9.3 The Debate About International Trade
Let’s now turn to assessing the arguments that are most frequently used in the often-heated debates about whether international trade is good for Americans.
Five Arguments for Limiting International Trade
Our supply-and-demand analysis showed that both importing and exporting raise the economic surplus of Americans. But it left out some important details that lead some to argue that there are specific cases where government should consider restraining international trade. The proponents of limiting international trade raise five major arguments. As we evaluate each argument we’ll then turn to the counterarguments. It’s up to you to judge which you find most convincing.
Argument one: National security requires that we produce strategically important goods ourselves.
International trade makes countries more reliant on one another, but this may not be a good thing if other countries don’t have our best interests at heart. This suggests that it may be critical to our national security for strategically important goods like weapons systems to be made domestically. Some expand this idea to include high-tech fields with security implications, like cryptography. An even broader interpretation suggests that we also need to protect domestic sources of food, so that we can still eat if today’s trading partners become tomorrow’s enemies.
The counterargument is that these concerns are often overstated. For example, dozens of countries export food and other essentials, and it’s unlikely that the United States will go to war with all of them at once. The national security argument is often cited by industries—such as the U.S. watchmaking industry!—with only a tenuous connection to actual national security. And sometimes trade limitations will undermine our national security. For example, limiting exports of encryption software actually helped foreign competitors develop encryption technology, by reducing the competition from superior American products.
Argument two: Protection can help infant industries develop.
The infant industry argument suggests that governments can help create new industries by shielding fledgling businesses from international competition. For instance, Brazil banned imports of computers for many years, hoping that new Brazilian businesses—infants—would spring up to meet demand, and through time, they would develop efficient production methods. They hoped that once these businesses had learned enough to be globally competitive, they could allow international trade to resume.
But the infant industry often fails to grow up. Brazil’s computer manufacturers never became as efficient as American businesses like Dell. All that Brazil got for its efforts was high computer prices and several inefficient computer businesses that eventually went bust. This example illustrates the critique that it can be difficult for governments to identify which industries are likely to mature well if shielded from competition. A related problem is that as infant industries grow, their political power also increases, leading them to pressure governments to keep renewing their “temporary” assistance.
Argument three: Anti-dumping laws prevent unfair competition.
Another argument suggests that trade policy should be used to shield domestic businesses from unfair competition. For instance, sometimes a foreign company will temporarily charge extremely low prices—effectively “dumping” their goods on the U.S. market—so that they can drive their U.S. competitors out of business. If successful, this would lead to less competition and higher prices in the long run, which would be bad for American consumers. Anti-dumping laws try to prevent this.
Opponents argue that in practice it’s hard to figure out if foreign businesses are dumping their goods to drive out American competitors, or if they’re efficient producers offering great prices. Whatever the reality, local businesses will try to convince the government that cheap imports represent unfair competition. Sometimes those local businesses are right, and anti-dumping laws serve their purpose. But frequently, these foreign businesses simply hold a comparative advantage that allows them to produce at a lower cost.
Argument four: Trade shouldn’t be a way to skirt regulations.
America’s voters have agreed, through the laws passed by their elected officials, that businesses must meet certain minimum standards. For example, U.S. factories can’t employ children, they must pay workers at least minimum wage, they must meet environmental standards, and they must follow certain safety precautions to protect both workers and consumers.
These standards drive costs up, but we get something in return—namely, safer products, a cleaner environment, and a marketplace that treats everyone fairly. Trade provides a way to get around these social agreements. For instance, we strictly regulate how U.S. factories dispose of environmentally sensitive waste. But buying goods produced by dirty foreign factories is just as bad for the environment. By this view, it makes sense to restrict some kinds of trade to preserve the rules society has agreed upon. The argument is that if we prevent unsafe or unethical practices at home, we often want to also hold foreign businesses to the same standards.
Opponents argue that the labor or environmental standards that are appropriate for a rich country like the United States are not appropriate for poorer nations. They fear that restricting trade with poor countries can create even more poverty.
Argument five: Foreign competition may lead to job losses.
Possibly the most common argument against free trade comes from workers who are concerned that foreign competition will cost them their jobs. Our earlier analysis suggests that workers in import-competing sectors are right to be concerned, because greater openness to trade leads those firms that lack a comparative advantage to shrink and lay off workers.
While reducing foreign trade can preserve some jobs in import-competing sectors, it will destroy jobs in businesses that rely on imported inputs. For instance, U.S. restrictions on sugar imports preserve jobs in the domestic sugar industry, but the high price of sugar in the United States (nearly double that of the rest of the world) has pushed candy manufacturing to other countries. Trade typically also causes export-oriented sectors to expand, and retaliatory trade restrictions often prevent these jobs—which typically offer higher wages—from being created.
Many of those workers in import-competing sectors whose jobs are destroyed can and do retrain and find new jobs. This suggests that opening up to international trade will have only a temporary effect on unemployment. Indeed, Figure 8 shows that there is no relationship between how much a country imports and its unemployment rate.
Figure 8 | Unemployment Is Not Related to Imports
Data from: World Bank.
Workers who worry about their jobs counter that the “temporary” adjustments caused by trade last for a long time. And they’ve got a point. There’s evidence that the tremendous growth of the Chinese manufacturing sector, and the associated rise in Chinese exports, has reduced employment and wages in the American manufacturing sector. And it doesn’t yet seem like many of these lost jobs have been replaced by jobs in other sectors, even many years later. So while trade might only have a temporary effect on unemployment, this “temporary” effect may last long enough to be virtually permanent for some people.
An Intuitive Approach to the International Trade Debate
This is one way of making cars.
As you’ve probably noticed, the economic argument in favor of international trade—which is based on comparative advantage leading to greater economic surplus—can be pretty technical. This has led economists to try to find better ways to make their point. The following two parables provide a different perspective, highlighting the logical errors that sometimes creep into political debates about trade.
Harvesting an Iowa car crop?
This is another: You can grow corn and export it overseas, in return for new cars.
There are at least two ways to make cars. The first involves assembly lines in Detroit, where skilled manufacturing workers—assisted by plenty of robots—transform steel into General Motors cars. The second way is less well known, but perhaps more amazing: You can grow cars in Iowa.
Here’s how. Buy corn seeds, sow them, and water them. With enough care, you’ll soon have a field full of corn. Harvest this corn, and put it on a boat headed into the Pacific Ocean. Wait a few months, and the ship will return with Toyotas. Now just drive those cars off the boat. Voila! You’ve harvested a crop of cars that you grew from seeds. The fact that this happened because the cargo ship stopped in Japan to trade corn for cars is beside the point. The cars were the direct result of the efforts of farmers in Iowa.
Both of these methods of making cars employ plenty of American workers—in one case, it’s manufacturing workers in Detroit; in the other, it’s farm workers in Iowa. And they each produce high-quality cars. So why would we prefer one approach to the other? This question is central to the trade debate, because when people argue for protecting American industries from international competition, they’re effectively arguing that we should build cars in Detroit, and stop growing them in Iowa. But that’s inefficient. When there are different ways to make something, we typically let different producers compete with each other, letting buyers choose to buy from the lowest-cost producer. But if we force Americans to buy Detroit-made cars, even if it’s cheaper to grow them in Iowa, then we’ll end up paying more for our cars. This efficiency loss is a major reason not to limit international trade.
Free trade in the solar system?
Despite this, many people still argue that international trade is “unfair.” For instance, some say that it is unfair for American workers to compete with China, because workers there are paid less than one-twentieth American wages. And they say it’s unfair that America buys more from China than China buys from us. The Alliance for American Manufacturing made these arguments in a letter to The New York Times, shown in the left column, below. Presumably, it is hoping these arguments will convince the government to reduce Chinese imports into the United States.
One way to assess the validity of an argument is to consider its implications in an analogous setting. The right column shows an analogous letter that we imagined the American light-bulb manufacturers might write, complaining about the cheap imports of light, not from another country, but from even further away—from the Sun!
The Alliance for American Manufacturing is hoping that its arguments will convince the government to ban or tax imports from China. Do you find its argument convincing? If so, why shouldn’t the (fake) Alliance for Light-Bulb Manufacturing also get similar protection? It’s easy to do—we could just require that buildings eliminate their windows to protect light-bulb manufacturers from the Sun’s “unfair” competition! That sounds absurd, but that’s sort of the point of this story.
Let’s now turn to examining international trade policy in more detail.