Sen. Orrin Hatch, R-Utah, author of the recently passed Trade Promotion Authority bill, makes the usual case for trade agreements and TPA:
“We need to get this bill passed. We need to pass it for the American workers who want good, high-paying jobs. We need to pass it for our farmers, ranchers, manufacturers, and entrepreneurs who need access to foreign markets in order to compete.”
Hatch is as confused as most Washingtonians about the actual case for free trade.
This whole “exports and jobs” framework is misguided. In the Cato Journal, economist Ronald Krieger explained the difference between the economist’s and the non-economist’s views of trade. The economist believes that “the purpose of economic activity is to enhance the wellbeing of individual consumers and households.” And that “imports are the benefit for which exports are the cost.” Imports are the things we want—clothing, televisions, cars, software, ideas—and exports are what we have to trade in order to get them.
And thus: “The objective of foreign trade is therefore to get goods on advantageous terms.” That is why we want free—or at least freer—trade: to remove the impediments that prevent people from finding the best ways to satisfy their wants. Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale.
This whole ‘exports and jobs’ framework is misguided.
Hatch isn’t alone in missing this point. President Barack Obama’s official statement on “Promoting U.S. Jobs by Increasing Trade and Exports” mentions exports more than 40 times; imports, not once. Sen. Rob Portman, R-Ohio, a former U.S. trade representative, says that a trade agreement “is vital to increasing American exports.”
If Saudi Arabia would give us oil for free, or if South Korea would give us televisions for free, Americans would be better off. The people and capital used to produce televisions—or produce things that were traded for televisions—could then shift to producing other goods.
Unfortunately for us, we don’t get those goods from other countries for free.
Sometimes international trade is seen in terms of competition between nations. We should view it, instead, like domestic trade, as a form of cooperation. By trading, people in both countries can prosper. Goods are produced by individuals and businesses, not by nation-states. “South Korea” doesn’t produce televisions; “the United States” doesn’t produce the world’s most popular entertainment. Individuals, organized into partnerships and corporations in each country, produce and exchange.
In any case, today’s economy is so globally integrated that it’s not clear even what a “Japanese” or “Dutch” company is. If Apple Inc. produces iPads in China and sells them in Europe, which “country” is racking up points on the international scoreboard? The immediate winners would seem to be investors and engineers in the United States, workers in China, and consumers in Europe; but of course the broader benefits of international trade will accrue to investors, workers, and consumers in all those areas.
The benefit of international trade to consumers is clear: We can buy goods produced in other countries if we find them better or cheaper. There are other benefits as well. First, it allows the division of labor to work on a broader scale, enabling the people in each country to produce the goods at which they have a comparative advantage. As the economist Ludwig von Mises put it, “The inhabitants of [Switzerland] prefer to manufacture watches instead of growing wheat. Watchmaking is for them the cheapest way to acquire wheat. On the other hand the growing of wheat is the cheapest way for the Canadian farmer to acquire watches.”