Free Trade Is What Makes America Great

free trade

Free Trade is as American as apple pie.

In the context of trade, “free” means without tariffs, quotas or other restrictions impeding it between international states. Comparative advantage is having the ability to produce something at a lower price. Alan Blinder writes how it benefits consumers and producers, and how protectionism at best swaps jobs in industries while costing us tremendously.

Most of us have used laundry services at some point, yet are not worried about “protecting” ourselves from the “unfair competition” of low-paid laundry workers by doing our own laundry. It’s because we actually believe in and benefit from free trade, specialization and comparative advantage even if we don’t know it. Firms specialize in work, and we pay them with money we earn doing something we do better. Eliminating specialization lowers our standard of living.

Some countries can manufacture products more cheaply than America can. When they offer them for sale to us, we buy them as we buy the services of laundry workers, with money we earn doing things we do well. We don’t keep “cheap foreign products” out and purchase more expensive American ones because the nation as a whole is worse off when foreign goods are kept out though certain American industries would be better off.

If another country can make many or all goods cheaper than we can, free trade with them will not lead to unemployment for American workers due to the inability to compete with cheaper foreign labor. Why? There will be industries in which that country has an overwhelming cost advantage and others in which its cost advantage is slight.

Free trade allows the United States to produce most of whatever that other country has the lowest cost advantage to make and the other country to produce most of what it has the highest cost advantage to make; then the two nations will trade. The two countries, taken together, will get both products cheaper than if each produced them at home, and workers in both countries will have jobs.

If the average American worker earns twenty dollars per hour while the average worker in another country earns two dollars per hour, free trade does not make it impossible to protect the higher American wage. In other words, there is no leveling down until both America’s and the other country’s workers earn eleven dollars per hour.

If there were only one industry and occupation in which people could work, then free trade would indeed force American wages close to the other country’s levels if that country’s workers were as good as Americans. Fortunately, economies are composed of many industries and occupations. If America concentrates its employment where it does best, there is no reason why American wages can’t remain far above the other country’s wages for a long time—even though the two nations trade freely.

A country’s wage level depends fundamentally on the productivity of its labor force and not on its trade policy. As long as American workers remain more skilled and better educated, work with more capital, and use superior technology, they will continue to earn higher wages than the other country’s counterparts. If and when these advantages end, the wage gap will disappear. Trade is just a detail that helps ensure that American labor is employed where it has some advantage.

China Proves It

China’s trade surplus with the United States has been widening precisely as the wage gap between the two countries has been narrowing. If cheap Chinese labor was stealing American jobs, why did the theft intensify as the wage gap fell?

Chinese productivity growing at enormous rates is why. The remarkable upward march of Chinese productivity both raised Chinese wages relative to American wages and turned China into a world competitor.

People only deceive themselves by thinking they can stop the inevitable by closing our borders. We shouldn’t even be worried about China’s growth economically. The fact that another country becomes wealthier does not mean that Americans must become poorer.

Free Trade Is American

America is maybe the greatest free-trade zone in the world. Michigan manufactures cars; New York provides banking; Texas pumps oil and gas. The fifty states trade freely with one another, and that helps them all prosper. Imagine how much our standard of living would suffer if we were not allowed to buy any goods or services that originated outside of our home states?

“Buying American” to save American jobs is the worst way to save jobs, and actually saves few jobs in the long run. Blinder explains:

Many estimates have been made of the cost of ‘saving jobs’ by protectionism. While the estimates differ widely across industries, they are almost always much larger than the wages of the protected workers. For example, one study in the early 1990s estimated that U.S. consumers paid $1,285,000 annually for each job in the luggage industry that was preserved by barriers to imports, a sum that greatly exceeded the average earnings of a luggage worker. That same study estimated that restricting foreign imports cost $199,000 annually for each textile worker’s job that was saved, $1,044,000 for each softwood lumber job saved, and $1,376,000 for every job saved in the benzenoid chemical industry. Yes, $1,376,000 a year!”

Americans may be willing to pay a price to save jobs, but not this price. Conversely, lumberjacks would most likely take a onetime severance of $1,o44,000 for a promise never to seek work in the industry again. Protectionism, at best, swaps jobs. protecting one American industry from foreign competition imposes higher costs on others. Blinder notes:

….quotas on imports of semiconductors sent the prices of memory chips skyrocketing in the 1980s, thereby damaging the computer industry. Steel quotas force U.S. automakers to pay more for materials, making them less competitive.”

Additionally, protecting favored industries from foreign competition will provoke responses from other countries, which only limits American access to foreign markets as export industries pay the price for protecting import-competing industries. The value of the dollar is affected as well. Restricting imports means Americans spend less on foreign goods. Fewer American dollars in the world means the value of our dollar rises, causing American goods to become more expensive to buy overseas. That hurts exporters, causing jobs to be lost in those industries.

The best way to think about free trade? Some lawyers are better typists than their secretaries, but they don’t usually fire their secretaries to do their own typing? Why?

The lawyer may be better than the secretary at both arguing cases and typing, but they will fare better by concentrating on the practice of law and leaving the typing to a secretary. It not only makes the economy more efficient, but ensures both the lawyer and secretary will have work to do.

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