Schansberg: Understanding Trade Policy

January 24, 2017

by Eric Schansberg, Ph.D.

Our new president often expresses hostility toward international trade. On this topic, he will find many allies in Congress for there are winners and losers with trade — and trade restrictions. How can we make sense of the relevant economics and politics?

It’s easy to underestimate the value of international trade. Its benefits are relatively subtle while its costs are relatively obvious. Consumers benefit from greater choice, higher quality and lower prices. But it’s easy to take this for granted. Producers are well aware of their competition — domestic and foreign. Workers, though, worry about losing their jobs.

The flip side of the good news for consumers is tough news for producers and workers— somewhere between keeping them on their toes and driving them out of business.

In contrast, trade restrictions are often politically attractive. Its benefits are relatively obvious while its costs are relatively subtle. When we limit foreign competition, all of the above is reversed. Again, consumers are less likely to see the cause and effect. But producers are keenly aware that business is easier and jobs are more secure with fewer competitors.

Econ teachers use various principles to explain these ideas. For example, you don’t need a doctorate in economics to understand the value of competition and the trouble with monopoly power — for both consumers and markets.

The most important of these principles is the practical and philosophical value of voluntary, mutually beneficial trade. When we engage in trade, both parties perceive that they benefit, enhancing their well-being and increasing social wealth. Extending this principle across national boundaries may be interesting, politically, but it does not change the underlying economics.

Teachers also use three analogies to make these points. First, blockades are an attempt to prevent a country from importing goods during a war. Likewise, trade sanctions are used to hurt countries by limiting trade with them. When should we impose blockades or trade sanctions on ourselves?

Second, boycotts are a refusal to engage in what would otherwise be a mutually beneficial trade. We want to impose a cost on a producer — for something they’ve done that is unrelated to what they sell. To do this, we’re willing to impose a cost on ourselves, moving from our top choice to a lesser choice. Trade restrictions are like a self-imposed boycott. When should we force American consumers to boycott international goods?

Third, discrimination is a refusal to engage in otherwise beneficial trade, because I have a problem with someone — for example, their race or religion. Discrimination harms the discriminator in material terms, but those who engage in it enjoy messing with the other party. Why would we want to mandate discrimination against those in other countries and do harm to ourselves and to them?

Sometimes, thought experiments can be helpful to make the subtle more obvious. For example, if we imagine that a trade restriction is good for our economy, then it should be good for a state as well. And if it’s good for a state, it should be good for a county. And if it’s good for a county, it should be good for towns and neighborhoods. Once we extend the policy far enough, its costs become quite obvious.

My friend David Norton takes this a step further with this parable: A virtuous man would only eat food within 10 feet of living room recliner — cockroaches and the occasional mouse. He could sew the mouse pelts into clothing and use the guts for thread. So why stop at “Brexit”—the exit of Britain from Europe? Perhaps we should strive for “LRexit” — where we each remove our Living Rooms from the global economy. Conveniently, our Living Rooms already have walls to keep out the Mexicans, Canadians, Chinese and other neighbors who want to take our rodent-catching, pelt-sewing and mouse-cooking jobs. And surely, if we allowed trade, outsiders would undercut our living room “markets” for mouse — with chicken, fish, and vegetables.

One more parable, this one from Dr. Steven Landsburg: Imagine that an entrepreneur figures out how to turn grain into inexpensive, high-quality cars. Grain goes into the factory. Through a mysterious and efficient process, the entrepreneur is able to pay good wages and produce a great product. Consumers cheer and the country applauds the technological advance. But then, a journalist discovers that the “technological advance” is international trade. The entrepreneur has been selling the grain overseas, receiving cars in return. When people hear this news, they are furious and ask legislators to pass all sorts of restrictions on the entrepreneur. The extension of mutually beneficial trade — whether domestic or international — is equivalent to the winners and losers that occur with technological advance.

The new president seems to misunderstand this basic point. Will Congress go along with him, protecting certain jobs and helping interest groups through bi-partisan crony capitalism — while harming consumers, markets, and the economy as a whole? Or will freedom and wealth-creating international trade be allowed to grow?

Eric Schansberg, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, is a professor of economics at Indiana University Southeast. A version of this essay was first published in the Louisville Courier-Journal.



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