International Trade for Dummies

Gary Wolfram
Issue CCLXIII - October 31, 2010
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There is a good deal of confusion over the issue of trade. You can really see it in the advertising being done for different political campaigns, particularly in the Michigan governor's race and the 7th congressional district race. There is talk of "fair trade" and "shipping jobs to China". Much of the discussion misses the fact that trade creates wealth for society as a whole. The discussion also assumes that trade occurs between countries rather than between individuals. It may not be too late to clear up some of these misconceptions prior to the election.

If we think about it, trade makes us better off in much the same way that innovation makes us better off. If I can produce hats less expensively because I invent a machine that sews hats more efficiently than hats can be sewn by hand, that will be good for all consumers. This was the essence of the industrial revolution that we learned about in school. Few of us learned that we would all be better off today if textiles were made by hand and we hadn't invented those darn machines. But the industrial revolution was not a good thing for you personally if you were a hat maker who made hats by hand. You would have been driven out of business by the new machine-produced hats.

If we find that we can produce hats more cheaply because the Japanese can make components of the hat more cheaply than we can, then we are better off in the same way that we are when someone invents a machine to sew hats. In fact, Adam Smith in his famous book, An Inquiry into the Nature and Causes of the Wealth of Nations, points out that you could grow grapes and make wine in Scotland if you wanted to spend enough to do so, but Great Britain would be better off making woolen coats and trading them to the French for wine.

Two hundred and thirty-four years later we seem to have forgotten this principle.

Politicians who say outsourcing is good for the economy are in fact correct. What they really mean is that we will have less production and more expensive goods and services if we don't allow for the specialization of labor and what David Ricardo, some two hundred years ago, called comparative advantage to help us produce things. We could have protected the jobs of typists if we had not allowed the use of computers, but our society as a whole would be worse off. The same holds true for allowing the production of goods and services to be done in the way that makes the most efficient use of resources. In many cases that will mean at least part of the production will be done outside of the political boundaries of a particular state.

It is silly to say that someone sent jobs to China. If you go to the Port of Long Beach you will not see crates being loaded onto ships with "jobs" printed on the side. What happens is that machinery and other materials may go to other countries, and this makes their workers more productive, which makes all goods and services less expensive for us. It also makes those workers wealthier and they can demand our goods and services. When I was a kid, "Made in Japan" meant cheap, shoddy products made by cheap Japanese labor. Today it means Lexus, made with labor costs that are higher than ours. An entrepreneur who has operations in China is making all of us in Michigan better off, except for those who have a special interest in keeping a job that would not exist if we are free to trade with others throughout the globe.

This leads us to a final point. The United States does not trade with China. You or I trade with China, probably in a very circuitous route. I produce college professor services, teaching economics, and I use the income I receive to buy items, such as a television, that might be made in China. Someone in China made the television and the company that produced it traded it to me for my dollars. They then use those dollars to buy a good produced in America by someone other than me. But the trade that occurs is between individuals. This trade is voluntary and must make both parties better off, or they wouldn't engage in the exchange. All voluntary trade is fair. What is unfair is when the government tells me that I can't trade my dollars for something that someone in China, or Mexico, or France wants to sell me.

Those who argue that someone who engages in voluntary exchanges with persons in another country shouldn't be elected are those who would make us all worse off in order to protect their special interest. It is possible to protect the jobs of those who put up telephone lines by not allowing us to use cell phones, but we shouldn't act like those who make cell phones or choose to use them are to be scolded for eliminating the job of the Wichita lineman. In the same way we shouldn't scold those who make us better off by using international trade to produce goods and services in the most efficient manner.

This post was originally published in The Michigan View on October 22, 2010. 

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