Political Borders’ Continuing Economic Irrelevance to Trade

by Don Boudreaux on April 12, 2016

in Economics, Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to the Wall Street Journal:

Greg Ip too readily buys Larry Summers’s and Paul Krugman’s case that a combination of weak aggregate demand and low interest rates supplies an economic justification for protectionism (“The Case for Free Trade Is Weaker Than You Think,” April 11).

First, this case rests on the claim that the only mechanism by which capital inflows boost domestic employment is by reducing domestic interest rates.  But this claim is mistaken.  When, for example, Sony uses dollars earned on its exports to America to build a retail outlet in America, the U.S. trade deficit rises yet the resulting capital inflows create domestic employment.  Such an outcome is possible even if aggregate demand and interest rates are low.  Ditto if, say, investors in Australia use U.S. dollars to supply seed money to a Silicon Valley upstart.

Second, contrary to Messrs. Ip’s, Summers’s, and Krugman’s implication, whatever problems are caused by inadequate aggregate demand and low interest rates are not unique to international trade.  These problems do not, therefore, justify a policy of treating foreign commerce and goods differently from domestic commerce and goods.

If the economy truly is such as Messrs. Ip, Summers and Krugman suppose it to be, then every fall – regardless of source or reason – in the demand for currently produced outputs increases unemployment.  If Messrs. Ip’s, Summers’s and Krugman’s analyses reveal that economic conditions justify restrictions on international commerce in order to close trade deficits, then those same analyses justify restrictions also on domestic commerce to prevent savings from increasing.  Not only must the government threaten to shoot or to cage people who insist on buying imports, it must also threaten to shoot or to cage people who, say, insist on saving more for their retirements, for their children’s education, or to buy a new home.  Additionally, the government must also forcibly prevent current debtors from reducing their rates of borrowing.

Unless and until Messrs. Ip, Summers, and Krugman admit and endorse the full implications of their alleged case against free trade, we have good reason to believe that their endorsement of this case against free trade is poorly thought out.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

It’s child’s play to describe possible economic problems that arise when trade occurs with foreigners.  It’s next-to-impossible to describe such problems that also do not arise with equal likelihood (or equal unlikelihood) when trade occurs domestically.

(I thank Mike Long for alerting me to Ip’s essay.)


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