International trade is a controversial subject. There’s a lot of arguments surrounding it. We’re not going to go through all of them by any means. But here are some of the most common:
Let’s consider trade and jobs.
What happens when a tariff is lowered? Well, imports will increase, and there will be fewer jobs in the import competing industry. For example, if we have a tariff on shoes and we reduce the tariff, we’ll have imports of more shoes from China and from Vietnam, and that will mean fewer jobs in the American shoe-producing industry. That’s what people see when they think about reducing a tariff. They’re worried about losing those jobs in the American industry.
However, we want to see the issue in a deeper way, in a more fundamental way, and a key question to ask is, “Why do people send us goods? Why would workers in China and Vietnam work long hours to send us shoes?" It’s certainly not from the kindness of their heart.
Ultimately, they want goods in return, goods or services. They are working – they are producing in order to consume. They are sending us goods because they want goods in return. They are not doing it out of the goodness of their hearts, but out of self-interest as Adam Smith said.
And that leads to a fundamental insight about international trade. Namely, we pay for our imports with exports. When we import more, we will ultimately export more because we pay for our imports through our exports. What this means is that trade doesn’t destroy jobs overall. Trade moves jobs from import-competing industries to export industries, and overall, wages increase on average because of comparative advantage. Because we pay for our imports with exports, when we import more, we will export more. Jobs will reduce in the import competing industries and increase in the export industries.
Now, this process is not always easy. Problems can occur when we lose jobs in low-skill import-competing sectors and gain jobs in high-skill export sectors. Overall, when the United States imports goods, we typically import goods produced by low-skill, because America on average is a high-skill economy, it has high-skilled workers on a world level, but we do have some low-skill workers, and imports tend to compete with the products produced by low-skilled workers. Everything will be fine if our education system is working well, and if those low-skill workers can increase their skills and move to high-tech – or high-skill, not necessarily high-tech – high-skill sectors. Of course, that’s a big "if,” and the transition can be difficult.
We have to put this in context, however. In a growing economy, jobs are appearing and disappearing all the time, not just or even fundamentally because of international trade, but because of changes in preferences and changes in technology. Let’s take a look at that.
It’s important when thinking about trade and jobs and jobs in general that the American economy succeeds precisely because jobs are being created and destroyed all the time. Job destruction is often a sign of progress and growth. Think about Thomas Edison. He destroyed the whaling industry with his invention of the light bulb. CDs – some of you may not even remember compact discs – they destroyed jobs in the record industry. MP3s destroyed jobs in the CD industry. This is the way progress often occurs. Employment and the standard of living overall keep rising over time, and the reason they’re rising is precisely that old jobs are being destroyed, new jobs are being created. Overall, in the churn, there’s a trend towards richer jobs, higher-paying jobs, higher wages. Overall technology, trade, these benefit the U.S. economy.
Regarding Child Labor
Child labor is something which no one wants, but it’s important to understand that child labor is something which happens when people are poor. Child labor was common in 19th century Great Britain and the United States. Child labor declined in the developed world as people got richer.
Forces that reduced child labor in the developed world are also at work in the developing countries. As countries become richer, child labor declines. As real GDP per capita increases, the percent of children ages 10 to 14 in the labor force decreases. So, increases in real GDP reduce the percent of children in the labor force. So in China, for example, there are about 12 percent of kids in the labor force, but because there are so many Chinese children, that’s a large number of children in absolute numbers.
Again the key here is really that economic growth reduces child labor. So if you want to reduce child labor you want a country to become rich. The question is, “Can one accelerate this process by banning child labor or by refusing to trade with countries that use child labor?" That’s really refusing to trade with the poorest of countries. Do we really want to do that? Do we really want to say to poor countries, "We’re not going to trade with you." There are many opportunities here for unintended consequences of laws which may have been trying to do a good thing but backfire. So, for example, when India banned child labor, one of the effects of that was to reduce the wages of children because now you have to hire them under the table. Because their wages were lower, the families were poorer, and because the families were poorer, they had to rely even more on child labor. So it is very easy to create a policy which backfires.
It is not, in my view, a good idea to use international trade as a weapon or as a tool against child labor. A much better idea would be to help poor countries, would be to offer free schooling in poor countries, to offer lunches for schools in poor countries. This increases the incentive to send the children to school because then they are fed. So there are lots of things we can do to reduce child labor in poorer countries, but to say to those countries, "We’re not going to trade with you because you’re poor and you’re using child labor just exactly the same way we did in the 19th century." That is really not in my view a productive policy.
Trade and national security
Yeah, some industries probably should be protected to protect national security. The problem is this argument is subject to great abuse. Almost every industry can and does make the claim that they’re essential for national security.
So let’s give some examples. Vaccine production? Yes, probably a good idea for us to have some domestic capability. We don’t always want to buy our vaccines from abroad, just in case. Angora goat fleece? Am I serious? Yes. Believe it or not, we have protected Angora goats with the argument that their fleece is necessary to produce military uniforms. Yep, some people think goats are vital to national security. I’m not kidding.
The key industries argument is very popular among the high-tech crowd. The argument is, is that there are some industries, which for a variety of reasons, are especially important for a nation to have a foothold in. "Biology, microbiology is going to be the future, therefore we need to have this type of industry." Or, "Computers are the future, therefore we need to have this type of industry." The argument is that these industries create spillovers for other industries. They create learning, they create research, they create workers, high-tech workers, which spread out to other areas of the economy and benefit the economy in ways which go beyond the GDP produced by those particular industries. Ross Perot famously made this argument when he said, "Producing computer chips is better than potato chips."
In some ways this may be true, but it’s overall not a compelling argument. For example, today most computer chips are cheap, mass-produced products. They’re not something we really want to be producing at all. They’re not even produced with a lot of labor. They’re mostly produced in big factories which don’t actually make lot of money. Much better to design the product the way Apple does, making lots of profit, than to buy the chips which Apple uses in its iPhones, which don’t make a lot of money at all. In 1990, Walmart contributed more to the boom in productivity than Silicon Valley. So it’s always difficult to say exactly which are the most important industries. You wouldn’t think that Walmart retail is a hugely important industry, and yet, Walmart is the world’s largest firm, and it has done a huge amount to make the American economy more productive.
So no one really knows which industries are the ones with the really important spillovers, and when we add in political economy, the tendency for politics to often choose based upon the wrong reasons – this argument is really not very compelling.
Here’s an argument which again works in theory, but is less likely to work in practice. It’s possible for a country to use tariffs and quotas to get a larger share of the gains from trade. The argument here is that if you can limit or tax exports, not tax imports, but tax exports, then you can let domestic firms act as a cartel, so it’s a way of helping domestic firms to be more like a monopoly, to act like a cartel. So the government plus the domestic firms put – creates a tax, or limits exports, in order to raise the price of those exports on world markets and in order to grab up more of the gains from trade. It can work, especially if there are few substitutes for U.S.-produced goods. On the other hand, if there are substitutes for U.S.-produced goods, or if we push the price of our goods up too high, and that creates the substitutes, we may in the long run really reduce our market.
Moreover, these arguments for strategic trade protectionism are not such a great idea if other countries can retaliate. If every country tries to do this, then world trade as a whole will shrink and no country will be better off. So in trying to grab up a larger slice of the pie, we have to always be worried about making the pie smaller. Again, the argument works in theory. A very clever government might be able to do it, but in practice, this is really not a very good reason for limiting trade.
So to sum up, restrictions on trade waste resources by transferring production from low-cost foreign producers to high-cost domestic producers. Restrictions on trade also prevent domestic consumers from exploiting all of the gains from trade. There are some good arguments for restricting trade. Some arguments are valid, but they’re usually of limited applicability. Overall, I think free trade is a robust policy in the sense of it’s a policy which works well in most circumstances, and protectionism will work well only in a limited number of circumstances.
