TPP: Foreign Imports Are Good For Americans by David Boaz, Foundation For Economic Education
Trade is not a trade-off
Too many advocates of trade liberalization don’t really understand the case for free trade. Consider this sympathetic interview by Steve Inskeep of 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.
Inskeep refers to the lowering of U.S. tariffs as “a trade-off,” and Froman accepts that characterization. Both operate from the premise that Americans want other countries to reduce their barriers to our exports, and that the “trade-off” for that benefit is that we must reduce our own trade barriers.
That’s backwards. The benefit of trade is that we get access to goods and services that we might not get otherwise, or we get to pay 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.
Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale.
This is a point that Cato scholars and our 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 real free trade requires liberalization 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 economist believes that “The purpose of economic activity is to enhance the wellbeing of individual consumers and households.” And, 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.
And 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 [2010] 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 harbor 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, organized 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 labor to work on a broader scale, enabling the people in each country to produce the goods at which they have a comparative advantage.
As 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 USTR Froman, Senate Finance Committee chair Orrin Hatch, and other advocates of trade liberalization will come to understand and to advocate the strong case for free trade, which economists have understood since Adam Smith in 1776.
