Jobs and other myths about trade -

Jobs and other myths about trade

Stephen Gordon on a debunking spree


Politicians and pundits talk a lot about trade policy, but much of what they say either adds nothing to or subtracts from public understanding about trade. Here are a few talking points that are both popular and wrong:

1) Exports are good. Not true; exports are the costs we pay for engaging in international trade. Diverting domestic productive resources to producing more things for foreigners doesn’t increase our standards of living.

2) Imports are bad. This is point one restated: imports are the benefits from trade. The reason we engage in international trade is to obtain goods and services more cheaply than we can produce them for ourselves.

3) Trade deficits are bad. I went though this at length in this post: noting that a country has a trade deficit (or, more properly, a current account deficit) is the same thing as noting that domestic investment is larger than domestic savings. It’s not obvious why this is necessarily a bad thing.

4) Trade deficits are a sign of a slowing economy. The Canadian trade balance is generally counter-cyclical: falling during expansions and rising during recessions. A trade deficit is standard fare for Canadian expansions, not something to get concerned about.

5) Liberalized trade increases employment. Again, this is point one restated. Liberalized trade may increase the number of workers in certain export-oriented sectors. But the effect on total employment in the economy is zero.

6) Liberalized trade reduces employment. Again, this is point two restated. Liberalized trade may reduce the number of workers in certain sectors vulnerable to foreign competition. But the effect on total employment in the economy is still zero.

The best way of thinking about the effects of liberalized trade on the economy is the way we think about new technology. The following passage is taken from Steven Landsburg’s The Armchair Economist (an extended version of this passage is available here):

There are two technologies for producing automobiles in America.  One is to manufacture them in Detroit, and the other is to grow them in Iowa.  Everybody knows about the first technology; let me tell you about the second.  First, you plant seeds, which are the raw material from which automobiles are constructed.  You wait a few months until wheat appears.  Then you harvest the wheat, load it onto ships, and said the ships eastward into the Pacific Ocean.  After a few months, the ships reappear with Toyotas on them.

International trade is nothing but a form of technology.  The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being.  To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars…

In 1817, David Ricardo—the first economist to think with the precision, though not the language, of pure mathematics—laid the foundation for all future thought about international trade.  In the intervening 150 years his theory has been much elaborated but its foundations remain as firmly established as anything in economics.  Trade theory predicts first that if you protect American producers in one industry from foreign competition, then you must damage American producers in other industries.  It predicts second that if you protect American producers in one industry from foreign competition, there must be a net loss in economic efficiency.  Ordinarily, textbooks establish these propositions through graphs, equations, and intricate reasoning.  [This] little story … makes the same propositions blindingly obvious with a single compelling metaphor.  That is economics at its best.

The arguments for and against liberalized trade are pretty much the same as the arguments for and against new technologies. Not everyone benefits, and the transition costs may not be trivial. But in the long run, suppressing trade has the same effect on our standard of living as suppressing new technologies. And trade liberalization has the same effect as the introduction of new technologies — increased incomes and improved standards of living.

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