There are Lots of Ways to Be Wrong about Trade – and Protectionists Seize them All

by Don Boudreaux on August 15, 2018

in Myths and Fallacies, Trade

Here’s a letter to the editor of Project Syndicate:

Robert Skidelsky’s apology for “liberal protectionism” (“Protectionism for Liberals,” August 14) is a flood of flaws. Here are just two.

First, contrary to Lord Skidelsky’s claim, the case for a country to freely trade with other countries is no more weakened by changes over time in the tasks for which that country has comparative advantages than is the case for an individual to freely trade with other individuals weakened by changes over time in the task for which that individual has a comparative advantage.

When I was 17 my comparative advantage was in bagging groceries; ten years later it was in teaching economics. Similar changes occurred in the comparative advantages of many of the people with whom I traded. And yet these changes – some ‘natural,’ most (like mine) consciously pursued – did not create a situation in which I would have been made better off had a third party obstructed my freedom to trade with other individuals.

Second, it’s untrue that today’s relatively high mobility of capital results in the wholesale offshoring of production by high-wage countries, such as the United States, to low-wage countries. For example, not only is the real value of manufacturing output in the U.S. today near an all-time high, but also the real value of the stock of foreign direct investments in the U.S. has never been higher than it is today. (It is today 23 times higher than it was in 1977* – the year that the U.S. began its current run of trade deficits.)

Additionally, the vast majority of outward foreign direct investment by Americans is not in low-wage countries but in high-wage countries. In 2017, the five countries in which the value of Americans’ stock of foreign direct investment assets was highest were, in order: the Netherlands, the United Kingdom, Luxembourg, Ireland, and Canada. Also in 2017, a whopping 93 percent of Americans’ direct equity investment outflows in manufacturing went to Europe and Canada** rather than – as Lord Skidelsky presumes – to low-wage countries.

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

* I converted the nominal dollars here into real dollars using this inflation adjustor.

**

(I thank Richard Ebeling for alerting me to Skidelsky’s essay.)

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