I have been disturbed by the strong opposition to free trade on both the Left and the Right. In fact, I find it amazing that the Republican Party front-runner has the same views on trade as a socialist. Regardless, I’ve written so much about Trump and Sanders that I need to take the day off. Instead, I will try to persuade you (though I’m sure many of you already agree) that free trade is unambiguously good for the United States.
To understand why trade is good, we must go back to David Ricardo. The key term to grasp is comparative advantage. Each country has industries and sectors that are more productive than other countries, and each country has industries and sectors that are less productive. When countries are autarkic – that is, when they are self-sufficient – they have to waste resources on producing things that are relatively inefficient to create. This is a simple fact that anyone who has taken intro level economics can explain. Just to illustrate, let’s look at a basic model. In our model, there exist two countries: Britain and Germany. Moreover, there are only two goods produced: beer and marmalade. Britain can produce a maximum of 40 jars of marmalade or 20 bottles of beer. In contrast, Germany can produce 40 bottles of beer or 20 jars of marmalade. Because there is a finite amount of labor, producing more of one item necessitates producing less of the other item. This is called opportunity cost. For Germany, producing one more marmalade means giving up two beers. Thus, there is a higher opportunity cost for Germany when they produce marmalade, and the opposite is true for Britain. Trading allows for specialization. For example, Germany can specialize in beer production and Britain in marmalade production. This is the most efficient system because this arrangement has the lowest opportunity cost. In other words, an economy in which countries specialize in their relative advantage produces the greatest amount of goods and services at the lowest cost to production efficiency. This is why free trade is always the best and most efficient system.
Now, one might ask, how can trade be good when we are losing jobs to China and Mexico? Beyond the fact that this argument ignores the multi-causality of job loss, the simple answer is that Mexico and China have cheaper wages and are thus relatively more efficient than the U.S. at producing low value-added goods. However, the U.S. is significantly better at industries that require high-skilled labor, and we outcompete Mexico and China when it comes to the service sector and innovation. In fact, when economists account for this in GDP, the U.S. is leaps and bounds ahead of every other country. It isn’t even close. So yes, we are losing low-skilled jobs to other countries, but we are gaining far more than we lose because we are able to specialize in the areas that we are most productive in instead of wasting precious time and resources on inefficient sectors of the economy. Moreover, it’s not at all clear that trade is even the primary driver of job loss. Many economists believe that most job loss in low-skilled fields can be attributed to technological innovation. It’s not the Chinese outcompeting American workers; it’s robots.
Of course, low-skilled labor is an important part of our workforce, and it shouldn’t be ignored. It’s easy for college students like me to talk in the abstract about the benefits of free trade, but it’s another thing entirely for people living paycheck to paycheck. I understand this completely, and it is something that needs to be addressed. However, the solution is not to eliminate free trade. We should not hurt our national economic competitiveness simply to appease low-skilled workers. We should, however, invest in education and trade adjustment programs that teach workers new skills if they work in industries adversely affected by trade. This helps everyone. It allows workers to gain new skills and thus become more competitive on the market, and it also increases America’s human capital, thus boosting our overall GDP.
At this point, you might still be unconvinced. So far all I have done is describe some abstract theory, provided a contrived beer and marmalade economy, and thrown out some vocab words. So, I also want to give some empirical examples to demonstrate that import substitution (aka mercantilism) doesn’t work. The most obvious case against protectionism is the People’s Republic of China. Until Deng Xiaoping, China was a strictly controlled economy. While there was some opening after Nixon met with Mao, Deng was the first leader to truly liberalize the economy and allow for significant trade with the outside world. While China was stagnating and poverty stricken under Mao, China is now the second-largest economy in the world due in large part to Deng’s reforms. Another example is South Korea, a country that tried import substitution for the first few decades after WWII. Instead of giving Korean firms an advantaged, it made them relatively unproductive because they were sheltered from international competition. Without competition forcing them to innovate and become more efficient, South Korean companies were unable to become globally competitive, and for a long time South Korea’s economy was relatively stagnant. However, in the 1960s, the government implemented a number of economic reforms including opening up their markets to greater international trade. The result was a booming developed economy that is now one of the most competitive in the world.
I also want to address NAFTA because it’s the bogeyman of the Left and according to Trump “a bad deal.” NAFTA was actually a very successful free trade agreement. When it was implemented, the number of American jobs increased. Of course, some low-skilled labor was displaced, but because NAFTA increased the size of the overall economy, it actually increased the demand for labor and boosted employment in the U.S. In fact, contrary to what many politicians would have you believe, unemployment dropped from 7% to 4%, the lowest level seen in decades. The benefits of this trade didn’t just manifest in U.S. labor markets, though. Canada, too, saw increased employment levels. Another important part of NAFTA is its dispute settlement mechanism, which is one of the best in the world right now. This mechanism allows for effective arbitration over things like currency manipulation, and the TPP has incorporated similar, though more advanced, mechanisms in its framework.
Finally, I want to talk about trade surpluses/deficits because they are a common argument used by opponents of free trade. A trade surplus is just the total value of exports minus the total value of imports. However, it doesn’t mean that much. For example, the United States maintained a trade surplus throughout the entire Great Depression, yet it clearly didn’t make life easier or the economy stronger. Conversely, the U.S. has a significant trade deficit now, yet it has the largest, most dynamic economy of any country on the planet. What matters is not the total amount of net-trade income, it’s the amount of goods and services American citizens can access. To quote Thomas Sowell, “If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a ‘deficit’ or a ‘surplus’ in the international balance of trade.” It’s also important to realize that even though Americans don’t produce as much as the Chinese, we invent pretty much everything that other countries produce. So, while iPhones are built in China, the profits flow back to an American company that pays taxes to the American government and employs American computer scientists and engineers. Instead of focusing only on where the end product is produced, it is crucial to also account for the non-tangible elements of production: the innovation, R&D, and investment. It is easy to pretend that the U.S. is weakened because of the trade deficit, but if one actually accurately accounts for the value of American innovation, it becomes clear that the U.S. possesses a trade surplus with China. Just don’t tell Trump or Sanders.
In summary, trade is always good for the overall economy. That is basic economics, and anyone telling you otherwise is trying to con you for your vote. I entreat everyone to carefully analyze the things these political clowns are telling you. They are often wrong, and they are almost always designed to get votes without having any basis in reality. This is true for every candidate, not just the two I love to beat up on the most. The more trade we have, the more consumer goods we can get at lower prices. There are economic problems for America to overcome, but imposing masive tarriffs and trade barriers is not a viable remedy.