What's the Problem with Trade?

by Don Boudreaux on November 25, 2006

in Trade

A frequent commentor here at the Cafe, Bruce Hall, is convinced that American trade with China ultimately will hurt Americans.

I can’t figure out why, though, Mr. Hall is worried.  His comments, along with his posts at his blog Hall of Record, suggest that he fears that Chinese government policy — for example, the alleged undervaluation of the Chinese yuan — threaten American economic prosperity.

If the Chinese economy continues growing and the Chinese continue to offer to sell things to Americans at prices that Americans find attractive, what’s the problem?  Would it be a problem, for example, if an inexpensive process were discovered for making luxury automobiles out of dirt?  GM, Ford, Toyota, BMW, and other auto producers, and their workers, would suffer for a time — but would such a discovery doom the American economy?  Or suppose that a formula for curing cancer, cystic fibrosis, obesity, impotence, and restless-leg syndrome is discovered, a formula that uses only tap water, salt, and human hair.  Would the discovery of such formula bring economic doom?  Physicians, nurses, hospitals, and pharmaceutical companies would suffer — but would such a discovery be bad for the economy?

Or would it be a problem if, for whatever reason, Microsoft Corp. decides to give away all of its software free of charge for an indefinite — perhaps infinite — period of time?

No.

The fact that existing producers are subject to more and more competition — not only from other firms but from new techniques — is both a sign of economic progress and a source of such progress.

As the Chinese economy grows, as its producers become more efficient (or as the Chinese government continues to subsidize U.S. consumption by pumping resources into some Chinese industries), Americans’ costs of satisfying their desires fall.  What’s the problem?  I simply don’t see it.

Yes, the U.S. economy would be jolted by change if the Chinese are subsidizing their producers and then one day unexpectedly and suddenly stop.  But there’s nothing unique about such unexpected jolts.  The same jolts hit economies when new discoveries are made, when consumer tastes suddenly change.  (Just think of the jolt to Hershey’s, Anheuser-Busch, and other carbohydrate producers when the Atkins Diet became popular!)  Are we to reject artificially inexpensive goods and services merely because one day the subsidies that make them artificially inexpensive might end?

Or perhaps Mr. Hall (and others skeptics of free trade) worry that the Chinese economy will one day reverse course and begin to shrink.  Our "dependence" upon China might then prove dangerous.  Almost anything is possible, but to reject assured improvements today in prosperity because of the (remote) prospect that one of the contributors to that prosperity (China) might tomorrow no longer be an attractive trading partner is a fool’s move.

If Americans are becoming profligate, unproductive, myopic, or otherwise unfit for lasting prosperity, that would truly be a problem (albeit one made less severe by trade with prudent, abstemious, productive, creative, and long-run oriented non-Americans).  But under no plausible set of circumstances is more open trade with foreigners a threat to American prosperity.

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{ 14 comments }

python November 25, 2006 at 6:50 pm

Back in October on this forum (http://cafehayek.com/2006/10/more_on_steelin.html) , I asked "If a clever guy invented a cheap personal transportation device that you could build yourself and made cars unnecessary – and therefore no more need for automotive employees – would you build one? What if it was a Chinese guy that invented it?)"

No one responded :-) But I'll bring it up again in light of Dr. Boudreaux's comments.

Despite the Bruce Hall's of the world, the issue is not that progress might happen. The issue is how well our economic environment can either create or adapt to the progress. Progress means change. And even those who will lose their job in the automotive industry will see huge benefits from automotive progress.

Because markets know what people want better than any government does, it only makes sense to let the markets decide how to move money/goods/labor. Money will move more "efficiently" when government plays only a minor role in the labor market, the capital market, the trade market, and the private property market.

How can it be good for anyone if the government tells everyone to pay more for something they could get cheaper elsewhere?

The fear of some is that if the government doesn't regulate enough, the little guy will get hurt. Well, the little guy has had a lot more job opportunities in the past 200 years then he ever did when the kings and emperors were running the show. (245 words ;-) )

Rory Meakin November 25, 2006 at 7:24 pm

I've never really understood the problem people have with foreign governments subsidising our consumption of their goods. It might be a bit morally iffy to have the poor Chinese taxpayer 'donate', via the Chinese government, some of his income to making Chinese goods cheaper for us Westerners, but if they insist why stop them?

There is, I suppose, an objection in that efficiency would be reduced. That is, if Western production is supplanted by subsidised Chinese production, then resources of both will be misallocated as a result. In the West, the resources that would have supported the production of the goods which the subsidised Chinese imports have displaced will be diverted to the next most efficient use. The gap represents the efficiency loss.

I haven't sat down and drawn graphs or studied evidence to prove it, but my hunch is that the efficiency loss in the West would be less than the value of the Chinese subsidy.

ben November 25, 2006 at 8:53 pm

Don said:

"But under no plausible set of circumstances is more open trade with foreigners a threat to American prosperity."

Put like this, this is strikingly strong statement, and I am not aware of a single exception to that rule.

My favorite argument for free trade is this:

a) specialisation is the source of all prosperity above subsistence.

b) trade necessarily expands opportunities for specialisation, and therefore raises prosperity.

c) protection delays but cannot prevent shifts in specialisation in the long run i.e. the costs of specialisation (change in mix of production, temporary unemployment)are ultimately unavoidable.

Allen November 25, 2006 at 9:19 pm

I'm glad to see that you haven't bought into China undervaluing it's currency to subsidize it's imports. Even if they are and they were to finally let it float at market rates, it's likely that a lot of China's price-sensative cheap manufacturing would shift to other low-cost countries. I'm sure Cambodia, Bangladesh, Pakistan, Palistine, Peru and others would be more than happy to produce those textiles. And an increasingly export-oriented Vietnam could pick up some of the slack.

Another way of looking at is that I have a hard time seeing problems in China suddenly changing the dynamics for things like CRT TVs. The market in the US isn't goign to give much wiggle room for anything but lowering prices on them given the dropping prices of more desirable LCDs and Plasma TVs. If anything trouble in China decreasing it's CRT exports would hasten the adoption of the new technologies.

Lowcountryjoe November 25, 2006 at 9:25 pm

Now this is just dumb…everyone that hasn't had their way of thinking tainted by an Econimcs course can surely tell you: people trade with one another to make themselves worse off than before. It's just that simple and you people that espouse ecomic liberty don't seem to get this at all…commerce, competition, and choice are all bad things; nothing good ever comes from any of it. Why do you people peddle these fantasies on the web?

Bruce Hall November 26, 2006 at 1:03 am

I continue to appreciate your efforts to educate me; however, I will also continue to distinguish between trade that is open and equitable and countries whose trade practices are designed to weaken U.S. (and other) manufacturers in order to strengthen their own.

U.S. manufacturers have had to deal with counterfeiting, theft of proprietary information, currency manipulation and being locked out of lucrative markets by various tactics such as the Japanese requiring individual "safety inspections" of each vehicle destined for their country from the U.S. (the U.S. only requires certification of a model, not individual vehicles)… among the methods used to ensure that "free trade" is only a figment of the academics imagination.

I guess we'll see how far the subsidies go when the dollar continues to slide. I know, that will just improve the position of our manufacturers for exporting… all of those flat screen TVs that are not made in the U.S. among the other high tech items no longer made here.

But I do enjoy your site and, in a perfect world, might actually agree with you most of the time. But then, economists don't necessarily agree with each other, so….

Jeremy November 26, 2006 at 9:24 am

Rory said "I've never really understood the problem people have with foreign governments subsidising our consumption of their goods."
Some people will see the problem as foreign government subsidies wiping out competition, eliminating jobs etc.

He went on:
"In the West, the resources that would have supported the production of the goods which the subsidised Chinese imports have displaced will be diverted to the next most efficient use"

Wars? Haliburton? Trans fats? Someone's not living in the real world.

CalcaMutin November 26, 2006 at 11:39 am

What's more despicable? Raising a physical fence on the US-Mexican border to keep immigrants out, or raising a protectionist wall to keep foreign goods out? I suspect that the fence is the lesser evil, yet the "moral authorities" are not at all scandalized by the economical wall.

Bret November 26, 2006 at 12:31 pm

Don Boudreaux wrote: "But under no plausible set of circumstances is more open trade with foreigners a threat to American prosperity."

I guess I'm a little surprised that Don can't get his thinking outside his box enough to imagine any plausible set of circumstances at any time for all eternity where trade might actually be a net negative to Americans (depending on how exactly you define prosperity).

For example, one of the cornerstones of capitalism is its ability to efficiently allocate scarce resources, goods, and services. But what if one day in the (perhaps very distant) future, these things are no longer scarce? What if our level of productivity, with the help of robots and automation, is so high that there's enough food, clothing, housing, transportation, entertainment, etc., such that demand is virtually completely sated?

In this particular scenario, demand for labor would be weak since production is already meeting demand. This would be further exacerbated by the fact that technology would probably further increase productivity, requiring even fewer hours of labor to sate demand.

Since I believe that humans need to be able to work and feel productive to be happy and "prosperous", the world would begin feeling less prosperous at this point. In such a scenario, any country that's producing more than it's consuming (like China is now) would actually be more prosperous because they would be productively employing more people.

So that's one example of a set of circumstances where trade might hurt "prosperity". I can think of many more. Granted, they're all in the distant future (decades at least), but the farther out you look, the larger the set of plausible scenarios.

Rory Meakin November 26, 2006 at 8:26 pm

Jeremy wrote: "Some people will see the problem as foreign government subsidies wiping out competition, eliminating jobs etc."
I didn't say I was unaware some imbeciles will roll off mindless nonsense such as that. I simply said I don't understand the problem. I don't think anyone seriously believes unemployment is caused by inadequate protection of wasteful and inefficient companies from competition (across borders or not) any more.

I think people tend to forget that consumption is the aim, not production. We produce because in order to consume something you first have to produce it (or exchange it for something else you produced.) Imports are good, exports are bad. Exports are sacrifices we make in order to get the imports we want.

Lowcountryjoe November 26, 2006 at 10:49 pm

Seriously, Rory, and no sarcasm here — that is a fantastic point and one that isn't brought up enough. I think that we all recognize trade as a means to trade away our surpluses in exchange for the things that we have not produced but reading the way you put it (simplified yet with so much clarity for a complexed topic).

We should celebrate those governments who wish to subsidize our consumption on the two fronts: with outright goods that are cheaper than what they should be and with their willingness to buy our debt so that we can expand and consume even more than before. As long as we're not subsidizing (and unfortunately we are), then we're the ones who are better off because of the protectionist arrangements of foreigners.

Next time I encounter an argument from a free trade antagonist I will vow to ask the following question that was spurred on by your comment…"Should we start calculating national income by scrapping the 'consumption' variable and replacing it with a 'production' variable?" Certainly we'd be healthier being served attorney services at dinner, decorating our homes with banking activities & distrubution services, and driving our health care/pharmacueticals to and from work and the store.

DRR November 27, 2006 at 12:25 am

I'm mostly pro liberalized trade. But there's a huge debate going on in economics blog circles & I'd like the obviously pro trade faction here to answer them.

1: If the lowering of trade barriers puts American workers, both blue & white collar, in direct competition with foreign labor willing to work cheaper, thereby increasing the chances they will lose their job. What incentive do they have to support such liberalization measures?

2: If the situation with China (trade deficit, currency devaluation) is really no big deal, then why do so many prominent mainstream economists, who could hardly be characterized as trade reactionaries, worry about it & currency so much?

3: The last few years have seen, what could be characterized as a paradigm shift on trade. Economists like Dani Rodrik have been questioning the degree to which trade contributes to economic growth &Organizations like the World Bank have reevaluated the proposed gains of liberalized trade, and the newer proposed benefits are substantially lower than they were even 3 years ago. And that's assuming a kind of world shock therapy rather than a more gradual liberaliation in the Doha talks. In which projected benefits would be even lower.

Given this; what reasons are there for someone, who may lose their job due to such liberalization efforts, to support such measures if it's even arguable whether it's a net win for most?

4: Finally there is the matter of distribution from the gains from trade. Much support for liberalized trade is based on the idea that the winners from trade could theoretically compensate the losers. Only this never actually happens. So considering an overwhelming share of the gains from liberalized trade, increased economic integration & great efficiency go towards the already wealthy, what incentive does a steel worker have to support a measure, who's downsides include putting him in competition with low wage foreign labor & increasing his chances of losing his job, and who's upsides overwhelmingly benefit the wealthy?

5: On a last note; if protection is such a bad thing, why do so many states practice it? And only discontinue it when forced to by International Trade governing bodies? Why have the liberalized trade brigade, touting the gains China & India have been making, routinely ignore those countries industrial policies & extensive amounts of protection?

Don't get me wrong. I am a liberal internationalist at heart. I would like to see all the barriers to trade, capital & labor be lowered or eliminated. I'm naturally averse to all forms of reaction (Natiivism, Protectionism, Isolationism) I'm extremely worried about the economic nationalist direction our country is taking. These have been the primary objections the anti-traders have provided against trade liberalization & I've yet to see economists in the Pro-Trade camp really address them, beyond the sentiment that, yes things are bad, but we shouldn't embrace protectionism. Which is fine, but it's not addressing the issue.

That's not to say the people here can. I generally trust a handful of economists who are pro-trade/pro-market, but reality-based and not libertarian idealogues. If they got mostly nuthin' in response to these concerns, I don't know suppose a cadre of Hayek worshippers would either, but right now I'm looking for anything to restore my liberal faith.

JohnDewey November 27, 2006 at 9:40 am

Bret: "What if our level of productivity, with the help of robots and automation, is so high that there's enough food, clothing, housing, transportation, entertainment, etc., such that demand is virtually completely sated?"

Wasn't this the world Kurt Vonnegut foresaw in "Player Piano"? Somehow it didn't happen. Sixty years later our demand for goods and services continues to grow.

I think the world you hypothesize will never happen, Bret. But suppose we did find a way to satisfy all conceivable demands with only one-fourth the current labor hours. What would be wrong with ten hour work weeks?

JohnDewey November 27, 2006 at 10:10 am

DRR: "Much support for liberalized trade is based on the idea that the winners from trade could theoretically compensate the losers."

Really? Why should "winners" – whatever that means – compensate those who overprice their labor services and refuse to work for market level wages? If a factory worker neglected to acquire a skill beyond operating a pneumatic wrench to attach screws, why should that worker be compensated at all for his or her poor career choice? There is no constitutional right to union level wages.

DRR: "So considering an overwhelming share of the gains from liberalized trade, increased economic integration & great efficiency go towards the already wealthy …"

How did you reach that conclusion? Most of the low-priced clothing sold at WalMart – and the low-priced televisions sold at Best Buy – and the low-priced power tools sold at Home Depot – are not purchased by the wealthy. Middle class and lower class Americans enjoy the higher quality and lower prices that international trade brought to the U.S.

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