This week as American and Korean trade officials meet in Washington to discuss pending trade issues, citizens in both countries should keep in mind a fable credited to James Ingram, author of a 1983 textbook on international trade.
As Ingram explained it, an unknown entrepreneur discovers a way to turn wheat and lumber into cars. His factory, which had been built on the edge of town near the sea, was off-limits to protect his secret process. As wheat and lumber were turned into products consumers wanted the businessman was hailed as a hero across the country.
Then, a journalist investigates. He finds a former employee who reveals that the large factory is empty. There was a large hole in the back of the factory, where ships imported cars and exported grain. Because of the news story, the businessman was vilified for driving up the nation’s trade deficit, eliminating U.S. jobs, and destroying the nation’s automobile market.
In reality that fable isn’t that different from the view of trade that policymakers and governments hold. Although the economic argument justifying free trade is over and won, with economists across the ideological spectrum agreeing that there are “gains from trade,” policymakers and governments continue to view free trade as a problem. Some even portray trade as a “war” between nations. As economist Paul Krugman said, “The view of trade as a quasi-military competition is indeed the conventional wisdom among policymakers, business leaders, and influential intellectuals.” This, Krugman argues, results in international economic confrontations “arising not from real conflicts of interest among nations, but from shadows and mirages.”
Trade is not a problem of economics — it is a problem for policymakers who must keep politically active industries happy. The political activism of the steel industry is the reason U.S. Trade Representative Robert Zoellick told the House of Representatives on March 7 that he was considering imposing safeguard measures to protect the producers of steel. That is even though protection of steel drives up the price of goods made of steel and there are 40 times more workers in the steel-using industry. The politically active unions in Korea, which earlier this month protested the sale of Daewoo Motors to General Motors by burning an American flag at a demonstration and tossing firebombs at GM’s headquarters in Seoul, are the reason trade officials from Seoul will be recalcitrant on import barriers to American automobiles.
An example of how political thinking clouds the minds of policymakers is the issue of trade dumping. It has been said that there are some things so dumb that only an intellectual could believe them. Surely “trade dumping” is one such myth believed by policymakers. Supposedly we are harmed when other countries sell products below cost, otherwise known as dumping. Would American citizens be damaged if Hyundai gave away free cars to American citizens or if General Motors gave away free cars to Koreans? That is to the benefit of consumers, even if competitors are forced to lower prices. Nonetheless, policymakers would call for an anti-dumping investigation.
International trade is not a contest between nations — consumers benefit when they are allowed to trade. As Margaret Thatcher pointed out: People trade with companies; countries don’t trade. Trade deficits are a result of voluntary transactions between buyers and sellers who feel they are better off. Trade restrictions can have a negative effect, such as in Korea where Korean consumers must pay five or six times the world price for rice.
Sometimes when policymakers and interest groups spend too much time looking at statistics, and forget the goal of increasing the well-being of citizens, they can come to crazy conclusions that only policymakers and interest groups can believe. For instance, development economist Peter Bauer noted a few years ago that using per capita income as the standard of well-being, the birth of a child would have a negative impact on a family and the economy in general while the birth of a farm animal would be a blessing. Likewise with trade — while policymakers may wring their hands because a favored sector supposedly is threatened by competition, consumers who get goods are in most cases pleased with the product they’ve received.
Even if policymakers and industries seeking protection from competition are determined to make trade a political issue, consumers and voters need to ignore them. Benjamin Franklin got it right when he declared: “No nation was ever ruined by trade.” But nations have been ruined by the foolishness of policymakers micromanaging the economy and causing trade friction between nations. At times, the friction leads to humorous incidents, such as in the 1980s when U.S. Congressmen were smashing Japanese radios on the Capitol steps. At other times, it leads to trade wars.
Trade barriers reveal the split between buyers and sellers — buyers want as many choices as possible while producers want to limit choices. The question is if governments are going to side with consumers or producers, not if they can get “concessions” from other governments. Importers who bring in goods to market that can be sold more cheaply than goods produced locally should be hailed as heroes, even if they aren’t so highly regarded in fables or by policymakers.