Backsliding on Free Trade

By David Strom
Wednesday, November 21, 2007

There is something about free trade that scares the dickens out of many ordinary Americans.

It just doesn’t seem to make sense to them that opening American markets to goods and services from other countries could possibly yield a net benefit by creating jobs, increasing productivity, and making Americans overall much wealthier.

After all, if a job that could be done by an American is now being done in India, China, or even Bangladesh, doesn’t that mean one fewer American working?

Well, no, it doesn’t. And the increasing drumbeat against free trade in American politics is one of the most dangerous threats to the American economy since the passage of the Smoot-Hawley act, which helped extend the Great Depression for nearly a decade.

Both economic theory and real world experience have shown that as markets expand, prosperity within those markets grows with them. Just as it makes no sense to limit trade between the States—the Commerce Clause of the Constitution was written precisely to prevent individual States from erecting trade barriers within the Union—it makes just as little sense to artificially limit trade between countries.

The economic theory behind free trade is pretty simple, really: it is based upon the idea of “comparative advantage.” In the United States, for instance, it makes much more sense for some areas of the country to focus on grain production—say the Midwest—than on trying to grow cotton or vegetables. It makes little sense for Vermont to focus on trying to provide its own coal when it can be produced much cheaper in West Virginia. Minnesota will never be the wine capital of the United States.

In essence, comparative advantage is nothing more than “doing what you do best,” which maximizes everybody’s productivity.

There is nothing magical about national borders when it comes to comparative advantage. Resources, education, skills, and other costs of doing business vary widely around the world. As trade increases worldwide, everybody gains access to an ever wider diversity of goods and services being produced by those who can provide them at the lowest cost and highest efficiency.

Efficiency drives productivity, and higher productivity means that luxuries that used to be affordable to only the few become widely available to everybody. Manufacturing in China has helped bring LCD TVs and $39 DVD players to the average American.

So why are people so afraid of free trade?

That, too, is actually pretty simple to understand. Economist Joseph Schumpeter introduced the idea that economic growth is a process he called “creative destruction;” economic growth is driven by innovation and radical, disruptive change, and in the wake of that change comes a string of winners and losers.

There is no doubt that as the market expands from a national to a global scale, some Americans have felt the bite of competition from abroad, leading to huge personal disruptions. But those disruptions are no different than what happened when the car displaced the horse and wagon and the personal computer displaced the old mainframe.

Should we have abandoned automobiles and enforced the use of outdated technology to ensure the jobs of those whose expertise was suddenly outmoded? Of course not. The people employed in these outdated industries moved on to more productive activities elsewhere in the economy—making us all wealthier than we otherwise would be if we had protected their jobs.

Even the big bad wolf of free trade, outsourcing, is wildly overstated as a threat to the American economy. While the “Big 3” automakers, for instance, have hemorrhaged jobs, Mercedes Benz, Toyota, and a host of foreign automakers have moved their manufacturing facilities to the United States because our workers are cheaper and more productive than their counterparts abroad. Many “foreign” cars have more American parts and labor than do typical “American” cars.

If free trade were truly the disaster that many portray it as, the employment and productivity statistics certainly don’t reflect it. Unemployment is at 4.7%, productivity jumped in the last quarter jumped by an astounding 4.9%. That translates into two facts: jobs are still relatively plentiful, and increased productivity means both higher profits and lower prices overall.

Millions of American jobs and consumers depend upon free trade for their prosperity. Our focus should not be on erecting barriers to goods and services from other countries—which raise our standard of living—but on breaking down trade barriers in other countries—whose protectionist practices harm their own economies.

It’s pretty simple, really: The bigger the market, the higher the division of labor; the higher the division of labor, the more productive each individual becomes; the higher productivity is, the wealthier we all can become.

To me, that sounds like a pretty good deal for us all.