Trade is not a trade-off, explains David Boaz
It’s not just trade’s oppinents who have much to learn. Too many advocates of trade liberalisation don’t really understand the case for free trade either. Consider this sympathetic interview on NPR with U.S. Trade Representative Michael Froman, the chief negotiator of the Trans-Pacific Partnership:
NPR: Froman argues the TPP, the Trans-Pacific Partnership, will give U.S. industries more access to foreign markets. Granted, there’s a trade-off. Other nations get more access to the U.S. for their products. Froman contends that, at least, happens slowly as tariffs or import taxes drop.
Froman: The tariff on imported trucks from Japan, as an example, won’t go away for 30 years. On apparel and textiles, we worked very closely with the textile manufacturers in the U.S. to come up with an outcome that they could be comfortable with, so that we’ll let in clothes coming that are made Vietnam or made in Malaysia, but they’ve got to use U.S. fabric.
This is nuts. The interviewer refers to the lowering of U.S. tariffs as “a trade-off,” and Trade Representative Froman accepts that characterisation. Both operate from the premise that Americans want other countries to reduce their barriers to American exports, and that the alleged “trade-off” for that benefit is that the U.S. must reduce their own trade barriers.
That’s backwards. Free trade allows us all to benefit from the worldwide division of labour, specialisation, comparative advantage, and economies of scale. The benefit of trade is that we get access to goods and services that we might not get otherwise, or we get to pay much lower prices for the goods we want.
More broadly, we want free — or at least freer — trade in order to remove the impediments that prevent people from finding the best ways to satisfy their wants.
This is a point that Cato scholars at the Herbert A. Stiefel Center for Trade Policy Studies have been making for years. As Center director Dan Ikenson wrote last year:
Arguably, opening foreign markets should be an aim of trade policy, but [to feel the benefits at hime] real free trade requires liberalisation at home. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports — the so-called terms of trade.
Trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports, yet holding firm to those domestic barriers while insisting that foreign markets open wider is the U.S. trade negotiating strategy.
Indeed, that’s almost every government’s negotiating strategy. It is the crux of reciprocity-based trade negotiations, which, at its core, is a rejection of free trade.
Ikenson and Scott Lincicome made that case at greater length, with specific emphasis on the “central misconception” that “exports are good and imports are bad,” almost five years ago.
Thirty years ago in the Cato Journal, the economist Ronald Krieger explained the difference between the economist’s and the non-economist’s views of trade. The non-economist believes that the primary purpose of all economic activity is to produce jobs and growth. The economist however understands that “the purpose of economic activity is to enhance the wellbeing of individual consumers and households.” On this basis therefore, “imports are the benefit for which exports are the cost.”
Imports are the things we want — clothing, televisions, cars, software, ideas — and exports are what we have to trade in order to get them. The fewer of the latter paying for the more of the former, the better off we all are.
I wrote more about this persistent misunderstanding in The Libertarian Mind (buy it now!):
Politicians just don’t seem to get this. President Obama’s official  statement on “Promoting U.S. Jobs by Increasing Trade and Exports” mentions exports more than forty times; imports, not once. His Republican critics agree: Senator Rob Portman says that a trade agreement “is vital to increasing American exports.”
More colorfully, during his 1996 presidential campaign, Pat Buchanan stood at the Port of Baltimore and said, “This harbour in Baltimore is one of the biggest and busiest in the nation. There needs to be more American goods going out.” That’s fundamentally mistaken. We don’t want to send any more of our wealth overseas than we have to in order to acquire goods from overseas.
If Saudi Arabia would give us oil for free, or if South Korea would give us televisions for free, Americans would be better off. The people and capital that used to produce televisions — or used to produce things that were traded for televisions — could then shift to producing other goods.
Unfortunately for us, we don’t get those goods from other countries for free. But if we can get them cheaper than it would cost us to produce them ourselves, we’re better off.
Sometimes international trade is seen in terms of competition between nations. We should view it, instead, like domestic trade, as a form of cooperation. By trading, people in both countries can prosper. And we should remember that goods are produced by individuals and businesses, not by nation-states. “South Korea” doesn’t produce televisions; “the United States” doesn’t produce the world’s most popular entertainment. Individuals, organised into partnerships and corporations in each country, produce and exchange.
In any case, today’s economy is so globally integrated that it’s not clear even what a “Japanese” or “Dutch” company is. If Apple Inc. produces iPads in China and sells them in Europe, which “country” is racking up points on the international scoreboard? The immediate winners would seem to be investors and engineers in the United States, workers in China, and consumers in Europe; but of course the broader benefits of international trade will accrue to investors, workers, and consumers in all those areas.
The benefit of international trade to consumers is clear: We can buy goods produced in other countries if we find them better or cheaper. There are other benefits as well. First, it allows the division of labour to work on a broader scale, enabling the people in each country to produce the goods at which they have a comparative advantage.
As Ludwig Von Mises put it, “The inhabitants of [Switzerland] prefer to manufacture watches instead of growing wheat. Watchmaking is for them the cheapest way to acquire wheat. On the other hand the growing of wheat is the cheapest way for the Canadian farmer to acquire watches.”
I hope that politicians, commentators and blog commenters --- and even so-called advocates of trade liberalisation -- will come to understand and to advocate the strong case for free trade, which economists have understood since Adam Smith in 1776.
David Boaz is the executive vice president of the Cato Institute and has played a key role in the development of the Cato Institute and the libertarian movement. He is the author of The Libertarian Mind: A Manifesto for Freedom and the editor of The Libertarian Reader.
His articles have been published in the Wall Street Journal, the New York Times, the Washington Post, the Los Angeles Times, National Review, and Slate, and he wrote the entry on libertarianism forEncyclopedia Britannica. He is a frequent guest on national television and radio shows, and has appeared on ABC’s Politically Incorrect with Bill Maher, CNN’s Crossfire, NPR’s Talk of the Nation and All Things Considered, The McLaughlin Group, Stossel, The Independents, Fox News Channel, BBC, Voice of America, Radio Free Europe, and other media.
A version of this post appeared at FEE.
[Pic of Auckland by Skyscraper City.]
- “The current Republican front-runner, Donald Trump, has repeatedly claimed that China, and many other countries, such as Mexico and Vietnam, are ‘killing us’ in foreign trade. … The implication of this belief and its intellectual foundations is that the United States needs to adopt a government policy of increasing exports and reducing imports by such means as protective tariffs, import quotas, and export subsidies. …
“Now the truth is that in the monetary conditions of the present-day world … an outflow of part of the money supply of a country in exchange for imports is positively favourable. … Exporting part of the supply of dollars represents getting imports of real goods in exchange for pieces of paper that are virtually costless to produce and replace. At the same time, it limits the rise in prices in the United States by holding down the increase in the supply of money in circulation in the United States. Thus, seen in this light, an excess of imports over exports turns out actually to be highly favourable rather than ‘unfavourable.’”
China et al. Are Not “Killing Us” – GEORGE REISMAN’S BLOG
- “…the prices of the items in the market basket that low-income families buy have increased less than items in the basket that high-income families buy. … one reason prices rose less for low-income people is that they were buying goods from China.”
Trade with China Is Especially Good for Low-Income Earners: Cheaper Goods Help People with Less to Spend – David R. Henderson, FEE
- “Trump frequently suggests, as he did in the debate, that Mexico could pay for the wall out of the $58 billion trade deficit. But that is nonsensical. The trade deficit does not go to the government; it just indicates that Americans are buying more goods from Mexico than the other way around.”
Fact-Checking Trump on Trade – NOT PC
- “Tariffs are taxes on imports. Simple as that.”
Cue Card Libertarianism: Tariffs – NOT PC