Trade is Good

I really wish mercantilism was a policy we could all forget about. This horse has been beaten dead

since the days of Adam Smith. However every generation it seems to rear its ugly head. Things were going well for free traders when NAFTA was ratified and began to phase out some of the trade barriers in North America. Despite protectionist claims that we would hear a sucking sound as jobs moved to Mexico we proceeded happily into the booming 90s economy and the only “sucking sound” to be heard was in the oval office. Then once the tech bubble crashed we had a new danger and reason for government intervention, outsourcing. Outrage over outsourcing has kind of hovered in the background of the zeitgeist for a while with the housing bubble etc but I noticed that ideas of this sort have been making a resurgence especially in light of the Chinese currency devaluations and the trade agreements with South Korea, So I decided to write up a general response to common arguments against a unilateral elimination of American trade barriers.

This is partially true. American labor is too expensive for low skill labor intensive industries like garment making etc to be competitive on the world market. However in no way does this justify taxing the entirety of American consumers in order to promote a few inefficient domestic producers, this creates excess waste and inefficiency by preventing the transition to industries where Americans have a comparative advantage, which would benefit everyone, including the workers. It is also important to realize that nearly everyone is a consumer of imports, far more than the number employed in making export goods. Tariffs and quotas would benefit government and the minority of Americans, at the expense of everyone else. The question must also be raised why is American Labor more expensive? Government interventions in the economy including regulations, wage price laws, and government enforced union labor all distort the labor market and make it prohibitively costly for many industries. Treat the disease rather than the symptoms.

This is actually not true. American manufacturing has remained relatively stable as a percentage of GDP for decades. However, increasing productivity has allowed us to manufacture more and more goods while employment in that sector fell. This should be viewed as progress because it allows Americans to enjoy a greater number of services while still being able to consume manufactured goods. Would our standard of living be higher if Americans could not enjoy things like restaurants, doctors, carpet cleaning and the rest of the vast panoply of the American service industry because those resources were tied up in manufacturing widgets for the rest of the world?

Americans import more than we export, making us poorer. This makes sense if you view this from a monetary standpoint. American dollars flow overseas to pay for the foreign imports. However consider a country that focused on exporting to foreign countries say subsidizing their exporters, and implemented protectionist tariffs. This country might have lots of money flowing in (the mercantilist balance of payments) but they would be poor because all the goods that money is used to buy would be in other countries, or at the inflated prices because of the tariffs. Having a trade deficit actually is a benefit to the American consumer, it allows them to consume more than they produce. Value is flowing into the country instead of out. Further the majority of American imports are actually not consumer goods, so tariffs would actually hurt American producers as well as consumers. Money is a wonderful invention, however care has to be taken not to conflate money with wealth.

“We’re buying oil from overseas, funding our own destruction!”

You may have heard this if you enjoy listening to conservative pundits talk about energy, but turn down Fox News a minute and ponder. Yes, our energy policy is self-destructive. Yes, maybe OPEC’s roster isn’t exactly America’s Christmas list, but is buying oil from foreign countries really hurting us? Just imagine if those countries refused to sell to us, they would really have us over a barrel then, and the benefit isn’t just to oil-starved American industry. The oil producers and distributors and shippers now have more money, and yes they may use it to fund Al-Qaeda, but they have a good incentive not to because of the wealthy markets in the west they would give up if a full scale war broke out. This applies to all trade goods. Highly integrated economies increase the cost of warfare and its unpopularity by creating groups that are dependent on peaceful trade and cooperation. Trade barriers act as barriers to peace and reduce powerful disincentives to aggression. As Bastiat famously remarked “If goods don’t cross borders, armies will.”

The case for unfettered trade is a strong one, and while free trade may seem like an ancillary issue with all the other abuses of our government, it is still an important one.

“It is inconsistent to support a policy of low trade barriers. Either trade barriers are useful, then they cannot be high enough; or they are harmful, then they have to disappear completely.” – Ludwig von Mises