structure of the proposed tariffs with blanket declarations of the folly of protectionism and industrial policy. Those who admitted the long history of presidents announcing temporary tariffs of various kinds often averred that the reasons were political rather than economic — an attempt to buy votes from particular constituencies while the nation as a whole paid the price.

Lost in the noise is the fact that the world is awash in steel, to the point that China, in an effort to reduce overcapacity at a time of declining domestic and international demand, is in the process of mothballing plants with aggregate productive capacity greater than the entire American steel industry. In that context, doing something to protect American steelmakers doesn't seem entirely absurd, even if the administration's chosen methods seem designed to maximize opposition.

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These kinds of rear-guard protective actions are a frequent feature of American trade policy. But they are far from its focus. And neither is its focus some abstract notion of "free trade." Rather, America does have an industrial policy, and has had one for decades. It just isn't one that puts steel and other heavy industry at the center of the picture.

Each of the last four administrations has aggressively negotiated trade deals with countries around the world. Tariffs being already generally low, and world trade already substantially free, the focus of these deals has been less and less on opening up foreign markets to American manufactures. Rather, the increasing focus has been on promoting America's most profitable exports: software, entertainment, pharmaceuticals, agriculture, and finance.

These are among America's most successful industries, responsible for the lion's share of American corporate profits. It makes sense that America's trade negotiators would pay close attention to their needs and concerns. But they are not industries that depend primarily on industrial capacity, or sophisticated manufacturing processes. Indeed, the cost of production of an additional unit in these industries is generally negligible, and in some cases is literally zero. Rather, the value created by these industries is largely in the area of intellectual property.

But intellectual "property," unlike physical property, only exists at all because of government protection. America's copyright and patent protections are extensive examples of government-granted monopolies, which forbid people not merely from stealing something that belongs to someone else, as with physical property, but from copying what someone else did first. One can debate whether such protections are just or unjust, but they are not natural products of the market, but rather of government intervention therein. Some of the best evidence for this fact is that a major objective of America's trade deals has been to get other countries to accept the imposition of America's own intellectual property rules. Even in agriculture, much of the interest of American negotiators is in opening foreign markets to American-designed seeds, and ensuring American companies get properly paid for them.

In negotiations, America has readily traded agreement on protections for American intellectual property for greater access to America's markets, and even to technology transfer that enables less-developed countries to move up the value chain. And this has been a good trade for America's leading industries.

Is that a good trade for America as a whole? It depends on how you look at it. On the one hand, America's most successful industries are so successful in part because these are areas of American comparative advantage. All else being equal, both global wealth and American wealth would be maximized by attending to that comparative advantage. And uniform rules for intellectual property provide a more stable basis on which companies can invest in R&D, generating new property that will translate into more wealth.

On the other hand, there really are national security considerations involved in maintaining industrial capacity in areas like steel production. And there would be reasons to be concerned about America's ability to sustain cycles of innovation if we allowed our manufacturing base to be eroded to the point that we lost the knowledge embedded in sophisticated manufacturing processes, because that under-the-fingernails knowledge is where a great many innovations come from in the first place.

Moreover, there are social considerations to be raised by a policy that focuses too narrowly on maximizing export profits. These leading industries generate most of their profits off a relatively small base of highly paid, highly educated workers. General Motors generates less net profit than Google, but a far greater number of middle-class workers — and a vastly greater number of middle-class blue-collar workers — depend on General Motors than on Google for their livelihoods.

That's not an argument for simple-mindedly protecting whatever companies employ a lot of people, profitability and innovation be damned. But it is an argument for taking seriously the challenge of sustaining a thriving manufacturing base in an era of increased competition and increased automation. Our trade competitors — not only China, but Japan and Germany, Brazil and Canada as well — certainly do.

And the Trump administration should be criticized for doing it badly rather than for trying to do it at all.