Nov 20 2007
Professor Russ Roberts, host of the EconTalk podcast, has an essay in the latest issues of Foreign Policy journal titled “Why We Trade”. In this piece, Roberts defends the benefits of trade from a broad perspective, beyond the popular political view of trade, usually along the lines of “exports, good – imports, bad”. Roberts compares this line of thinking (characteristic of presidential candidates of both the Republican and Democratic parties), to the 14th century, pre-Adam Smith view of world trade, known as mercantilism.
Mercantilism was a view of global economic interaction that placed emphasis on the accumulation of gold and other precious metals from abroad in exchange for your country’s exports. The doctrine failed to recognize the importance of imports from abroad, as this was viewed as a loss of wealth to foreigners. Mercantilists viewed wealth in terms of bullion or the amount of precious metals a country owned. Today, of course, our understanding of wealth has evolved to account for the amount of output, or products (goods and services), we are able to consume. Herein lies the flaw in the rhetoric of modern politicians who, “are always talking about the necessity of other countries’ opening their markets to American products. They never mention the virtues of opening U.S. markets to foreign products.”
In response to the mercantilist tone of modern policy makers’ rhetoric, professor Roberts points out:
The logic of “exports, good—imports, bad” seems straightforward at first—after all, when a factory closes because of foreign competition, there seem to be fewer jobs than there otherwise would be. Don’t imports cause factories to close?Don’t exports build factories?
But is the logic really so clear? As a thought experiment, take what would seem to be the ideal situation for a mercantilist. Suppose we only export and import nothing. The ultimate trade surplus. So we work and use raw materials and effort and creativity to produce stuff for others without getting anything in return. There’s another name for that. It’s called slavery. How can a country get rich working for others?
Then there’s the mercantilist nightmare: We import from abroad, but foreigners buy nothing from us. What would the world be like if every morning you woke up and found a Japanese car in your driveway, Chinese clothing in your closet, and French wine in your cellar? All at no cost. Does that sound like heaven or hell? The only analogy I can think of is Santa Claus. How can a country get poor from free stuff? Or cheap stuff? How do imports hurt us?
We don’t export to create jobs. We export so we can have money to buy the stuff that’s hard for us to make—or at least hard for us to make as cheaply. We export because that’s the only way to get imports. If people would just give us stuff, then we wouldn’t have to export. But the world doesn’t work that way.
Roberts goes on to address that popular view that imports “hurt us” because they destroy jobs. It is true that free trade eliminates jobs in certain industries, but only in those that cannot achieve the level of efficiency and low costs that our trading partners can achieve. If workers are being tied up in inefficient industries at home, then perhaps trade is actually beneficial to these workers (and certainly society as a whole) since their loss of work may result in their finding new work in an industry that is cost competitive and produces at a level of efficiency that allows us to be competitive with our trading partners. Trade allows our economy and our workers to shift it focus from inefficient to highly efficient industries. As students of economics, you surely know by now why efficiency (both productive and allocative) is good for society.
There is something to be said about the role of government in free trade, after all. If it is not in the best interest for the government to protect American jobs by erecting barriers to trade aimed at keeping cheap imports out, then what can the government do to soften the impact on those whose jobs are lost do to globalization of our economy? How refreshing it would be to hear presidential candidates speak not of “protecting” us from low price imports (after all, who really wants to pay more for anything), but instead shift their rhetoric towards the discussion of retraining and helping structurally unemployed workers find their way into an industry in which the US still maintains a competitive edge.
If the government were to assist workers displaced by free trade in the realm of education and training, then the shift from jobs in which their productivity was relatively low to ones in which their productivity is relatively high could occur more easily and fears of long-term structural unemployment could be put aside.
And the outcome should such training programs succeed in placing workers in high efficiency jobs? Clearly, greater productivity means higher income and greater access to wealth. In a world where wealth is measured not by the amount of gold bullion locked up in your safe, rather by the amount of physical output we’re able to accumulate, then higher productivity, higher wage jobs at home and low price goods imported from abroad is a recipe for increased wealth; not, as many politicians seem to think, a lower quality of life at home.
Perhaps the government should do more to soften the impact of globalization on American workers. But as professor Roberts points out, blocking the entrance of cheap imports will help no one in the American economy, even those workers who remain employed in high cost, inefficient and unproductive industries. For in the long-run, through effective design and implementation of re-training programs and the embracing of free-trade policies, everyone in American should benefit through the creation of high-productivity, higher wage jobs and access to lower priced manufactured goods imported from abroad. Higher incomes and lower prices means greater wealth.
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