More on the "Harm" from Trade

by Don Boudreaux on January 8, 2007

in Trade

People who are skeptical of international trade — or who remain "open-minded" on the matter — because, as they say, trade has both "winners" and "losers," take far too parochial a perspective.  I tried in this earlier post to explain why I think that the longer the time period taken account of, the greater the proportion of the population that is helped by trade and the lower is the proportion hurt by it.

Here, though, is a different angle: arguing that trade has "losers" is simply another way of saying that competition has "losers."  Anyone who questions the merits of trade because they can identify persons harmed by it is someone who questions the merits of competition.

Unlike in my earlier post, I am here not drawing an analogy.  Literally, to oppose or to question trade because some people "lose" from it is to oppose or to question competition.  That is, the observed "loses" are just as accurately described as "loses" from competition as "loses" from trade.

Perhaps the point of this post is trivial, but I think that it’s important because it’s much more difficult, rhetorically, to object to competition than it is to object to trade.  Compared to the number of people who now nod in agreement whenever some talking-head thunders in stentorian tones that "trade" harms the economy, many fewer would nod in agreement if this same thundering pundit (or politician) asserted that "competition" harms the economy.  Compared to the number of people who think it wise and sensible when the pundit suggests that trade be limited as a means of fostering prosperity, fewer people would think it wise and sensible if this pundit instead suggested, explicitly, that competition be limited as a means of fostering prosperity.

Be Sociable, Share!

Comments

comments

Add a Comment    Share Share    Print    Email

{ 35 comments }

Jeff S. January 8, 2007 at 6:51 pm

Slightly off-topic, but could someone please explain to this non-economist the following statement in today's WSJ (The Outlook Section, titled "Why the US Should Root for Dollar to Weaken More"): "The (current account deficit) is equivalent to nearly 7% of the US economy–a level that, if sustained, would cause the nation's foreign debts to pile up to dangerous levels". The column later remarks that a 3% level "…(is) more sustainable…" At what level, if any, would it be dangerous and why? I'm not stupid but I need a jump start on understanding this. Thanks.

Rex Pjesky January 8, 2007 at 7:26 pm

Hey, Jeff S. Spend some time reading the trade index of this blog for your answer. Also see the coyote blog (links to both are on the left.)

Reading this will reveal that the WSJ is in error.
The trade deficit is not debt.

RayMofda January 8, 2007 at 8:03 pm

How much of the 2-30 billion cost of the wall along the Mexican border should be costed against the benefits of NAFTA?

Jeff S. January 8, 2007 at 8:06 pm

Thanks, Rex. Yes, I know that the trade deficit is not debt. So allowing for the WSJ's poor word choice, should there ever be a concern about the ratio of a given annual current account deficit to GDP? The guy who wrote the column never explained why 3% is OK, but 7% is a dangerous level. I'm just trying to understand his thinking and have read many posts here and at coyote and still can't figure out what it might be based on what I've learned. If someone can summarize what it might be, I'd be grateful.

Matt C. January 8, 2007 at 9:26 pm

I think Russ' second part of his article on EconLib.org about comparative advantage does a great job of explaining this.

He argues after a change in the economic situation on the island:

"Even the Fishers can benefit from economic change. That change creates the opportunity for the Fishers to move away from fishing and do something else productive. There is more to life than fish and water. And the Fishers have other skills outside of fishing. They chose fishing because at the time, that was the most productive activity for them. But they can do other things. Now that cheap fish are available, something else is the best use of the Fisher's time. And if the Fishers struggle to adapt to the changes on Treasure Island, their children will surely inherit a richer range of choices.

Without an increase in productivity or the opportunity to trade beyond these two families, the Palmers and the Fishers will always live near subsistence. But if the families on the island can now acquire fish more easily, then the Fishers and their children can devote their time to doing other things that enrich their lives and the lives of those around them. The Palmers will have the ability to pay for those things now that fish are cheaper."

The whole article can be found here.

http://www.econlib.org/library/Columns/y2006/Robertsstandardofliving.html

Mark Perry January 8, 2007 at 10:08 pm

You could substitute "progress" or "technology" for "competition" and Don's argument would be the same. Legislation that limited progress or technology would just as harmful as protectionist legislation.

Half Sigma January 8, 2007 at 11:20 pm

For an alternative take on competition, read my blog post on how competition causes higher prices:

http://www.halfsigma.com/2005/06/does_competitio.html

Albert Z January 9, 2007 at 1:07 am

Your correct that saying free trade has winners and losers is just like saying competition has winners and losers. However with trade some of the winners are foreigners. And although the benefits to everyone clearly exceeds the losses to losers, some may not like that foreigners are more well off "relative" to Americans. This is similar to Steve Landsburg's point made on FOX NEWs with John Gibson that to care more about someone you dont know in Michigan compared to someone you dont know in Juarez is racist. Perhaps for some Libertarians nationalism is clearly equivalent to racism. (Im not one of them.) I think that if you want to persuade people about the merits of trade you should simply note how much better off America is because of it, both as consumers and producers (who have cheaper inputs).

Bruce G Charlton January 9, 2007 at 1:53 am

I agree with DB that if 'trade' could be replaced with 'competition' it would probably persuade a few more people.

But plenty of people are against competition, or at least are very skeptical and uncomfortable about it. The reason given is often that they consider competition almost random, so that they believe that winners are not necessarily better than losers.

For example, there is not much competition in UK academic life (except at the top level, among star research professors) once you have tenure, and there is great resistance to introducing competition. Onereason is that university administration is perceived as incompetent in decision making, so people think administration would be likely to promote the worst and sack the best.

In economic markets, anti-competition views usually go along with a belief that comsumers are incompetent (and therefore, also with a technocratic bias – that experts should decide for the consumer).

I personally believe that competition is vital for modernizing societies – but humans evolved in hunter gatherer societies so we have to *learn* about the benefits of competition. Our 'instincts' are pretty anti-competitive.

undergroundman January 9, 2007 at 3:19 am

You didn't address any of my concerns. I'll state them again:

1) It's not efficient to make poor developing economies "lose" – because at a certain point we have to look at their need. And their need is enormous. Many of them are no better off (indeed, they are worse off) then they were hundreds of years ago. And the environment is suffering even more. There are enough resources in the world to fulfill that need, easily.

Now, the solution to this is not tariffs on either side. The solution is more "fair trade".

2) The developed countries can't compete because of subsidies. Ever heard of farm subsidies, buddy?

3) Historically the developed countries used tariffs to develop burgeoning industrial capacity. These days it's even harder to jump into the game and beat high-tech companies – thus, put a tariff on the outside while perfecting your product, then eliminate the tariff later.

The purpose of economics is to maximize social welfare, is it not? Could we not view the callousness of capitalism as a powerful market failure, then?

Hasan Jafri January 9, 2007 at 4:52 am

Nice thought, but all trade is not competition and all competition is not trade. Perfect markets exist more in textbooks than on the ground, and the economies spawned by globalization — the frequent subject of talking head punditry — are no different. Sometimes Adam Smith's hand rotates with the economic ill wind like a weathervane. That's what gets the talking heads excited.

I am not saying competition is not good or that trade is innately bad, as some people might. They're the best system we've got. That doesn't mean it's ill-advised to be skeptical.

Nick January 9, 2007 at 8:01 am

Don,
Nice try, but I think you give people to omuch credit. You could stand on the street corner and speak with grave concern about the dangers of clean drinking water and my guess is some people would be nodding in agreement. Ever see the old "Candid Camera" episode where they walked around in a vacant lot in front of an abandoned building with blank signs, and then stopped people passing by and asked them to join the "protest"? Sure enough, within a couple of hours they had several dozen walking around in circles in a vacant lot along with them….That said, I appreciate your effort and hope you keep up the good work.

triticale January 9, 2007 at 10:50 am

"The purpose of economics is to maximize social welfare, is it not?"

Social welfare? There's a nice pair of undefined terms. I'm guessing that's a reference to bread and circuses.

lowcountryjoe January 9, 2007 at 10:53 am

"The purpose of economics is to maximize social welfare, is it not?"

No, you have confused the word "economics" with the word "policy" and even then, this the word "welfare" in your sentence is ambiguous. Economics is the study of how societies allocate scarce resources.

Most — but cetainly not all — of the people who post on this website believe in laissez-faire as good policy because they have a respect for Homo-economicus. And, evidence and history are on the side of this majority that post here. You know why that is? It's because laissez-faire as a policy has shown that it does, in fact, as you put it, "maximize [the] social welfare".

JohnDewey January 9, 2007 at 10:56 am

Albert Z.: "Your correct that saying free trade has winners and losers is just like saying competition has winners and losers. However with trade some of the winners are foreigners."

In the long run, who loses when people are allowed to buy from whomever they wish? Everyone.

How can U.S. consumers be losers when they are allowed to buy less expensive products, regardless of the source?

Restraint on trade – as promoted by rustbelt union members – definitely makes losers of American consumers. So if one is truly patriotic, he can only support trade restraint if he believes U.S. union workers are somehow more deserving then U.S. consumers.

JohnDewey January 9, 2007 at 11:01 am

"to care more about someone you dont know in Michigan compared to someone you dont know in Juarez is racist."

Why is Michigan continually presented as the loser in free trade? As I pointed out elsewhere, Michigan exports more goods to other nations than any state except more populous Texas, California, and New York. Furthermore, Michigan's exports have been growing at 5% to 8% annually, and now total $37 billion.

If free trade were ended today, the winners might be a few union-dominated rustbelt companies. The losers would be both the millions who work for America's exporters and all consumers who enjoy lower prices of imports.

jb January 9, 2007 at 11:17 am

Yeah, to echo some of the others here, I think people recognize that trade is a form of competition. But it is against a far more mysterious, distant, shadowy, nebulous competitor than the one down the street.

For example, the idea that Ford could compete with GM is perfectly fine. But to compete with that strange, government-subsidized, groupthink Toyota? That's just not fair, not right.

(I don't actually believe what I just wrote, I'm interpreting the motivation behind what Lou Dobbs and others have written)

Another example – in sports, you have a team you root for. Let's take college football – someone from LSU would root for LSU to beat Florida. But when Florida played OSU for the title last night, I bet most of them were rooting for Florida. Because Florida is familiar, and they have neighbors and friends who root for Florida, and if Florida wins, it raises the prestige of the entire SEC, so LSU gains something if Florida wins.

So I dont' think that appealing to competition will work.

In my mind, the key to liberation is to convince people that we don't produce T-shirts and cars anymore, because we can produce much more sophisticated and valuable things, like fighter jets, software and pharmaceuticals.

Besides, in 5 – 10 years, we'll have mastered fully automated production, and we won't need the Chinese to build cars and t-shirts, because we'll be able to do it all with robots. And then it will be the Chinese bemoaning the fact that all they produce is cars and t-shirts, while we produce sophisticated robots and advanced software systems.

save_the_rustbelt January 9, 2007 at 11:19 am

"…I tried in this earlier post to explain why I think that the longer the time period taken account of, the greater the proportion of the population that is helped by trade and the lower is the proportion hurt by it…."

Very few would argue the long-term benefits of trade.

What we do question is record numbers of personal bankruptcies and home foreclosures (2002-2005) while we are

1) pissing away $1 trillion in Iraq
2) accruing record corporate and Wall Street profits
3) record corporate welfare (oil, farming, defense contractors, etc.)

If you don't like income redistribution or government largesse, then please apply that both ways.

The less powerful may not have lobbyists, but they do get to vote.

Go Sherrod Brown!

Half Sigma January 9, 2007 at 11:27 am

"And then it will be the Chinese bemoaning the fact that all they produce is cars and t-shirts, while we produce sophisticated robots and advanced software systems."

Why are you so sure that it's not going to be the other way around? Do you think the Chinese are so dumb they can't invent robots first? Chinese kids do better in math than American kids. That's the next generation of robot engineers. Their robot engineers could be a lot better than ours.

JohnDewey January 9, 2007 at 11:36 am

"Why are you so sure that it's not going to be the other way around? "

Quite frankly, I don't care who automates those jobs. If automation allows me to spend leads less for cars and T-shirts, I'm all for it.

"Their robot engineers could be a lot better than ours."

Perhaps, but it's the entrepreneurs who will employ the robots. I have a lot of faith in American entrepreneurs.

Matt C. January 9, 2007 at 11:36 am

Save-
What you have realize about bankruptcies and home forclosures have more to do with monetary policy than foreign trade. I am sure few would argue against your first and third point on this website.

Monetary policy has made it easier for the federal government to create money out of nothing. You only exacerbate the inflationary problem when you add trade blocking policies to the mix. This is what happened during the depression, it only makes the situation worse.

Daniel January 9, 2007 at 11:56 am

Undergroundman: "1) It's not efficient to make poor developing economies "lose" – because at a certain point we have to look at their need."

Read 2 papers by Abdiweli M. Ali & Hodan Isse: "Foreign aid and free Trade and their effect on income: A Panel Analysis, (Forthcoming), Journal of Developing Areas & "An empirical analysis of the determinants of foreign aid: A panel approach," International Advances in Economic Research, 2006, Vol. 12 (2).

Their work shows that free trade is a much better development tool than foreign aid. Countries that have been involved in trade and weaned themselves off of foreign aid have done much better than those hooked on foreign aid.

2 — Yes, I venture to say that everyone reading this blog has heard of farm subsidies. And with farm subsidies free trade doesn't exist for agricultural goods. I also venture to say that nearly 100% of the readers and hosts of this blog are opposed to farm subsidies. I was even before my uncle sold his farm and retired.

Flash Gordon January 9, 2007 at 12:06 pm

We might remember what Milton Friedman spent his life trying to teach us. We are a free people. There is no political freedom without economic freedom. It is our freedom that is at stake. Except in extraordinary circumstances such as war or the illegal transfer of contraband, we are free to buy from or sell to those of our own choosing under terms that we voluntarily accept. Even if those we want to buy from or sell to live on the other side of the world.

Whenever trade restrictions are imposed, someone is taking away someone else's freedom for their own selfish gain. It is the person who had his freedom infringed who is the loser. The person who desires to benefit from the loss of another person's freedom does not become a loser by being denied such a privilege.

Free trade does not produce winners and losers. Trade restrictions produce winners and losers. Protectionism is not merely economically dysfunctional, it is immoral.

Michael Sullivan January 9, 2007 at 6:32 pm

"The guy who wrote the column never explained why 3% is OK, but 7% is a dangerous level. "

If you look at all americans as an aggregate consumer, the trade deficit minus GDP growth represents net out(in)flow. So a current account deficit greater than GDP growth basically means we're sending money out of the country, or a net negative savings rate.

That's fine and dandy for a while when you're wealthy, but it's not tenable forever if we intend to maintain our standard of living. Basically, we're getting those goods by selling off our capital stock, and but for foreign investment, we'd have had a pretty steep recession.

That's bad economic news, despite the spin you'll see put on it some places. It's not a problem solved by restrictive trade policies, or caused by china doing something to harm us. In fact, the fact that chinese and other foreign investors are willing to hold US cash or invest in the US has been the difference between a fairly robust (if top heavy) economy, and a very deep recession over the last few years. But that doesn't mean that a trade deficit higher than GDP growth is a good thing for the US in general.

Now, don't get me wrong, I'm not an alarmist. It represents dollars flowing out of the US economy. But the US is rich, relative to most of the world, and contains a *lot* of people who are independently wealthy. The idea that we might temporarily spend down our capital stock is not crazy at all. So we are trading our wealth (of which we have a lot) for the labor of people in other countries (of which they have a lot), and most of the time, those trades are benefiting both sides.

That said, many people spend more than they earn and later regret it. We are not all perfectly rational actors. To what extent this outflow represents trades we are happy with in *hindsight* is not clear.

What is clear is that if that kind of outflow continues, and the population does not decline, we will be poorer.

So it's potentially a big deal.

Where I agree 100% with Don and Russ is that restricting free trade won't heal the (possible) problem of which the trade deficit is an indicator. If anything, it would likely make the real problem far worse. For instance, it might provoke an actual recession.

Half Sigma January 9, 2007 at 8:44 pm

Perhaps, but it's the entrepreneurs who will employ the robots. I have a lot of faith in American entrepreneurs.

You are demonstrating a typical American arrogance. "We are the best in the world and we don't even have to work at it." I'm sure the Romans felt the same way. As did the British during the height of the British Empire.

If Robots are the next Big Thing, then the country that can make the best robots will be the world's leading economy.

Quite frankly, I don't care who automates those jobs.

In that case, you're just weird compared to the normal person.

Imagine two candidates running for President. One says that he will support policies that keep American the world's greatest economic power. The other says he will support policies that will lead to some other country becoming the world's greatest economic power with America becoming a second rate nation.

Who do you think the voters will go for?

JohnDewey January 9, 2007 at 8:45 pm

michael sullivan: "What is clear is that if that kind of outflow continues, and the population does not decline, we will be poorer."

I don't understand all this concern about "trading our wealth". Are you assuming that only a fixed amount of wealth exists in the U.S.? and that foreign investment in the U.S. implies disinvestment by U.S. citizens?

Flash Gordon January 10, 2007 at 2:33 am

I thought a trade "deficit", or current account deficit, resulted in a capital surplus.

JohnDewey January 10, 2007 at 8:15 am

half sigma: "The other says he will support policies that will lead to some other country becoming the world's greatest economic power with America becoming a second rate nation."

How can you believe that allowing U.S. citizens to buy whatever they wish to buy will cause America to become a second rate nation? Despite all the increased trade the past decade, the U.S. GDP is at an all time high. Manufacturing output in the U.S. is at an all time high. The accumulated wealth of U.S. citizens is at an all time high.

Where's the evidence you have that unrestricted trade leads to a decline of the U.S.? Where's the evidence, Half Sigma?

JohnDewey January 10, 2007 at 8:26 am

Half sigma: "If Robots are the next Big Thing, then the country that can make the best robots will be the world's leading economy."

I disagree. In the long run, the world's leading economy – the nation with the highest GDP – is likely to be the nation with the most workers, especially skilled workers. That would be China, assuming, of course, that China continues to free its economy and its citizens.

I'm not arguing that Chinese citizens are anywhere near as free as Americans. But they certainly have more freedom than 30 years ago.

Quite frankly, I do not care in the least if China's GDP overtakes that of the U.S. Being first or second or third has no bearing on the absolute prosperity of U.S. citizens.

Michael Sullivan January 10, 2007 at 6:20 pm

"I don't understand all this concern about "trading our wealth". Are you assuming that only a fixed amount of wealth exists in the U.S.?"

Why would I assume that? That would require colossal economic ignorance. This is Cafe Hayek, not lefty wingnut central.

"and that foreign investment in the U.S. implies disinvestment by U.S. citizens?"

What do you mean by "disinvestment"? Money that foreigners invest, certainly wasn't invested by US citizens. The trade deficit absolutely represents goods we bought from overseas, over and above what people bought from us. If you model "all US citizens" as a single household, then a trade deficit means that we spent more than we earned. If we've got a big ol' trust fund paying out more than the difference, that's not a problem, but it's not clear how big the trust fund is.

That's why I'm talking about the *difference* between the trade deficit and GDP growth. I realize that GDP is not wealth, but it's hard to find estimates for total wealth.

If it turns out that the wealth of US citizens is increasing by far more each year than the current account deficit, then yeah, it's not that big a deal.

But we are essentially shipping IOUs overseas when we have a trade deficit. There has got to be some point at which that represents a problem, or a loss of wealth. It's like an interest free loan, and we certainly shouldn't be complaining that the chinese (or whoever) are offering it to us, but it's still a problematic indicator about our economy if the deficit is much greater than real GDP growth.

The trade deficit can be defined as not a problem if you presume that all actors are rational, and every transaction maximizes utility for the actors involved. IOW, if we are losing wealth, it's because we want the things we bought more than the wealth.

The problem with that argument is that individuals often spend more than they earn and later regret this choice. In the moment, they wanted the items more than the money, but down the road, they wish they had chosen differently — they did not, in the moment understand the long run cumulative effect of their choices. The same thing could be happening in the whole US economy. The higher the trade deficit, the more likely that's the case.

Cornelius van Vorst January 11, 2007 at 12:33 am

" If you model "all US citizens" as a single household, then a trade deficit means that we spent more than we earned."

Well, that's a rather silly statement. Are the Chinese stuffing the dollars in their mattresses?

JohnDewey January 11, 2007 at 6:03 am

michael sullivan: "If you model "all US citizens" as a single household, then a trade deficit means that we spent more than we earned."

I don't think that's what a trade deficit means. If foreigners decide to invest more in the U.S. than U.S. citizens decide to invest overseas, then the U.S. has a capital account surplus. A capital account surplus is balanced by a current account deficit, or trade deficit. It's just accounting for flows of money, not some measure of economic strength.

Actually, the fact that foreigners wish to invest so much here indicates the enormous strength of the U.S. economy.

"But we are essentially shipping IOUs overseas when we have a trade deficit."

IMO, that's not the correct perspective.

Congress generated these IOU's when it chose to spend more than it took in. Those IOU's exist regardless of whatever foreign trade exists. That the Chinese government rather than U.S. citizens decided to buy these IOU's is irrelevant.

The other form of IOU's – where foreigners invest in our economic growth – is definitely a plus for our economy. I see nothing but good for the U.S. when Toyota decides to invest in a plant in San Antonio. I do not see how BMW investing in a plant in Spartenburg, SC, has ominous signs for our future. I cannot see how Honda building a plant in Greensburg, IN, is a problem for our generation or any generation to follow. And yet, this investment further drives our capital account surplus, and, by definition, our current account deficit.

ben January 12, 2007 at 3:58 pm

Rustbelt

"1) pissing away $1 trillion in Iraq
2) accruing record corporate and Wall Street profits
3) record corporate welfare (oil, farming, defense contractors, etc.)"

These are often cited by opponents of trade, but are irrelevant to the question of trade policy. A war in Iraq could have occurred with or without trade. Record profits could have occurred with or without trade (that they are a problem at all is debatable). Corporate welfare could be related to trade, in the sense that lobbyists use trade as the excuse for subsidy. This is not an argument against international trade though. In fact it is an argument for more of it, if that has the effect of disciplining the companies paying lobbyists to actually compete.

Perhaps I have misread your argument, it just isn't clear why the money spent in Iraq is relevant here.

ben January 12, 2007 at 4:00 pm

Undergroundman

"2) The developed countries can't compete because of subsidies. Ever heard of farm subsidies, buddy?"

I just read this. You have it exactly backwards. It is first world economies who are paying their farmers subsidies, not developing countries.

ben January 12, 2007 at 4:06 pm

>>michael sullivan: "If you model "all US citizens" as a single household, then a trade deficit means that we spent more than we earned."

>I don't think that's what a trade deficit means. If foreigners decide to invest more in the U.S. than U.S. citizens decide to invest overseas, then the U.S. has a capital account surplus. A capital account surplus is balanced by a current account deficit, or trade deficit. It's just accounting for flows of money, not some measure of economic strength.

>Actually, the fact that foreigners wish to invest so much here indicates the enormous strength of the U.S. economy.

Exactly.

Previous post:

Next post: