By Donald J. Boudreaux
Monday, April 20, 2015
The most recent debate over providing the US president
fast-track trade-negotiating authority raises the perennial catalog of
questions and concerns about free trade. This is understandable: the benefits
of free international trade are often diffuse and hard to see, while the
benefits of shielding specific groups from foreign competition are often
immediate and visible. This illusion fuels the common perception that free
trade is detrimental to the American economy. It also tips the scales in favor
of special interests seeking protection from foreign competition. As a result,
the federal government currently imposes thousands of tariffs, quotas, and other
barriers to trade.
However well intended, restrictions on foreign trade harm
the very people they aim to protect: American consumers and producers. Trade
restrictions limit the choices of what Americans can buy; they also drive up
the prices of everything from clothing and groceries to the materials
manufacturers use to make everyday products. Moreover, it is lower-income
Americans who generally bear a disproportionate share of these costs.
Below, Mercatus Center senior research fellow Donald J.
Boudreaux reviews the benefits of freeing and increasing international trade
and addresses some of the most pervasive myths that surround the free trade
debate.
The Truths of Free Trade
Free trade increases prosperity for Americans—and the
citizens of all participating nations—by allowing consumers to buy more,
better-quality products at lower costs. It drives economic growth, enhanced
efficiency, increased innovation, and the greater fairness that accompanies a
rules-based system. These benefits increase as overall trade—exports and
imports—increases.
• Free trade
increases access to higher-quality, lower-priced goods. Cheaper imports,
particularly from countries such as China and Mexico, have eased inflationary
pressure in the United States.1 Prices are held down by more than two percent
for every one-percent share in the market by imports from low-income countries
like China.
• Free trade
means more growth. At least half of US imports are not consumer goods; they are
inputs for US-based producers, according to economists from the Bureau of
Economic Analysis. Freeing trade reduces imported-input costs, thus reducing
businesses’ production costs and promoting economic growth.
• Free trade
improves efficiency and innovation. Over time, free trade works with other
market processes to shift workers and resources to more productive uses,
allowing more efficient industries to thrive. The result is higher wages,
investment in such things as infrastructure, and a more dynamic economy that
continues to create new jobs and opportunities.2
• Free trade drives
competitiveness. Free trade does require American businesses and workers to
adapt to the shifting demands of the worldwide marketplace. But these
adjustments are critical to remaining competitive, and competition is what
fuels long-term growth.
• Free trade
promotes fairness. When everyone follows the same rules-based system, there is
less opportunity for cronyism, or the ability of participating nations to skew
trade advantages toward favored parties. In the absence of such a system,
bigger and better-connected industries can more easily acquire unfair
advantages, such as tax and regulatory loopholes, which shield them from
competition.
Myth vs. Reality
Myth: More exports mean more wealth.
Reality: It is the total level of trade—exports and imports—that
most accurately reflects American prosperity. Prosperity is defined by the
breadth and variety of what Americans are able to consume. More exports
increase wealth only because they allow Americans to buy more imports and give
non- Americans greater incentives to invest in America, helping the US economy
grow. Restricting imports leaves Americans worse off.
• Poorer
Americans suffer more from tariffs than higher-income people. Not only do they
spend more of their income on consumption goods, many of the goods they consume
are subject to higher tariffs than more expensive goods of the same type.3
• For example,
imported cheap sneakers can face a tariff as high as 60 percent, while men’s
leather dress shoes are subject to an 8.5 percent tariff. Similarly, plain
drinking glasses face a tariff of nearly 30 percent, while expensive crystal
glasses are taxed at 3 percent.
Myth: Free trade means jobs go overseas.
Reality: Free trade does not create more jobs, but
neither does protectionism.4 Free trade may reduce jobs in inefficient
industries, but it frees up resources to create jobs in efficient industries,
boosting overall wages and improving living standards. Protectionism, in
contrast, attempts to protect jobs that the market will not sustain; it does so
at the expense of more innovative industries.
• Much of the
change in the labor force is not the result of free trade but of innovation.
New technology, such as apps on mobile devices, has displaced a staggering
variety of products, including radios, cameras, alarm clocks, calculators,
compact discs, DVDs, carpenters’ levels, tape-measures, tape recorders,
blood-pressure monitors, cardiographs, flashlights, and file cabinets.
• Using
protectionist policies to “save” a job comes at enormous cost, as opportunities
shrink and input costs swell for industries downstream.
Myth: Restrictions on trade help Americans.
Reality: The only beneficiaries of trade restrictions are
the inefficient firms and special interests that secure these protections against
competition.
• Despite
receiving protection from foreign competition for many decades, large firms
have steadily left the US steel industry due to high fixed costs and
competition from smaller firms. Tariffs on steel increase costs in
steel-consuming industries, which employ 12 million Americans, compared to the
190,000 Americans employed in the steel-making industry.
• The United
States’ recent imposition of tariffs on Chinese-made solar panels resulted in
China imposing tariffs on American polysilicon, raising the cost of solar
equipment and reducing employment opportunities in both nations.
Myth: US trade deficits are bad for Americans.
Reality: US trade deficits generally are good for
Americans.5
The trade deficit is not debt. A growing trade deficit,
despite its misleading name, is good for the economy. It is typically a signal
that global investors are confident in America’s economic future. The US trade
deficit might be larger than it would otherwise be if a trading partner chooses
to keep the price of its currency artificially low, but this practice harms the
trading partner, not the United States.
• America’s
trade deficit increases whenever non-Americans choose to increase the amount
they invest in the United States. This is why another name for the trade
deficit is the “capital account surplus”— that is, the net investment funds
flowing into the United States. More investment means expansion of existing
businesses, more new businesses, higher worker productivity, and more output
enhancing activities, such as research and development, all of which increase
prosperity.
• So-called
“currency manipulation” by a trading partner does not harm the American
economy. For example, a lower price of the yuan makes Chinese goods cheaper for
American consumers, conferring a real benefit for the United States. Keeping
the price of the yuan lower through monetary policy, however, does not lower
the real costs of the resources and outputs exported by the Chinese people, who
also face higher prices for American imports. An undervalued yuan benefits
Americans at the expense of the Chinese.
1 Raphael Auer and Andreas M. Fischer, “The Effect of Low
Wage Import Competition on US Inflations Pressure,” Journal of Monetary
Economics 57, no. 4 (2010): 491–503. Their “results of a panel covering 325
manufacturing industries from 1997 to 2006 show that imports from nine low wage
countries are associated with a strong downward pressure on prices. When these
nations captured a 1 percent share of the US sector, the sector’s producer
prices decrease by 2.35%.”
2 Donald J. Boudreaux, Globalization (Westport, CT:
Greenwood Press, 2008), 55–67.
3 Edward Gresser, Freedom from Want , (Brooklyn, NY: Soft
Skull Press, 2007), 167.
4 Boudreaux, Globalization , 55–67.
5 Boudreaux, Globalization , 100–116.
No comments:
Post a Comment