Today, most arguments against free international trade are mounted by special interest groups. Both labor unions and management oppose free trade when they believe—sometimes correctly, sometimes incorrectly—that it will make them worse off. What they conveniently ignore is that free trade will make everyone else better off.
It is true that if the U.S. auto industry loses 5,000 jobs to foreign competitors, those 5,000 workers and their households are worse off. However, the millions of other households that can purchase less expensive, more efficient vehicles from a wider range of choices, are better off. The pain endured by one of those 5,000 households may well be greater than the benefit enjoyed by any given car-buying household. That is why labor unions fight so hard to keep their members' jobs. But an economist would argue that if another nation can make cars more efficiently, those autoworkers should move into another U.S. industry and let the whole population enjoy the benefits of free trade with the more efficient auto industry of another nation.
Special interest groups put forth various arguments to support their view. Some of these arguments make a certain amount of economic sense, and others are incorrect or at least suspect. The truth, however, is that those asking for protection from free trade usually stand to benefit the most.
The argument that “cheap foreign wages” will destroy a U.S. industry is bogus. What matters is not the level of wages, but the level of wages relative to the productivity of the workers. If a U.S. industry has high wages—say, quadruple the level of the foreign wage—but is six times more productive, that industry is still quite competitive with the foreign one.
Also, labor is only one component of the cost of a product. If a low-wage industry threatens a U.S. industry, it basically means that the foreign nation has a comparative advantage in that industry.
The arguments most often heard are …
Let's look at these positions one at a time.
Keeping jobs in the United States is important, but it's more important to keep jobs in industries in which we operate efficiently. Otherwise, we are subsidizing inefficiency, which hurts national productivity as well as consumers. If, indeed, another nation is more efficient—has a comparative advantage—in producing a product, it's in our interests to buy it from them.
As to the idea that we are “exporting jobs” when, say, U.S. auto manufacturers set up assembly plants in Mexico, the autoworkers' union has a point. But the same counterargument applies. If Mexico is the least expensive place to assemble the vehicles, from the economic standpoint, that is where it should be done—as long as it can be done with the same level of quality.
The quality argument is often put forth as a reason to keep jobs in the United States. In reality, however, imported goods of inferior quality sell at lower prices, which reflects their quality and gives the consumer another choice. (Some people like cheap shoes.) Also, foreign producers have a good record of improving the quality of their goods to meet U.S. standards. The Japanese auto industry of the 1970s provides an outstanding example of this. American producers in certain industries have done the same thing. For instance, over the past 20 years the California wine industry has improved the quality of its wines to compete with imports from France in the States. That created jobs in the United States' wine industry—and in trucking, warehousing, advertising, retailing, and restaurants (thereby employing otherwise unemployable wine stewards)—while combating imports of burgundy and Bordeaux.
We don't want money leaving the country may sound like a sensible argument when you look at the GDP formula. If we import more than we export, GDP is lowered. Doesn't that mean we are worse off? In a way, yes, but in a way, no.
The money-leaving-the-country argument goes all the way back to mercantilism, the economic theory that international trade generates wealth for a nation. The mercantilists believed that exports should be encouraged, imports should be discouraged, and gold should be hoarded. Mercantilism flourished in the 1600s and 1700s and fueled the worldwide exploration and imperialism of Western European nations in those centuries. However, as economic theory, mercantilism is dead.
Keeping money in the country is not a priority. We don't want exports to be high because they keep money in the country but because they fuel domestic production and incomes. If those incomes are spent on imports, that can be a very good thing for consumers. From the economists' point of view, the way to promote exports is not by limiting imports. Other nations will retaliate against protectionist policies anyway. The way to promote exports is to be as innovative, productive, and efficient as we can be.
National security is at stake with regard to some industries. Defense is the best example of an industry that requires protection on the basis of national security. Steel may be another, but the steel industry has been only partly successful with this argument. Oil is another industry on which national security can depend, although U.S. consumption of and dependence on foreign oil has been virtually encouraged by the phase out of fuel efficiency standards for passenger vehicles and low gasoline taxes (relative to those in Europe).
Although economists disagree about various ways to protect industries on which national security depends, most agree that some industries warrant such protection. They also agree that some industries that have claimed this status, such as the American watch industry (I'm serious), probably do not warrant it.
Other nations' unfair treatment of their workers is a relatively new argument against imports, and it can be a tough argument both to document and deflect. It's hard to document because, as we've learned, everything is relative. The awful truth is that jobs in sweatshops may enable people in poor nations to feed and cloth themselves. Limiting imports from these nations may hurt the very people we would be trying to help. These arguments are hard to deflect because the truth is that low cost foreign production sites often don't meet reasonable health and safety standards.
Then there is the issue of child labor and forced labor, which virtually everyone sees as highly exploitative. The U.S. Congress estimates that at least 250 million child laborers between the ages of 5 and 14 are now working worldwide, about half of them full time. The United States has funded and contributed to a number of efforts to prevent child labor, and is the world's largest contributor to the International Program for the Elimination of Child Labor.
Several efforts to have other nations voluntarily comply with guidelines for eliminating child labor are underway. In fact, the United States devotes some $30 million a year to international programs to end abusive child labor. In 1999, the United States ratified a new international initiative to eliminate child slavery, debt bondage, and forced labor. In addition, the Child Labor Deterrence Act was introduced as a bill to the U.S. Congress in 1999, but it has yet to pass. If it became law, the act would prohibit the importation of manufactured or mined products produced by children under the age of 15.
Other nations “dumping” goods in the United States and keeping our imports out do give protectionists ammunition in their battle against free trade. Dumping occurs when a nation sells its goods in a foreign market at a price that is lower than its price in the domestic market or lower than it cost to produce. The objective is to drive the domestic producer out of the market—and out of business—and then to raise the price when the domestic competition has gone out of business. Both dumping and protectionism by other nations can put the United States at a disadvantage.
Under current laws and trade agreements, dumping is illegal. If U.S. producers can prove that dumping is occurring, special duties can be added to the price of the goods being dumped. One reason that dumping occurs is that many foreign industries are subsidized by their government in ways that ours are not (although U.S. agriculture is highly subsidized, as is agriculture in most industrial nations). The steel industry is a good example of an industry that recently won protection, and in March, 2001, President Bush levied tariffs of up to 40 percent on certain types of steel imports.
When other countries practice protectionism, the preferred method is to work toward free—or at least fair—trade through a process of negotiation. These processes have been quite useful in recent years and have brought the world into an age of much freer international trade.
Excerpted from The Complete Idiot's Guide to Economics © 2003 by Tom Gorman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.