Tradeoffs and why trade is better on than off

Trade is an important subject. Big league. It occupied an especially prominent role in this election cycle, as proposed changes in trade policy made up a large part of Donald Trump’s platform. During his campaign, he conveyed the idea that globalization has generally been a bad thing, and we need to insulate ourselves more, except for when the Artist-of-the-Deal-in-Chief perceives a particular arrangement to be a “good deal.” Because of its salience, I would like to present my perspective on this theme, as both a citizen and aspiring economist.

Although it might seem obvious, I think it is important to discuss what, exactly, nations can usually expect to gain from trade. Centuries ago, it was widely believed that trade was only useful insofar as it increased a nation’s reserves of gold and silver. The only way a nation would gain from trade would be by exporting more value than it imported, resulting in a “favorable” balance of trade. To this end, the mercantilist school of thought would recommend large tariffs on imports so as to “improve” the balance of trade.

However, this narrow perspective is ridiculous for a good government to employ. Economic thinking has improved much since the 16th century, and economists are no longer so obsessed with precious metals, recognizing that wealth should more properly be thought of as things that have value and can be traded. From this more complete perspective, there is nothing particularly clever about trying to get other countries to buy as much of your stuff as possible, or to make it very hard for your citizens to buy foreign-made goods. Doing so hinders mutually beneficial exchanges that create value and therefore make nations wealthier.

The fact that wealth can be created simply by having goods cross borders is due to a concept economists call “comparative advantage,” which means a relatively favorable tradeoff between goods. If the country with a comparative advantage in a good exports that good, and imports a good for which it has a comparative disadvantage, it is able to consume more of both goods. Importantly, this argument applies to both trading countries, so that trade can be mutually beneficial, unlike the trade of mercantilist thought, which by definition requires a losing country with an “unfavorable” balance of trade.

This seems to be a point that our president finds hard to understand. This might be because, as Nobel laureate Paul Krugman has explained, running a business is very different from trying to manage an economy. In particular, Trump seems to see the world as having a fixed supply of points for which different countries compete in a zero-sum game. If the US would like to win more points, they must take them from Mexico’s supply, or China’s. It’s a world of cut-throat competition. The real world can be a much more hopeful place, where cooperation and trade can generate net benefits that don’t come at the expense of someone else. Trump’s confrontational economic mindset is inherently flawed. He sees international commerce through an almost mercantilist lens.

In fairness, the comparative advantage picture of trade is simplistic. Although net gains are produced, there are generally winners and losers from trade. Certain industries may benefit while others are hurt. More importantly, people may lose their jobs as a result of trade. These are serious issues, and those hurt by trade are completely justified in preferring protectionist policies. Some economists have shown that imports from China were probably responsible for the prolonged depression of several communities, and others have noted that displaced workers often make significantly less when they find a new job. It is reasonable to want to stop these negative effects, but a few things must be noted.

First, there is not a strong foundation for claiming that trade depresses or increases overall employment, as Donald Trump seems to believe. The total number of jobs are determined instead by several macroeconomic factors, including confidence and both monetary and fiscal policy. Second, most of the losses arising from trade, even if they persist for several years, are transitional. This means that the next generation of workers will probably not be affected by most of these shocks, although they will be affected by positive productivity gains arising from trade. It also means that moving from a liberal to a protectionist trade stance can be just as hurtful as going the other way. In fact, it has been pointed out that closing ourselves to trade now would be analogous to backing up a car after having run over a bike, and inflicting twice the damage in the process.

Third, economic theory suggests that the gains from trade outweigh the losses. This may seem like an abstract or coldly detached statement. Does it mean that cheaper manufactured goods for consumers outweigh the suffering of unemployed manufacturing workers? No. What economists mean is that the material gains outweigh the losses, so that it is in principle possible to take some of the gains from the winners and completely compensate the losers so that everyone is better off.

In practice, this is hard. But we’re also not trying as much as we could be. The Trade Adjustment Assistance program is intended to help those hurt by trade. Despite the fact that this is its sole purpose, it ends up doing far less for many of the losers than Social Security retirement benefits or medical benefits, although even together these only partially soften their losses. If we assisted the communities that are hit hardest, made it easier for people to move to different communities, or for them to train in a new profession, we might be able to get much closer to a world in which trade causes little damage and generates sizable benefits.

Immigration involves the international movement of people instead of goods, but many of the lessons mentioned above can be carried over. Even a semi-comprehensive discussion of immigration would be beyond the scope of this article and beyond the limits of the author’s knowledge, but it worth noting that immigration, like trade, can create winners and losers. However, simply saying “immigrants take our jobs” is too narrow-minded to be a useful policymaking stance.  In fact, many economists believe that immigration can cause large increases in overall welfare.

The next time that you think about international issues like trade, or hear Trump talk about them, keep in mind that the world isn’t a zero-sum game. It is possible to be better off at no one’s expense. Conversely, uncooperative attempts to win at the expense of others can sabotage even selfish goals.

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