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Why Free Trade is good.
The Concise Encyclopedia of Economics ^ | Alan S. Blinder

Posted on 03/09/2004 7:45:32 PM PST by freebacon

See also http://www.freerepublic.com/focus/f-news/1094309/posts for Free Market, Outsourcing, and the shortcomings of Socialism

..........................................

For more than two centuries, economists have steadfastly promoted free trade among nations as the best trade policy. Despite this intellectual barrage, many practical men and women of affairs continue to view the case for free trade skeptically, as an abstract argument made by ivory-tower economists with, at most, one foot on terra firma. Such people "know" that our vital industries must be protected from foreign competition.

The divergence between economists' beliefs and those of (even well-educated) men and women on the street seems to arise in making the leap from individuals to nations. In running our personal affairs, virtually all of us exploit the advantages of free trade and comparative advantage without thinking twice. For example, many of us have our shirts laundered at professional cleaners rather than wash and iron them ourselves. Anyone who advised us to "protect" ourselves from the "unfair competition" of low-paid laundry workers by doing our own wash would be thought looney. Common sense tells us to make use of companies that specialize in such work, paying them with money we earn doing something we do better. We understand intuitively that cutting ourselves off from specialists can only lower our standard of living.

Adam Smith's insight was that precisely the same logic applies to nations. Here is how he put it in 1776:

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy... If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.

The case for free trade among nations is no different. Spain, South Korea, and a variety of other countries manufacture shoes more cheaply than America can. They offer them for sale to us. Shall we buy them, as we buy the services of laundry workers, with money we earn doing things we do well—like writing computer software and growing wheat? Or shall we keep "cheap foreign shoes" out and purchase more expensive American shoes instead? It is pretty clear that the nation as a whole must be worse off if foreign shoes are kept out—even though the American shoe industry will be better off.

Most people accept this argument. But they worry about what happens if another country—say, Japan—can make everything, or almost everything, cheaper than we can. Will free trade with Japan then lead to unemployment for American workers, who will find themselves unable to compete with cheaper Japanese labor? The answer, which was provided by David Ricardo in 1810 (see Ricardo in Biographies section), is no. To see why, let us once again appeal to our personal affairs.

Some lawyers are better typists than their secretaries. Should such a lawyer fire his secretary and do his own typing? Not likely. Though the lawyer may be better than the secretary at both arguing cases and typing, he will fare better by concentrating his energies on the practice of law and leaving the typing to a secretary. Such specialization not only makes the economy more efficient, it also leaves both lawyer and secretary with productive work to do.

The same idea applies to nations. Suppose the Japanese could manufacture everything more cheaply than we can—which is certainly not true. Even in this worst-case scenario, there will of necessity be some industries in which Japan has an overwhelming cost advantage (say, televisions) and others in which its cost advantage is slight (say, chemicals). Under free trade the United States will produce most of the chemicals, Japan will produce most of the TVs, and the two nations will trade. The two countries, taken together, will get both products cheaper than if each produced them at home to meet all of its domestic needs. And what is also important, workers in both countries will have jobs.

Many people are skeptical about this argument for the following reason. Suppose the average American worker earns ten dollars per hour, while the average Japanese worker earns just six dollars per hour. Won't free trade make it impossible to defend the higher American wage? Won't there instead be a leveling down until, say, both American and Japanese workers earn eight dollars per hour? The answer, once again, is no. And specialization is part of the reason.

If there were only one industry and occupation in which people could work, then free trade would indeed force American wages close to Japanese levels if Japanese workers were as good as Americans (and who doubts that?). But modern economies are composed of many industries and occupations. If America concentrates its employment where it does best, there is no reason why American wages cannot remain far above Japanese wages for a long time—even though the two nations trade freely. A country's wage level depends fundamentally on the productivity of its labor force, not on its trade policy. As long as American workers remain more skilled and better educated, work with more capital, and use superior technology, they will continue to earn higher wages than their Japanese counterparts. If and when these advantages end, the wage gap will disappear. Trade is a mere detail that helps ensure that American labor is employed where, in Adam Smith's phrase, it has some advantage.

Those who are still not convinced should recall that Japan's trade surplus with the United States widened precisely as the wage gap between the two countries was disappearing. If cheap Japanese labor was stealing American jobs, why did the theft intensify as the wage gap closed? The answer, of course, is that Japanese productivity was growing at enormous rates. The remarkable upward march of Japanese productivity both raised Japanese wages relative to American wages and turned Japan into a ferocious competitor. To think that we can forestall the inevitable by closing our borders is to participate in a cruel self-deception.

Americans should appreciate the benefits of free trade more than most people, for we inhabit the greatest free trade zone in the world. Michigan manufactures cars; New York provides banking; Texas pumps oil and gas. The fifty states trade freely with one another, and that helps them all enjoy great prosperity. Indeed, one reason why the United States did so much better economically than Europe for two centuries is that we had free movement of goods and services while the European countries "protected" themselves from their neighbors. To appreciate the magnitudes involved, try to imagine how much your personal standard of living would suffer if you were not allowed to buy any goods or services that originated outside your home state.

A slogan occasionally seen on bumper stickers argues, "Buy American, save your job." This is grossly misleading for two main reasons. First, the costs of saving jobs in this particular way are enormous. Second, it is doubtful that any jobs are actually saved in the long run.

Many estimates have been made of the cost of "saving jobs" by protectionism. While the estimates differ widely across industries, they are almost always much larger than the wages of the protected workers. For example, one study estimated that in 1984 U.S. consumers paid $42,000 annually for each textile job that was preserved by import quotas, a sum that greatly exceeded the average earnings of a textile worker. That same study estimated that restricting foreign imports cost $105,000 annually for each automobile worker's job that was saved, $420,000 for each job in TV manufacturing, and $750,000 for every job saved in the steel industry. Yes, $750,000 a year!

While Americans may be willing to pay a price to save jobs, spending such enormous sums is plainly irrational. If you doubt that, imagine making the following offer to any steelworker who lost his job to foreign competition: we will give you severance pay of $750,000—not annually, but just once—in return for a promise never to seek work in a steel mill again. Can you imagine any worker turning the offer down? Is that not sufficient evidence that our present method of saving steelworkers' jobs is mad?

But the situation is actually worse, for a little deeper thought leads us to question whether any jobs are really saved overall. It is more likely that protectionist policies save some jobs by jeopardizing others. Why? First, protecting one American industry imposes higher costs on others. For example, quotas on imports of semiconductors sent the prices of memory chips skyrocketing in the eighties, thereby damaging the computer industry. Steel quotas force U.S. automakers to pay more for materials, making them less competitive.

Second, efforts to protect favored industries from foreign competition may induce reciprocal actions in other countries, thereby limiting American access to foreign markets. In that case export industries pay the price for protecting import-competing industries.

Third, there are the little-understood, but terribly important, effects of trade barriers on the value of the dollar. If we successfully restrict imports, Americans will spend less on foreign goods. With fewer dollars offered for sale on the world's currency markets, the value of the dollar will rise relative to that of other currencies. At that point unprotected industries start to suffer because a higher dollar makes U.S. goods less competitive in world markets. Once again, America's ability to export is harmed.

On balance the conclusion seems clear and compelling: while protectionism is sold as job saving, it probably really amounts to job swapping. It protects jobs in some industries only by destroying jobs in others.


TOPICS: Business/Economy; Culture/Society; Foreign Affairs; Government
KEYWORDS: freetrade; leftwingactivists; trade
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To: CWOJackson
I know you are not. I read these folk all the time.
21 posted on 03/09/2004 8:18:00 PM PST by annyokie (There are two sides to every argument, but I'm too busy to listen to yours.)
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To: Sinner6
"the protective system [] is conservative" .... Well there we have it. Marx recognizes that a tariff system is conservative and therefore he is against it.

"free trade system is destructive ".....Well, that do you know Marx see the free trade system as destructive but what does free trade destroy? Marx tells us in the next sentence

"It breaks up old nationalities" ..... Oh no Mr Bill, you mean a free trade system will destroy the good old USA? Yup, that's how Marx sees it, and he is correct as current developments (WTO, NAFTA, GATT) show. But it gets worse.

[it, free trade] "pushes the antagonism of the proletariat and the bourgeoisie to the extreme point." ..... What this means free traders is that the free trade system chases the lowest cost labor and reduces to the lowest point, subsistence, all labor. That would be you, me and our children if we continue our insane trade policies. But it gets worse.

"In a word, the free trade system hastens the social revolution "..... Hmmm, this doesn't sound good. What this means is that once free trade has reduced labor costs to the subsistence level, well the workers will just say screw it kill the elites and demand a Marxists economy.

"I vote in favor of free trade" ..... Well what do you know, Karl Marx is a free trader! who da thunk it.

22 posted on 03/09/2004 8:19:58 PM PST by jpsb (Nominated 1994 "Worst writer on the net")
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To: annyokie
But they worry about what happens if another country—say, Japan—can make everything, or almost everything, cheaper than we can.

So in each industry that we compete with cheap labor our wages are forced down huh? So what industries do not compete with cheap labor

Both of the above look like questions to me.

23 posted on 03/09/2004 8:26:40 PM PST by jpsb (Nominated 1994 "Worst writer on the net")
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To: annyokie
Yes, they are pretty easy to read aren't they.
24 posted on 03/09/2004 8:27:37 PM PST by CWOJackson (What are you complaining about, she called me compassionate...)
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To: jpsb
I'll make new things they have not dreamed of.
25 posted on 03/09/2004 8:28:01 PM PST by Spruce
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To: CWOJackson
still waiting
26 posted on 03/09/2004 8:28:33 PM PST by jpsb (Nominated 1994 "Worst writer on the net")
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To: Spruce
Yea, that will be cool. We will just invent a money machine, and ever American will have one. I can't wait.
27 posted on 03/09/2004 8:31:04 PM PST by jpsb (Nominated 1994 "Worst writer on the net")
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To: jpsb
And you do it so well.
28 posted on 03/09/2004 8:32:11 PM PST by CWOJackson (What are you complaining about, she called me compassionate...)
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To: CWOJackson
Yup once has to be willing to wait until the end of time if one has any hope of reading an intelligent post from you. Happily I am a very patent man.
29 posted on 03/09/2004 8:37:31 PM PST by jpsb (Nominated 1994 "Worst writer on the net")
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To: jpsb
I'm sure you're happy. It shows in your doom and gloom approach to life and politics. Some folks like that sort of thing...but I'll let you get back to sitting on your eggs again.
30 posted on 03/09/2004 8:39:29 PM PST by CWOJackson (What are you complaining about, she called me compassionate...)
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To: jpsb
I have had to transform my skillset numerous times. Your soul and the grace of God IS a money machine, if that's what you want.
31 posted on 03/09/2004 8:41:00 PM PST by Spruce
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To: claptrap
What is the new market these visionaries percieve?

We are a country of innovators. You might think about joining them by coming up with your own ideas. Just a thought.

32 posted on 03/09/2004 8:48:47 PM PST by hobson
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To: freebacon
No doubt the leadership of China and India are delighted with this mindset. The children and grandchildren of Americans will pay a bitter price for our insatiable appetite for cheap junk from WalMart.
33 posted on 03/09/2004 8:54:26 PM PST by neutrino (Oderint dum metuant: Let them hate us, so long as they fear us.)
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To: *"Free" Trade
bump
34 posted on 03/09/2004 10:51:26 PM PST by Libertarianize the GOP (Ideas have consequences)
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To: Willie Green
There you go again Willie...nice job Ignoring everything in the article that began this thread. Tell me Willie, is it xenophobia with you? I know that you're Christian, do you not glean anything from Matthew 15:21-15:28?

And as for the ridiculous quote you and others constantly 'trotsky' out there, have you actually read the entire speech that he gave? Go on...read it, because I know that you haven't yet! The guy was all over the place on these issues. It was almost like listening to John Kerry on the Iraq War.

35 posted on 03/10/2004 3:57:11 AM PST by LowCountryJoe (Shameless way to get you to view my FR homepage)
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To: jpsb
It is called comparative advantage. See the analogy of the lawyer and the secretary. This is different then absolute advatage.
36 posted on 03/10/2004 5:26:01 AM PST by Sinner6
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To: jpsb
But if you had ever bothered to read the Communist Manafisto you would relize how bad Marx's reasoning a logic skill are.
37 posted on 03/10/2004 5:28:59 AM PST by Sinner6
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To: freebacon
More idiocy from the "trade deficits don't matter" while "free trade solves all problems" crowd. Don't believe a word he says. This year's 500 billion dollar trade deficit will be spent by foreigners on USA assets that throw off a profit, rent or interest.

On
US government bonds
US factories
US commercial and residential property
US farms
US raw land
38 posted on 03/10/2004 5:35:33 AM PST by dennisw (“The fear of the Lord is the beginning of knowledge: but fools despise wisdom and instruction.”)
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To: dennisw
Also spent on
US stocks
US commercial paper
39 posted on 03/10/2004 5:36:30 AM PST by dennisw (“The fear of the Lord is the beginning of knowledge: but fools despise wisdom and instruction.”)
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To: claptrap
None of these Free trade puff pieces ever explain what great "new" jobs are waiting around the corner? What is the new market these visionaries percieve?

O, those are petty details which laid-off workers should figure out themselves. Let them pick up a new skill, move on or invent something new. The visionaries think in a much larger scale or are too busy making well deserved profits.

40 posted on 03/10/2004 6:02:58 AM PST by A. Pole (<SARCASM> The genocide of Albanians was stopped in its tracks before it began.</S>)
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