Economic Justification of Increased International Trade

There has been much debate about the issue of free trade and its effects on the economy. Without a doubt it has both positives and its negatives, but it seems that many people trying to take a side on this issue are doing so without being very well informed as to the economics behind international trade. This article is an attempt to discuss some of the common misconceptions about free trade and explain why five of the main arguments that anti-foreign trade activists stand behind don't hold true. The majority of the voting public does seem to understand the economics behind international trade and ignorantly form their biases against free trade. It's time that they understand what they're talking about before they take a side on the issue.More...

The anti-free trade arguments that are most common are:

* Free trade steals jobs away from the U.S.
* We don't want our money leaving the country
* It encourages labor exploitation
* Other nations are"dumping" in the U.S. and not buying our imports
* Free trade hurts the environment

Free trade steals jobs away from the U.S.

People complain about offshoring and how the amount of jobs that domestic companies have moved overseas is hurting the economy. First of all, lets make sure that it is actually offshoring that is causing companies downsize their employee base in the U.S. Lets look at manufacturing goods (MFG) as a whole, where in the U.S., the amount of employees in this industry is decreasing. People argue that this is to be blamed on trade, but you need to examine the relative percent changers in other industries to really determine what's going on here. Technology and Service industries are growing far more rapidly than the manufacturing industry is shrinking. This means that more jobs are opening up in these sectors which are higher paying, better jobs than the outsourced industrial jobs being lost. Another component of this is that the technological advancement of the United States is making production processes more efficient and cutting down the need for manual labor.

Importing goods will cause the domestic producers of those goods and their employees to lose out on income that they would have received if there were trade restrictions to protect domestic producers. It is also true that keeping jobs in the United States is important, but it is more important that we allocate our resources to the best use possible. If someone can produce same or better quality coffee than us for less, why wouldn't we buy their coffee and do something more productive with our resources that we were using to produce coffee? In other words, if a country has a comparative advantage in something let them produce it and we'll buy it from them while we specialize in producing something else that we have a comparative advantage in that they can buy from us. In this situation both countries will benefit from free trade and experience greater consumption possibilities.

We don't want our money leaving the country

When looking at the formula for GDP, (GDP = Consumption (C) + Investment (I) + Government Spending (G) + (Exports- Imports) (M-X)), this argument makes sense. If we are importing more than we're exporting then we're experiencing a trade deficit and lowering our GDP. Lower GDP means we're worse off right? Well yes... and no. Trying to keep money in the country should not be a priority. The reason that a country tries to have a high amount of exports is not because the money from those exports puts money into the economy, but because that money made on exports is what fuels domestic production. If domestic producers couldn't export their goods then they would be hurt, thus hurting the economy as a whole. If the increased revenues for domestic producers is spent on importing cheaper foreign goods consumers can benefit greatly. The way to promote exports is not to try to limit imports, but is to be more efficient at producing things than other countries are and to exploit these advantages by providing them with goods at a lower cost than they can produce them.

Free trade encourages labor exploitation

This argument is founded in the belief that the U.S. firms offshore their production processes to save money, but in doing so force low-skilled workers in that country to be subject to inhumane working conditions and prevent them from ever getting out of poverty. The harsh truth of the matter is that these low-paying jobs and harsh working conditions are actually the providing thousands of their employees to be able to feed and clothe themselves. Trying to reduce imports from nations like these or prevent offshoring to less developed countries actually hurts these nations. The U.S. is doing what it can to help prevent abusive child labor in foreign countries. They pay a wage premium of around 10 - 20% more than employers in their host countries, and the U.S. is the #1 contributor to many different efforts to put an end to child labor and unacceptable working conditions.

Other nations are"dumping" in the U.S. and not buying our imports

"Dumping" is when other countries try to flood another market with a good that is cheaper than the country can produce domestically, in order to try and drive domestic producers out of business and then raise prices once their competition is eliminated. This is a tricky situation because the affects of this are clearly negative in the long-run so we need to be careful not to let this happen, but we should not let the fear of foreign competition driving domestic producers out of business keep us from importing foreign goods. "Dumping" is illegal in the United States and if there is any of it occurring, domestic producers will be able to spot it and put an end to it before it becomes a problem. They know how much it costs to produce their good, and if their competition is selling items at obscenely low prices they will notice and investigate their operations.

Free trade hurts the environment

Since many nations have environmental standards that are not as strict as the United States', people believe that U.S. firms are going abroad to take advantage of these lax standards and save money by not having to worry about the effects of their production processes on the environment. Well it is true that many nations has lower standards than the U.S., but the firms from the U.S. in those nations consistently exceed the regulations of their host economies.

It's clearly not in a U.S firm's best interest to exploit foreign labor or environmental standards. Just because there is moral hazard for U.S. firms in these countries doesn't mean that they will actually try to get away with exploiting foreign countries because the cost of being caught doing so will still have many negative effects on a firm.

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This anti-foreign bias has somehow swept common belief and convinced the common non-economist public that engaging in trade with foreigners has a negative affect on domestic producers. On the other hand, people who have a background in economics understand that the positive affects of free trade drastically outweigh the negative ones, and thus, support and encourage increased international trade. So what is it that has caused the general non-economist public to believe that free trade is a bad thing? A well crafted survey conducted by Michael Hiscox provides a little insight as to why this anti-foreign bias is so prevalent. Everyone in his sample was asked "Do you favor or oppose increasing trade with other nations?" and "Is that strongly favor (oppose) or somewhat favor (oppose)?," combined with one of the following introductions:

* Pro-Trade Intro: Many people believe that increasing trade with other nations creates jobs and allows Americans to buy more types of goods at lower prices.
* Anti-Trade Intro: Many people believe that increasing trade with other nations leads to job losses and exposes American producers to unfair competition.
* Both Intros: Many people believe that increasing trade with other nations creates jobs and allows Americans to buy more types of goods at lower prices. Others believe that increasing trade with other nations leads to job losses and exposes American producers to unfair competition.
* No Intro

The results:

1. The Pro-Trade Intro had no effect; people who heard it were no more supportive of free trade than people who had No Intro.

2. Hearing either the Anti-Trade Intro OR Both Intros sharply reduced support for free trade. The Anti-Trade Intro reduced support by 17 percentage-points; Both Intros reduced support by 19 percentage-points!

These results suggest that people without a background in economics, in a free debate, will favor protectionism. In other words, free debate favors protectionism. With voices from both sides of this issue trying to turn favor towards their stance, the vast majority of the non-economist public have been persuaded that free trade is a bad thing for the economy. The reason that this anti-foreign bias has swept the nation is only because it is easier to see the local appliance store going out of business because a Wal-Mart came into town than it is to measure the increased producer surplus provided by that Wal-Mart to all of its customers. It is true that Wal-Mart makes it harder for some other local businesses to turn a profit because they simply can sell things at a lower price than smaller local businesses, and it does turn out that many of the products available at Wal-Mart are foreign made. What is not taken into account is how much money people are saving by shopping at Wal-Mart, and when you look at these numbers you will see that the positive affects of having a place like Wal-Mart to shop vastly outweigh the negatives.
“What is prudence in the conduct of every private family, can scarce be folly in a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry.” - The Wealth of Nations, Adam Smith

Adam Smith is commonly believed to be the father or modern economics and he had this issue figured out in 1776. In the time that he published The Wealth of Nations he was vastly considered to be correct in his intuitions. More than 200 years later we still don't educate the general public enough to understand key economic principles like the advantages of specialization, based on comparative advantage, and free trade.

Chris Schmitz - www.talkecon.com