Thursday, March 17, 2005
Is trade good or evil?
Boeing builds many planes near Seattle, and my hometown newspapers regularly run editorials calling for the U.S. to sanction European countries for subsidizing Airbus. Magazine articles endlessly re-hash the debate over whether low-cost imports from China are good because they help keep inflation low or bad because they destroy American manufacturing jobs. The U.S. steel and textile industries clamber for protection against dumping.
Trade policy is forever in the news. It was in the 1930s, when the U.S. congress, reacting to the Great Depression, passed the Smoot-Hawley Tariff Act severely curtailing trade. It was in the 1840s, when Great Britain fought the Opium Wars to protect its right to sell the drug to Chinese addicts.
A depressing number of debates on the merits of trade go like this: A says "trade benefits consumers by lowering prices." B says "trade harms workers by eliminating jobs." A responds "but everyone, including the displaced workers, benefit from lower prices." B responds "you can't buy anything at all if you don't have income". The assertions of both A and B are obviously correct. There is no way to get beyond these sound-bites without quantifying the dollars saved and wages lost, and no newspaper dares to impose such an analysis on its readers.
There actually is such an analysis, which is done in introductory economics courses around the world. Economists are quite fond of it. Done in the early 19th century by David Ricardo, it was one of the first mathematical models of an economic phenomenon. You draw some lines, measure slopes and intercepts, and obtain an actual answer to the question of whether trade is, in the net, good or bad. I'm quite fond of it myself, but I'm not going to describe it here.
Primarily because of such mathematical analysis, almost all economists are in agreement on the issue of trade policy. From that darling of the right, Milton Friedman, to that darling of the left, Paul Krugman, they will tell you that unfettered free trade is almost always good.
I'm going to show you an entirely non-mathematical way to understand the answer.
Imagine that, instead of selling us a product at a cost lower than domestic producers, a foreign producer were to give us the product. Surely the recipient of a gift isn't made worse off by accepting it? (Well, perhaps if the gift is opium, or a a Torjan horse, but let's stick to airplanes and textiles for the moment.) The situation for domestic producers would certainly look bleak. No one would buy from them. They would go out of business, and their workers would be out of their jobs. Still, even in the short run, the total amount of stuff available for domestic consumption would clearly be the same or greater. All the other stuff that was made before would continue to be made, and the free foreign supply of the product in question would replace the old domestic supply, if not exceed it.
In the longer run, the workers would get different jobs. They would produce other things, perhaps things that previously didn't get produced at all, because they had spent their time producing the old product. Then even more stuff would be available for domestic consumption.
The more realistic scenario is that the foreign producer still wants payment for the good, but less payment than the domestic producer. When a foreign producer undercuts a domestic producer, we haven't quite reached the happy state of getting the good for free, but we are closer, and, therefore, in the net, better off.
You can, if you like, also imagine the even less realistic scenario in which some hyper-mercantilist foreigners give us all the the products we currently produce, for free. Then no one in our country has a job, but we certainly aren't worse off!
I want to be very honest about what this argument proves and what it doesn't. It doesn't prove that every displaced worker is just as well-off in his new job as in his old one. Trade can increase inequality, and if you want to oppose trade you are welcome to claim that it does. But my argument does show that, if dollars saved are counted one-for-one against wages lost, in the aggregate and in the net, tade makes us better off. So if you want to oppose trade, you cannot claim that the costs of lost wages will outweight the gains of lower prices. That is simply and provably wrong. By concentrating on the total ammount of stuff available for domestic consumption, we have been able reach this conclusion without having to seperatly weigh the effects of each dollar of lost wages against the effects of each dollar of consumer savings.
Being able to produce more things with fewer workers lies at the heart of what we mean by economic progress. Seventy years ago, in the United States, we employed about 20% of workers to feed ourselves; today, we employ only about 2% to do so (U.S. census statistics). We are richer precisely because we don't need as many workers to feed ourselves as we used to. In the same way, our country will be richer if, by trade, we can obtain larger quantities of steel and textiles using fewer workers.
Imagine what the world might look like if, at the behest of farm workers, we had undertaken measures to insure that agricultural efficiency not increase, so that just as many of us had to work at keeping ourselves fed as did 200 years ago. Imagine what the world might look like if, at the behest of the luddites, we decreed that all socks be knit by hand. While these imagined worlds might have a certain romantic charm, it wouldn't take very long in a 200-year-old standard-of-living before the vast majority of us opted for progress.
Trade policy is forever in the news. It was in the 1930s, when the U.S. congress, reacting to the Great Depression, passed the Smoot-Hawley Tariff Act severely curtailing trade. It was in the 1840s, when Great Britain fought the Opium Wars to protect its right to sell the drug to Chinese addicts.
A depressing number of debates on the merits of trade go like this: A says "trade benefits consumers by lowering prices." B says "trade harms workers by eliminating jobs." A responds "but everyone, including the displaced workers, benefit from lower prices." B responds "you can't buy anything at all if you don't have income". The assertions of both A and B are obviously correct. There is no way to get beyond these sound-bites without quantifying the dollars saved and wages lost, and no newspaper dares to impose such an analysis on its readers.
There actually is such an analysis, which is done in introductory economics courses around the world. Economists are quite fond of it. Done in the early 19th century by David Ricardo, it was one of the first mathematical models of an economic phenomenon. You draw some lines, measure slopes and intercepts, and obtain an actual answer to the question of whether trade is, in the net, good or bad. I'm quite fond of it myself, but I'm not going to describe it here.
Primarily because of such mathematical analysis, almost all economists are in agreement on the issue of trade policy. From that darling of the right, Milton Friedman, to that darling of the left, Paul Krugman, they will tell you that unfettered free trade is almost always good.
I'm going to show you an entirely non-mathematical way to understand the answer.
Imagine that, instead of selling us a product at a cost lower than domestic producers, a foreign producer were to give us the product. Surely the recipient of a gift isn't made worse off by accepting it? (Well, perhaps if the gift is opium, or a a Torjan horse, but let's stick to airplanes and textiles for the moment.) The situation for domestic producers would certainly look bleak. No one would buy from them. They would go out of business, and their workers would be out of their jobs. Still, even in the short run, the total amount of stuff available for domestic consumption would clearly be the same or greater. All the other stuff that was made before would continue to be made, and the free foreign supply of the product in question would replace the old domestic supply, if not exceed it.
In the longer run, the workers would get different jobs. They would produce other things, perhaps things that previously didn't get produced at all, because they had spent their time producing the old product. Then even more stuff would be available for domestic consumption.
The more realistic scenario is that the foreign producer still wants payment for the good, but less payment than the domestic producer. When a foreign producer undercuts a domestic producer, we haven't quite reached the happy state of getting the good for free, but we are closer, and, therefore, in the net, better off.
You can, if you like, also imagine the even less realistic scenario in which some hyper-mercantilist foreigners give us all the the products we currently produce, for free. Then no one in our country has a job, but we certainly aren't worse off!
I want to be very honest about what this argument proves and what it doesn't. It doesn't prove that every displaced worker is just as well-off in his new job as in his old one. Trade can increase inequality, and if you want to oppose trade you are welcome to claim that it does. But my argument does show that, if dollars saved are counted one-for-one against wages lost, in the aggregate and in the net, tade makes us better off. So if you want to oppose trade, you cannot claim that the costs of lost wages will outweight the gains of lower prices. That is simply and provably wrong. By concentrating on the total ammount of stuff available for domestic consumption, we have been able reach this conclusion without having to seperatly weigh the effects of each dollar of lost wages against the effects of each dollar of consumer savings.
Being able to produce more things with fewer workers lies at the heart of what we mean by economic progress. Seventy years ago, in the United States, we employed about 20% of workers to feed ourselves; today, we employ only about 2% to do so (U.S. census statistics). We are richer precisely because we don't need as many workers to feed ourselves as we used to. In the same way, our country will be richer if, by trade, we can obtain larger quantities of steel and textiles using fewer workers.
Imagine what the world might look like if, at the behest of farm workers, we had undertaken measures to insure that agricultural efficiency not increase, so that just as many of us had to work at keeping ourselves fed as did 200 years ago. Imagine what the world might look like if, at the behest of the luddites, we decreed that all socks be knit by hand. While these imagined worlds might have a certain romantic charm, it wouldn't take very long in a 200-year-old standard-of-living before the vast majority of us opted for progress.
