As Donald Trump’s presidency gives way to Joe Biden’s, there’s hope that US trade policy will become better informed by economic understanding and, thus, less restrictive. After all, the consensus conclusion among economists – including the greatest trade economists from Adam Smith through Frédéric Bastiat, Henry George, and William Graham Sumner to Leland Yeager, Jagdish Bhagwati, Arvind Panagariya, and Douglas Irwin – is that the freer is trade in the home country, the greater is the ability of home-country residents to enrich themselves. If, therefore, government officials genuinely want their fellow citizens to thrive economically as much as possible, trade should be free. This conclusion holds regardless of the trade policies pursued by foreign governments.
But economics teaches another, more sobering lesson: government officials often have incentives to pursue policies that yield benefits to special interest groups while damaging the citizenry as a whole. In few policy areas is this lesson’s validity proven more regularly than in trade policy. Protective tariffs and export subsidies enrich a narrow sliver of politically influential producers at the larger expense of the general public.
It’s difficult for politicians to resist interest group pressures. But it’s not impossible. If the public believes that they will be damaged by some policy, politicians have no choice but to resist the pressures from interest groups pleading for that policy. And so in the spirit of helping the public to better appreciate the benefits they enjoy from free trade, and to see the harm they suffer from protectionism, I here conclude my four-part series on the principles of international trade. (You can find the earlier installments here, here, and here.)
10. Because wages reflect worker productivity, workers and firms in low-wage countries do not have an “unfair” advantage over workers in high-wage countries.
Contrary to popular mythology, high wages earned by workers in countries such as the US do not put them at a competitive disadvantage relative to workers and firms in low-wage countries, such as Vietnam. The reason is that, in markets, wages reflect worker productivity. The higher is a worker’s productivity, the higher is that worker’s wage. It follows that low-wage workers are paid as poorly as they are because they are not very productive. (If the low wages in some country are the result of that country not having an adequately functioning market economy, then the inefficiencies in that country are even greater than whatever are the remaining inefficiencies that keep wages low in liberalizing countries.)
The same relationship between worker productivity and pay holds at home. American teenagers, for example, are paid wages much lower than are American workers in their 30s, 40s, and 50s. The reason is that teenagers – having far fewer skills and much less experience than do older workers – are much less productive than are older workers. Teenagers’ lower wages reflect this lower productivity.
Yet no one declares that low-wage teenagers have an unfair competitive advantage over high-wage adults. No one advocates tariffs on goods and services supplied by teenagers lest the untariffed supply of such goods and services drive adults’ wages down to those earned by teens.
For the same correct reason that no one worries about free trade between adults and teens, no one should worry about free trade between high-wage fellow citizens and low-wage foreigners. High wages in the US reflect American workers’ high productivity. And these wages are no more likely to be driven down by free trade with low-wage countries than they are to be driven down by free trade with teenagers.
A more revealing name for “low-wage workers” is “low-productivity workers.” And so when you next encounter the charge that low-wage foreign workers enjoy an advantage over high-wage American workers, replace “low-wage” with “low-productivity,” and “high-wage” with “high-productivity,” to get this bit of silliness: “Low-productivity foreign workers have an advantage over high-productivity American workers.” This rewording clearly reveals why it’s a mistake for people in high-wage countries to fear trade with people in low-wage countries.
11. Economically, there’s nothing unique about trade that takes place across political borders.
Every consequence that arises when people are allowed to trade freely with fellow citizens arises when people are allowed to trade freely with foreigners. This truth holds for consequences deemed positive as well as for consequences deemed negative.
Do you gain by being allowed to shift your patronage from the supermarket located nearest your home to the supermarket located nearest your workplace? Of course. Likewise, you gain by being allowed to shift your patronage from an automaker in Michigan to an automaker in Japan.
When you shift your patronage to an automaker in Japan, do you perhaps contribute to workers losing their jobs at an automobile factory in Michigan? Of course. Likewise, when you shift your patronage from the supermarket nearest your home to the one nearest your workplace, you perhaps contribute to workers losing their jobs at the supermarket nearest your home. Yet unlike with you choosing to buy an imported car, no one suggests that your choosing to shop at a particular supermarket is economically damaging because it ‘destroys’ some particular jobs.
Every change in consumer spending causes some businesses to lose sales (and, hence, causes some jobs to be ‘destroyed’) as it causes some other businesses to gain sales (and, hence, causes some other jobs to be created). Indeed, every spending decision can be said both to create and to destroy jobs. Whenever you spend money in one way you thereby don’t spend that money in the way that you would have spent it had you chosen to spend differently. Therefore, whenever you spend money you not only help to create some jobs, you also help to destroy – or not to create – other jobs.
Consider Smith, your neighbor in Nantucket, who in 2021 buys a new Toyota Camry made in Japan. Some people accuse Smith of thereby harming American workers. But suppose that Smith had instead in 2021 chosen to buy a used 2012 Buick LaCrosse. Would anyone accuse Smith, in this second case, of harming American workers? No. Yet Smith’s spending decision in each case has the very same impact on the market for new American-made automobiles and on the demand for autoworkers in America.
12. The national-defense exception to the case for free trade must be handled with care.
Even Adam Smith conceded that narrow exceptions to a policy of unilateral free trade might justifiably be carved out in order to encourage certain sources of domestic supplies for military purposes. But Smith explicitly declared that such exceptions are costly; they make the nation less, not more, economically prosperous. This cost might be worth incurring, but care must be taken at least to recognize it as a cost.
Yet when handling the national-security exception we must take even greater care.
The existence of this exception will prompt many domestic producers to falsely portray their industries as essential to national defense and, thus, as deserving protection. Fearful of being labeled as soft on defense, politicians will be loath to resist these pleas for protection. Some industries not deserving such protection will, therefore, nevertheless get it.
Also, protection granted for national-security purposes might backfire even on its own terms. Because competition spurs both innovation and greater efficiencies, domestic producers who are shielded from the competition of foreign rivals have less incentive to innovate and to work hard to achieve greater efficiencies. Over time, trade protection designed to enhance the nation’s military capabilities might decrease it, relative to other nations, by stifling the innovativeness of domestic firms and by preventing them from supplying military goods at prices as low as possible.
That is, protection aimed at ensuring that domestic firms continue to operate with today’s leading technologies might well succeed too much. By protecting firms that today operate with today’s leading technologies or that produce today’s leading militarily-relevant outputs, national-security protectionism might prevent domestic firms tomorrow from producing with tomorrow’s leading technologies or from producing tomorrow’s leading militarily-relevant outputs.
When combined with the empirically verified reality that increased trade between nations decreases the likelihood of those nations getting into shooting wars with each other, what is left of the national-security exception to the case for unilateral free trade is very narrow indeed.