Lessons from the World’s Freest Economy

As a lifelong U.S. citizen, I have a personal confession to make: While the Trump administration ramps up its trade war with China, I’ve been contributing to an increase in the U.S. trade deficit. Last week I traveled in Hong Kong, where my daily expenses on lodging, meals, and incidentals drove the U.S. trade imbalance ever higher.

At a time when the United States is pursuing policies that limit commerce between peoples of different countries by imposing tariffs, my colleagues and I are bringing people from throughout the world together to engage with the ideas and institutions that lead to prosperity and human flourishing. One such idea is the concept of free trade among nations.

Hong Kong consistently ranks as the world’s freest economy, as measured by The Heritage Foundation index, which considers such factors as tax burden, government spending, the burden of regulation, protection of property rights and the lack of barriers to free trade. Hong Kong, historically a center of free trade, has enjoyed 24 consecutive years as the freest economy in the world. It is no coincidence that the residents of Hong Kong are among the world’s wealthiest, wealthier on a per capita purchasing power basis than Americans.

I lead an organization that teaches American studies to students from around the world. Students come to our summer program in Hong Kong from countries throughout Asia including Nepal, Indonesia, China, Vietnam, Myanmar, Cambodia and the Philippines to learn first-hand that rising living standards are not tied to tariffs that protect uncompetitive industries, but rather to the degree to which governments allow “creative destruction” to operate unhindered.

Famed economist Joseph Schumpeter, one of the first of the great European émigrés to the United States, described this as a “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” In plain language, Schumpeter meant that industries come and go as new technology and international competition lead to economic change and shifts in employment.

It is this Schumpeterian “gale of creative destruction” that the Trump administration is trying to stop with tariffs on imports — to the detriment of American consumers and American living standards. One must look no further than the cutbacks announced by Harley-Davidson, BMW and many other companies to understand the damage that tariffs can do to our economy.

Another very recent example of the self-defeating nature of trade wars is a recent report that Whirlpool, an American manufacturer that clamored for and received tariff protection from foreign competition in washing machines, saw its first-quarter net income fall $64 million from a year earlier, and its stock price decline by 15 percent. Meanwhile, American consumers have seen washer and dryer prices climb 20 percent in the three months through June, the steepest rise in at least 12 years, according to Labor Department estimates. These examples demonstrate that while trade is win-win, trade wars are lose-lose.

Sadly, America’s protectionist trade policies reinforce the role of Hong Kong as the model for economic progress. As a student attending our program from Vietnam told me, “Hong Kong represents the example for other nations in Asia to follow if they seek to raise their living standards.”

Adam Smith once said that “little else is requisite to carry a state to the highest degree of opulence … but peace, easy taxes, and a tolerable administration of justice.” Hong Kong leads the way in all three categories, with an average tax burden of only 14 percent and few regulatory barriers to establishing and operating a business enterprise.

By spending three weeks in Hong Kong studying how free trade, low taxes, and limited regulation spur market activity – ideas which historically fueled the success of the American economy – our students from throughout Asia are being equipped to bring prosperity to their countries. American policymakers could do well to re-learn these lessons rather than assume prosperity can be achieved by interfering with the forces of competition and creative destruction that are the source of human progress. That’d be worth a little increase in the trade deficit, don’t you think?

Roger R. Ream is the president of The Fund for American Studies.

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