Here’s a note to a second cousin of mine.
Prentiss:
Suspicious of my and other economists’ support for free trade, you offered at my Facebook page the following comment:
So we remove all our tariffs and trade restrictions. America buys cheap foreign stuff exclusively. All domestic production ceases. The only jobs are in medicine, education, government, retail (Amazon) and gardening. Did Adam Smith discuss this?
I understand that it’s commonplace in certain circles – on both the political left and right – to conclude that if we Americans eliminate our protectionist policies, we’ll end up impoverishing ourselves by importing lots of things at low prices as we produce only services. But this conclusion makes no sense.
Forget the difficulty of squaring a fall in the prices of things that people want to buy with impoverishment of those people. Forget also that the empirical evidence contradicts your prediction about U.S. production: As tariff rates from the end of WWII until about eight years ago steadily fell, U.S. industrial production rose, as did U.S. exports of goods. Forget, too, that, even as we imported more goods from abroad, more than half of the value-added of the manufactured goods that we purchase today (2023) remains American-made. Instead, let’s explore your argument’s logic.
If you mean (as do large numbers of people who I encounter) that elimination of U.S. protectionism will result in Americans importing lots of stuff and exporting nothing in return, then, well, that’s bizarrely unrealistic. Foreigners supply their exports to us in order to earn dollars to spend or invest in the U.S. If foreigners wanted nothing from us, they’d sell nothing to us. It follows that the more foreigners sell to us, the more they’ll buy from us. Further, just as economic theory predicts, as our imports rise, so do our exports rise.
It’s silly to worry that foreigners will deluge us with gifts, expecting from us nothing in return. (By the way, if foreigners were ever to put Americans first in this way, that would be to our enormous advantage, just as it is to our advantage whenever technological innovations enable us to get more output from fewer inputs.)
But perhaps you instead mean that elimination of U.S. protectionism will result in Americans specializing fully in services (and not at all at producing tangible things), and paying for our imported goods by exporting services. Again, as an empirical matter this outcome is extremely unlikely, but – national-security concerns aside – there would be nothing to lament about this outcome if that’s where free trade takes our economy.
The highest-paying jobs are in the service sector – a big reason why the vast majority of Americans aspire to work in the service sector. What’s true for service-sector workers Taylor Swift and Warren Buffett (and also Don Boudreaux and Prentiss Davis), who are much wealthier than they’d be if they were forced to work in manufacturing plants, is true for most American workers. And to the extent that free trade would increase the demand for U.S. service-sector output, the productivity of Americans working in the service sector would almost certainly rise as would the real wages earned by those Americans.
This outcome would be applause-worthy.
But, to repeat, the fact that today (2024) two-thirds of American exports are goods alone makes it’s highly unrealistic to suppose that elimination of U.S. trade barriers would result in the American economy specializing completely in services.
…..
As for Adam Smith, he understood trade very well and, therefore, he would never have supposed that a country that imports more after freeing its trade would export less.
Sincerely,
Don
