Source: Forbes
I view the House vote today on trade-promotion authority, a necessary prelude to an important Asian trade deal, as a test of economic literacy. If there is anything most economists that don’t work for labor unions tend to agree on, it is freer trade. However, even if they pass the trade authority and ultimately some sort of trade bill, I’m not sure they will really have passed the economic literacy test for two major reasons.
One reason is that it has become commonplace to burden new deals that are supposed to take advantages of differences among trading partners with provisions “to level the playing field” like environmental, labor, and other measures. Trade is supposed to take advantage of unlevel playing fields, not take place only after all the social engineering has taken place.
The second threat to the literacy tests is the way the proponents and opponents frame the issue. It’s all about jobs. Proponents talk about all the good new jobs that will be created by more exports; opponents talk about all the good jobs lost to imports. Usually each side doesn’t acknowledge the points made on the other side. Everybody talks to their own choir.
I’m a proponent of freer trade, externally and internally, but it’s not a job issue with me. The impact of freer trade—and I say freer rather than free trade because I doubt they will come close to pure free trade—is basically neutral on the number of net new jobs created. More exports will create more domestic jobs; more imports will destroy more domestic jobs. The net result is unknowable, but it is likely to be close to zero because exports and imports tend to move together, not by coincidence, but by causal relationship.
More exports create more domestic income and cause more foreign money to flow into the economy. Both these things will stimulate more imports. More of our imports will stimulate the economies of the exporting economies and send them more of my money, both of which will stimulate more exports to them. Again, it’s impossible to say in advance what will be the net impact on the job count, but it’s likely to be close to zero.
While freer trade doesn’t necessarily create net new jobs, it does make jobs count for more. Protection is inefficient. It means we are using scarce and valuable domestic labor to produce things that we don’t have a comparative advantage in. Freer trade would shift jobs toward our comparative advantage and do the same for our trading partners. The world will experience an extra expansion of income and output because the world’s labor is shifting toward comparative advantage.
A major obstacle to economic literacy on this issue is that when workers lose jobs to imports, it is obvious what is happening and why. The new jobs created by exports are more invisible and aren’t necessarily attributed to exports. Of course, there will be frictions, including some unemployment, in shifting labor toward its comparative advantage. Some politicians probably understand the merits of freer trade, but find it expedient to avoid counter intuitive arguments with their constituents and demagogue instead.
My favorite quotation on the merits of free trade came from Henry George, who pointed out that protectionists want to do to their country in peacetime what the country’s enemies would want to do to it during war time. That is, close its borders to trade.