Why do Americans trade with people in the rest of the world?That basic question seems to be lost today in the political debateover trade deficits, fast-track negotiating authority, and theWorld Trade Organization. Americans trade because doing so allowsus to concentrate on what we do best, thus raising productivity andincomes. We trade because the imports we receive allow us to enjoya higher standard of living. And we trade because exchanging whatwe produce with others for mutual benefit is an inalienable humanright, whether we trade with a neighbor down the road or a workeron the other side of the world. Given the inherent blessings offree trade, we should not insist that other nations lower theirtrade barriers before we lower our own. Unilateral tradeliberalization is its own reward.
In recent years we have heard over and over that freer tradecreates jobs. The idea is that, by lowering their trade barriers toour goods, we can increase our exports to other countries--andthose exports increase the overall sales and profits of Americancompanies, which can then go out and hire more workers. Jobs, jobs,jobs. QED.
In fact, free trade does not create jobs overall. It leads tomore jobs in some sectors and fewer in others, although, in theaggregate, for this country, it tends to exchange good jobs forbad. And it creates wealth, which is more important than jobs.
To see what I mean, let me relate an anecdote used by my friendJerry Jordan, president of the Federal Reserve Bank of Cleveland,in an article in the Cato Journal last summer. Jordandescribed a U.S. businessman visiting China a few years ago. TheAmerican came upon a team of 100 workers building a dam withshovels. Shovels.
He commented to a local official that, with an earth-movingmachine, a single worker could build the dam in an afternoon. Theofficial replied, "Yes, but think of all the unemployment thatwould 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 andgive them spoons."
Work is what we need to do in order to acquire things thatenable us to live well. Free trade helps us get those things morecheaply because it allows many more producers to sell them tous--and because it frees us to concentrate on the work we dobest.
This is what I want to talk about today. In the din overtrade--NAFTA, WTO, fast track, and the rest--the true and bestarguments for trade have not been heard. I believe there are two ofthose arguments--one is extremely powerful and has been madecogently by economists for more than 200 years; the other is abriefer argument from principle. Neither of these arguments has athing 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: itseems to carry political punch at the local level. Or it did. Butno longer. Americans can now see through it. And the results ofNAFTA belie it.
"Free trade does not create jobs," writes Melvyn Krauss of theHoover Institution in How Nations Grow Rich, his excellentbook on trade. Instead, "it creates income for the community byreallocating jobs and capital from lower-productivity tohigher-productivity sectors of the economy." In other words, tradeallows us to concentrate on what we do best. It may kill jobs inthe textile industry, which is labor intensive, but breed jobs inelectronics, where ingenious Americans have a "comparativeadvantage," in the famous phrase used by David Ricardo in 1817.
Say, for example, that a country is full of brilliantelectronics engineers but won't allow textile imports across itsborders. The engineers would have to sew their own shirts. They'dhave less time for electronics, and the country would be poorer forit. That would be true even if the engineers were great at bothelectronics and sewing. What counts is their comparative advantage:what do they do better (meaning more profitably) than otherpeople?
Another example is the lawyer who is an excellent typist. Infact, he may be a better typist than his secretary. Yet what makesthe most sense for a sound economy: for the lawyer to split histime between lawyering and typing or for the lawyer to lawyer andthe typist (who's not good at lawyering) to type? Obviously, thelatter. Thus, comparative advantage.
We Trade for Imports
It's not necessary to go into fancy economic discussions tounderstand why we trade. We trade for imports. This is the first oftwo 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 makeat home what it will cost him more to make than to buy. . . . If aforeign country can supply us with a commodity cheaper than weourselves 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 betterthings to do with their time. It is the same with foreign as withdomestic trade.
Milton and Rose Friedman wrote years ago: A "fallacy seldomcontradicted is that exports are good, imports are bad. The truthis very different. We cannot eat, wear or enjoy the goods we sendabroad. We eat bananas from Central America, wear Italian shoes,drive German automobiles, and enjoy programs we see on our JapaneseTV sets. Our gain from foreign trade is what we import. Exports arethe price we pay to get imports."
In exchange for imports, we offer other countries the thingswe produce cheaper or better: computers, chickens, movies,power generators. Or we just offer dollars. They send us cars, wesend them little pieces of paper, which are, in effect,non-interest-bearing IOUs that the people who send us imports haveto spend in this country, if not on goods, then on investments--onreal estate or auto plants in Tennessee or Treasury bonds.
This is quite a deal. We benefit from the lower prices thatimports give us, and we can use the money we save to buy thingsmade at home--or invest it.
It is just this point--that imports have immense benefits, suchas doing much to throttle inflation in the past two decades (andespecially in the past few years), forcing U.S. businesses tobecome more productive (just look at the auto industry), andhelping consumers live better--that the Clinton administration andcongressional leaders failed to promote in their tardy and confusedbattle for fast track.
Consumer Advocates Betray Consumers
Let me stop for a second and say how outraged I am--and howoutraged you should be--at the efforts of those who have thwartedfree trade over the years. People like Ralph Nader, who says he isa "consumer advocate." What a joke! As Adam Smith wrote:"Consumption is the sole end and purpose of all production, and theinterest of the producers ought to be attended to only in so far asit 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 consumersto buy a cornucopia of higher quality goods from other countries atlower prices than they would pay if they were restricted to buyinghomemade goods. Trade is obviously a huge benefit forconsumers--that is, individual buyers. And, says Adam Smith, whatis better for consumers is always better for an economy.
Yet consumer advocate Nader wants to stop consumers fromenjoying the benefits of trade. Why? To help others--producers, andunions, 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 theiremployees 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 Democratssuch as Reps. David Bonior of Michigan, Nita Lowey of New York, andothers 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 isto help preserve the interest of producers and unions--to maintaintheir cartels, just as big businesses did in the Smoot-Hawley days.We have come full circle. In 1928 it was the Republicans who wantedhigh tariffs to protect their business supporters; now it's theDemocrats.
What a change! The 1928 Democratic platform proposed to"increase the purchasing power of wages by reducing themonopolistic and extortionate tariff rates." Exactly. Tariffs--oreven nontariff barriers--amount to a tax. They raise the price ofgoods for consumers. They are, of course, a discriminatory tax.They raise the price of Japanese-made Toyotas but not the price ofU.S.-made Chevrolets. But, as we know, the price of Chevrolets tothe consumer will rise to meet, or only slightly undercut, theprice of Toyotas. Who benefits? Certainly not the consumer.
I believe the argument for imports is simple and powerful. Andit carries a political punch. By some estimates, 13 percent ofAmerican jobs are export dependent. That's roughly 18 millionAmerican workers, or if you want to count all their family members,40 million Americans. But all 270 million of us benefit fromimports.
As the Economic Report of the President correctly putsit, "Imports of goods have kept inflation low, while imports ofcapital have kept interest rates low, helping to sustain rapidincome growth." That is not to say that exports aren't wonderful.They are. "Jobs associated with goods exports tend to pay wages12.5 to 18 percent higher than other jobs," says the EconomicReport.
Exports are great, but the argument for them is more narrow--andalso more widespread--than the argument for imports.
The Inalienable Right to Trade
Now, let me briefly bring up the second thought I want to leaveyou with: that free trade is not merely an economic concept; it isa human right, a natural right.
People should have the right to exchange the sweat of theirbrows, the products of their hands and their minds, with whomeverthey wish. I should be free to trade with my corner dry cleaner, aBalinese shirt maker, a Cuban cigar roller, a Japanese lap-topmanufacturer. The right to trade is, I believe, one of ourinalienable rights, along with life, liberty, and the pursuit ofhappiness that the Declaration of Independence talks about. Thegovernment should be able to get between me and the person I wantto trade with only if that trade threatens the interest of nationalsecurity--if we are at war, or close to it.
Unfortunately, the Constitution itself seems at odds with thissentiment.
It specifically allows Congress to lay imposts and excises, thatis, tariffs, and to regulate commerce with foreign nations. It'seasy to understand that tariffs were far more important back in the18th century, when they were the main source of government revenue.But it's hard to deny that there is some natural, orhuman, 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 toabandon its current negotiating posture, which is that we will takedown our trade barriers if you will take down yours.
That is a reciprocity-based strategy, and it is built on afaulty premise, which is that current protectionist measures aregood for the United States, but we're willing to abandon them ifother countries abandon theirs, since we really want to get intotheir markets. That is like saying, I'll agree to stop banging myhead against the wall, but only if you stop banging yours. Theimplication 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 anarticle in Reason magazine: "The reciprocity-basedfree-trade strategy helps to frame the whole trade debate in termsthat favor the protectionist lobby. The special interests that seeka protectionist bailout rarely admit that they were out-competed bytheir foreign rivals. Rather they claim that they are the victimsof 'unfair competition.' . . . A policy of trade negotiations lendscredence 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, thenthe best way to do that is to take down our own barriers, no matterwhat anyone else does.
Unilateral free trade. As the Friedmans wrote in 1980: "We couldassume a consistent and principled stance. We could say to the restof the world: We believe in freedom and intend to practice it. Wecannot force you to be free. But we can offer full cooperation onequal terms to all. Our market is open to you without tariffs orother restrictions. Sell here what you can and wish to. Buywhatever you can and wish to. In that way, cooperation amongindividuals can be worldwide and free."
Is unilateral free trade such a flaky idea? Not at all. JagdishBhagwati, who is the Arthur Lehman Professor of Economics atColumbia University, points out that Hong Kong and Singapore areconspicuous unilateral free traders, as is New Zealand. Thosecountries have done exceptionally well economically.
In fact, Bhagwati, who is also an adjunct fellow at the AmericanEnterprise Institute, writes that "a large portion of the world'strade liberalization in the past quarter century has beenunilateral"--with beneficial effects to the countries who havepracticed it. "The most potent force for the worldwide freeing oftrade . . . is unilateral U.S. action. If the United Statescontinues to do away with tariffs and trade barriers, othercountries will follow suit--fast track or no fast track."
I strongly agree. We should abandon fast track or slow track orany other strategy that involves negotiations. Just get rid of allour tariffs and other barriers to the free flow of goods andservices into this country immediately.
What would we lose? Only the leverage we currently employ inusing our trade barriers as bargaining chips. But the truth is thatthose chips don't work very well. In general, nations willdismantle their obstacles to free trade only when they understandit's in the best interest of their consumers. More and more, theyare realizing that. By unilaterally adopting free trade, the UnitedStates can show them the way.
We will thrive. Taking down barriers has brought competitionthat's made our auto industry better, our communications industrythe best in the world. The demonstration effect will be powerful.Other nations will see the success of what we've done and will rushto do it themselves.
And besides, eliminating trade barriers is quite simply theright thing to do.