Posts Tagged Chicago Booth

The Virtue of Trade, the Folly of Protectionism

The election of Donald Trump has put a hot spotlight on the role of international trade in the US economy. Much of Trump’s support is due to a negative attitude toward trade that has been brewing for many years—most notably in the Rust Belt states most threatened by global competition.

The fact is that trade is good for the United States economically and geopolitically. A strong case for trade and against protectionism is made by University of Chicago economist John H. Cochrane in his essay 5 Logical Arguments Against the Protectionist Fallacy.” Cochrane’s essay is a springboard for the comments that follow.

MONEY FLOWS—FOLLOWING THE MONEY

Cochrane points out that money earned from exports to the US eventually comes back. The money comes back in the form of export revenues or foreign investment in the US. Presumably if those goods were sold domestically then US businesses would make similar investments. How would these investments from abroad differ from those made by domestic investors out of their savings? Sales by domestic companies substituting for imports would either cost more to customers leaving them with less money to spend in the economy or less profitable for the sellers leaving them with less money to invest. Thus, free trade actually brings more money into the US economy. With the exception of strategically sensitive items, trade should be encouraged.

At the same time we must recognize that while trade is good for the economy as a whole, there are large segments of the population who suffer job loss or reduced wages due to trade. A long time may pass and a lot of damage can be done as economies adjust.

Recommended Policy Response: Reduction of import barriers (and compelling our trading partners to reciprocate!) Tariffs and other import barriers are passed through to consumers in the form of higher prices;

  • Favor those countries who tend to buy US exports. While it is true that money spent on imports ultimately returns, some of it comes back much more quickly and directly from countries that tend to buy US goods. This is true of many countries due to historical or cultural closeness. Canada and Mexico, our North American neighbors are the most obvious examples. These countries are now closely integrated with the US. Imports from Mexico are better than imports from China and we should recognize that a strong, prosperous Mexico is in America’s interest.
  • Make it easy for countries to buy US exports. Encourage American commercial presence abroad. In fast growing developing countries especially, US investments will promote exports in several ways: buy creating jobs, which creates more customers; by creating a market for US exports to supply overseas manufacturing and distribution; helping overseas trading partners become accustomed to US business culture, parts and measurement standards.

WHY SHOULD MOVEMENT OF GOODS, MONEY OR PEOPLE BE CONSTRAINED SIMPLY FOR CROSSING AN INTERNATIONAL BORDER?

Cochrane correctly makes the point that if nations are justified in blocking imports from other nations, then states should take steps to block “imports” from other states. Should the northeast and midwest erect protections from cheap southern labor? By that logic Clevelanders should buy Hondas made in Ohio instead of Fords from Michigan or a Subaru from Indiana!

We should of course recognize that states and municipalities do compete for jobs and investment of various kinds whether it’s for factories or corporate headquarters or sports teams. And let’s not forget the recent doughnut war when North Carolina upstart Krispy Kreme dared challenge Dunkin Donuts on its home turf in Massachusetts! But however fierce the competition states would not consider a tariff on goods from other parts of the US. Why not? Why are domestic tariffs so obviously ridiculous while international tariffs are more acceptable? Could it be that we recognize that our states are integrated into a larger economic entity with a common set of laws and cultural norms. Under these conditions buyers and sellers have easy access to counterparts in another state. As a result interstate commerce occurs smoothly and inexpensively.

The global economy is also integrated and is becoming more so with improvements in transportation, communication and information technology. We see this integration on a regional basis which is why countries in North American, Western Europe and East Africa have with varying degrees of success formed regional trade blocs.

Recommended Policy Response:

  • Recognize that we are part of an increasingly integrated and interdependent world economy and remove arbitrary barriers to the movement of goods information, and people. In addition, our trade and immigration policies should be coordinated with those of Mexico and Canada.
  • Work more closely with Mexico to strengthen the Mexican economy. A stronger Mexican economy will lessen the incentive to illegally cross the border and will increase the customer base for US exports. Approach Mexico as a friend not as a threat.

ARE THE NUMBER OF JOBS FIXED? NO. THE NUMBER OF JOBS MUST INCREASE AS POPULATION INCREASES.

Most protectionist rhetoric is based on the premise that there are a fixed number of jobs that are “our” jobs, and that immigrants and foreign competitors are “stealing our jobs.”

The solutions to our immigration problems are long and complex but they generally do not start with blaming them for a tight labor market.

Many studies have shown that immigrants threaten jobs mostly at the lower skill levels. Several economists conclude that immigrant labor does not take jobs but it does slightly reduce wages. I myself have heard anecdotal evidence of this from friends in information technology who feel their wages are depressed by large numbers of immigrant professionals in the US on H1-B visas.

Recommended Policy Response: Reduce barriers to legal immigration. Enforce US labor law. Provide targeted assistance to those whose jobs are directly impacted by foreign competition.

JOB GAINS AND LOSSES DUE TO TRADE ARE ALWAYS NET GAINS AND LOSSES

There are winners and losers as a result of global trade. How do we minimize the losses and their impact while maximizing the gains?

Recommended Policy Response: Trade adjustment assistance; includes training, child care, mobility assistance, portable health care. Trade adjustment assistance for communities!

The bottom lines is the following:

  • We are better off with a more open society—one that creates customers, partners and political allies.
  • We should advocate for policies that enable ALL of our population to take advantages of openness and minimize the losses among those who are vulnerable.

 

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