Trade Briefing Paper No. 1

The Blessings of Free Trade

By James K. Glassman
May 1, 1998

Why do Americans trade with people in the rest of the world? That basic question seems to be lost today in the political debate over trade deficits, fast-track negotiating authority, and the World Trade Organization. Americans trade because doing so allows us to concentrate on what we do best, thus raising productivity and incomes. We trade because the imports we receive allow us to enjoy a higher standard of living. And we trade because exchanging what we produce with others for mutual benefit is an inalienable human right, whether we trade with a neighbor down the road or a worker on the other side of the world. Given the inherent blessings of free trade, we should not insist that other nations lower their trade barriers before we lower our own. Unilateral trade liberalization is its own reward.

Introduction

In recent years we have heard over and over that freer trade creates jobs. The idea is that, by lowering their trade barriers to our goods, we can increase our exports to other countries—and those exports increase the overall sales and profits of American companies, which can then go out and hire more workers. Jobs, jobs, jobs. QED.

In fact, free trade does not create jobs overall. It leads to more jobs in some sectors and fewer in others, although, in the aggregate, for this country, it tends to exchange good jobs for bad. And it creates wealth, which is more important than jobs.

To see what I mean, let me relate an anecdote used by my friend Jerry Jordan, president of the Federal Reserve Bank of Cleveland, in an article in the Cato Journal last summer. Jordan described a U.S. businessman visiting China a few years ago. The American came upon a team of 100 workers building a dam with shovels. Shovels.

He commented to a local official that, with an earth-moving machine, a single worker could build the dam in an afternoon. The official replied, “Yes, but think of all the unemployment that would create.”

“Oh,” said the businessman, “I thought you were building a dam. If it’s jobs you want to create, then take away their shovels and give them spoons.”

Work is what we need to do in order to acquire things that enable us to live well. Free trade helps us get those things more cheaply because it allows many more producers to sell them to us—and because it frees us to concentrate on the work we do best.

This is what I want to talk about today. In the din over trade—NAFTA, WTO, fast track, and the rest—the true and best arguments for trade have not been heard. I believe there are two of those arguments—one is extremely powerful and has been made cogently by economists for more than 200 years; the other is a briefer argument from principle. Neither of these arguments has a thing to do with jobs, jobs, jobs—or exports, exports, exports.

Trade Creates Wealth, Not Jobs

The argument for exports has only one thing going for it: it seems to carry political punch at the local level. Or it did. But no longer. Americans can now see through it. And the results of NAFTA belie it.

“Free trade does not create jobs,” writes Melvyn Krauss of the Hoover Institution in How Nations Grow Rich, his excellent book on trade. Instead, “it creates income for the community by reallocating jobs and capital from lower-productivity to higher-productivity sectors of the economy.” In other words, trade allows us to concentrate on what we do best. It may kill jobs in the textile industry, which is labor intensive, but breed jobs in electronics, where ingenious Americans have a “comparative advantage,” in the famous phrase used by David Ricardo in 1817.

Say, for example, that a country is full of brilliant electronics engineers but won’t allow textile imports across its borders. The engineers would have to sew their own shirts. They’d have less time for electronics, and the country would be poorer for it. That would be true even if the engineers were great at both electronics and sewing. What counts is their comparative advantage: what do they do better (meaning more profitably) than other people?

Another example is the lawyer who is an excellent typist. In fact, he may be a better typist than his secretary. Yet what makes the most sense for a sound economy: for the lawyer to split his time between lawyering and typing or for the lawyer to lawyer and the typist (who’s not good at lawyering) to type? Obviously, the latter. Thus, comparative advantage.

We Trade for Imports

It’s not necessary to go into fancy economic discussions to understand why we trade. We trade for imports. This is the first of two thoughts I want to leave you with today: not exports, imports.

No one said it better than Adam Smith more than 200 years ago: “It is the maxim of every prudent master of a family never to make at home what it will cost him more to make than to buy… . If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them.”

That is why electronics engineers do not sew their own shirts. It’s also why most American families do not grow their own wheat, grind their own flour, and bake their own bread. They have better things to do with their time. It is the same with foreign as with domestic trade.

Milton and Rose Friedman wrote years ago: A “fallacy seldom contradicted is that exports are good, imports are bad. The truth is very different. We cannot eat, wear or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports.”

In exchange for imports, we offer other countries the things we produce cheaper or better: computers, chickens, movies, power generators. Or we just offer dollars. They send us cars, we send them little pieces of paper, which are, in effect, non-interest-bearing IOUs that the people who send us imports have to spend in this country, if not on goods, then on investments—on real estate or auto plants in Tennessee or Treasury bonds.

This is quite a deal. We benefit from the lower prices that imports give us, and we can use the money we save to buy things made at home—or invest it.

It is just this point—that imports have immense benefits, such as doing much to throttle inflation in the past two decades (and especially in the past few years), forcing U.S. businesses to become more productive (just look at the auto industry), and helping consumers live better—that the Clinton administration and congressional leaders failed to promote in their tardy and confused battle for fast track.

Consumer Advocates Betray Consumers

Let me stop for a second and say how outraged I am—and how outraged you should be—at the efforts of those who have thwarted free trade over the years. People like Ralph Nader, who says he is a “consumer advocate.” What a joke! As Adam Smith wrote: “Consumption is the sole end and purpose of all production, and the interest of the producers ought to be attended to only in so far as it may be necessary for promoting that of the consumer.”

That is a great lesson for all policymakers to bear in mind. Ask, does this policy help consumers? Free trade allows consumers to buy a cornucopia of higher quality goods from other countries at lower prices than they would pay if they were restricted to buying homemade goods. Trade is obviously a huge benefit for consumers—that is, individual buyers. And, says Adam Smith, what is better for consumers is always better for an economy.

Yet consumer advocate Nader wants to stop consumers from enjoying the benefits of trade. Why? To help others—producers, and unions, which represent cartelized producers.

It is indeed true that some producers are hurt by free trade. And we can expect producers—such as textile industries and their employees and tomato growers—to kick and scream over free trade. Fine. But consumers—all 270 million of us—benefit mightily.

Let me also direct some outrage at so-called liberal Democrats such as Reps. David Bonior of Michigan, Nita Lowey of New York, and others who opposed fast track out of concern for “working” Americans. Why do they want to disrupt the current system?

It could be mere economic ignorance. More likely, though, it is to help preserve the interest of producers and unions—to maintain their cartels, just as big businesses did in the Smoot-Hawley days. We have come full circle. In 1928 it was the Republicans who wanted high tariffs to protect their business supporters; now it’s the Democrats.

What a change! The 1928 Democratic platform proposed to “increase the purchasing power of wages by reducing the monopolistic and extortionate tariff rates.” Exactly. Tariffs—or even nontariff barriers—amount to a tax. They raise the price of goods for consumers. They are, of course, a discriminatory tax. They raise the price of Japanese-made Toyotas but not the price of U.S.-made Chevrolets. But, as we know, the price of Chevrolets to the consumer will rise to meet, or only slightly undercut, the price of Toyotas. Who benefits? Certainly not the consumer.

I believe the argument for imports is simple and powerful. And it carries a political punch. By some estimates, 13 percent of American jobs are export dependent. That’s roughly 18 million American workers, or if you want to count all their family members, 40 million Americans. But all 270 million of us benefit from imports.

As the Economic Report of the President correctly puts it, “Imports of goods have kept inflation low, while imports of capital have kept interest rates low, helping to sustain rapid income growth.” That is not to say that exports aren’t wonderful. They are. “Jobs associated with goods exports tend to pay wages 12.5 to 18 percent higher than other jobs,” says the Economic Report.

Exports are great, but the argument for them is more narrow—and also more widespread—than the argument for imports.

The Inalienable Right to Trade

Now, let me briefly bring up the second thought I want to leave you with: that free trade is not merely an economic concept; it is a human right, a natural right.

People should have the right to exchange the sweat of their brows, the products of their hands and their minds, with whomever they wish. I should be free to trade with my corner dry cleaner, a Balinese shirt maker, a Cuban cigar roller, a Japanese lap-top manufacturer. The right to trade is, I believe, one of our inalienable rights, along with life, liberty, and the pursuit of happiness that the Declaration of Independence talks about. The government should be able to get between me and the person I want to trade with only if that trade threatens the interest of national security—if we are at war, or close to it.

Unfortunately, the Constitution itself seems at odds with this sentiment.

It specifically allows Congress to lay imposts and excises, that is, tariffs, and to regulate commerce with foreign nations. It’s easy to understand that tariffs were far more important back in the 18th century, when they were the main source of government revenue. But it’s hard to deny that there is some natural, or human, rights interest in trade.

Unilateral Free Trade

Now, what does all this mean in a policy sense?

My conclusion is that it would be smart for the United States to abandon its current negotiating posture, which is that we will take down our trade barriers if you will take down yours.

That is a reciprocity-based strategy, and it is built on a faulty premise, which is that current protectionist measures are good for the United States, but we’re willing to abandon them if other countries abandon theirs, since we really want to get into their markets. That is like saying, I’ll agree to stop banging my head against the wall, but only if you stop banging yours. The implication is that it makes sense for me to bang my head, but I am willing to negotiate that asset away.

As Brink Lindsey of the Cato Institute wrote in 1991 in an article in Reason magazine: “The reciprocity-based free-trade strategy helps to frame the whole trade debate in terms that favor the protectionist lobby. The special interests that seek a protectionist bailout rarely admit that they were out-competed by their foreign rivals. Rather they claim that they are the victims of ‘unfair competition.’ … A policy of trade negotiations lends credence to this ploy by focusing attention on the other countries’ import barrier and ‘unfair’ practices.”

Exactly. If our aim is to get imports into the United States, which is now at full employment with only 4.7 percent jobless, then the best way to do that is to take down our own barriers, no matter what anyone else does.

Unilateral free trade. As the Friedmans wrote in 1980: “We could assume a consistent and principled stance. We could say to the rest of the world: We believe in freedom and intend to practice it. We cannot force you to be free. But we can offer full cooperation on equal terms to all. Our market is open to you without tariffs or other restrictions. Sell here what you can and wish to. Buy whatever you can and wish to. In that way, cooperation among individuals can be worldwide and free.”

Is unilateral free trade such a flaky idea? Not at all. Jagdish Bhagwati, who is the Arthur Lehman Professor of Economics at Columbia University, points out that Hong Kong and Singapore are conspicuous unilateral free traders, as is New Zealand. Those countries have done exceptionally well economically.

In fact, Bhagwati, who is also an adjunct fellow at the American Enterprise Institute, writes that “a large portion of the world’s trade liberalization in the past quarter century has been unilateral”—with beneficial effects to the countries who have practiced it. “The most potent force for the worldwide freeing of trade … is unilateral U.S. action. If the United States continues to do away with tariffs and trade barriers, other countries will follow suit—fast track or no fast track.”

I strongly agree. We should abandon fast track or slow track or any other strategy that involves negotiations. Just get rid of all our tariffs and other barriers to the free flow of goods and services into this country immediately.

What would we lose? Only the leverage we currently employ in using our trade barriers as bargaining chips. But the truth is that those chips don’t work very well. In general, nations will dismantle their obstacles to free trade only when they understand it’s in the best interest of their consumers. More and more, they are realizing that. By unilaterally adopting free trade, the United States can show them the way.

We will thrive. Taking down barriers has brought competition that’s made our auto industry better, our communications industry the best in the world. The demonstration effect will be powerful. Other nations will see the success of what we’ve done and will rush to do it themselves.

And besides, eliminating trade barriers is quite simply the right thing to do.

James K. Glassman is a columnist for the Washington Post and a fellow at the American Enterprise Institute in Washington. This Trade Briefing Paper is adapted from a speech Glassman delivered at the Cato Institute’s invitation on February 23, 1998, to a meeting of congressional legislative aides on Capitol Hill.