The presidential campaign has brought up several economic issues, and international trade has been front and center of the debate. So, as I look at my Donald Trump tie that was made in China and my Donald Trump shirts that were made in Bangladesh and Indonesia, I want to clarify some basic economic concepts dealing with trade.
I want to dispel the myth that Trump and many others perpetuate: That if something is produced in the United States, this is good for Americans and, if something is made in another country, this is bad for Americans.
When I teach international trade to my Principles of Economics students, I ask them, “Who doesn’t want Italian or French wine to enter into the United States?” Of course, the correct answer is, “Domestic wine producers.” When I ask them, “What is the rationale behind the domestic industry opposing foreign wine?” they usually say, “To save American jobs.”
That is the myth we need to dispel.
Trade restrictions benefit some people, but certainly not all.
In his book Economics in One Lesson, Henry Hazlitt writes that most economic fallacies come from looking at the short-term, not the long-term effects of policies, and from looking at the effects of a policy on one group, not all groups. Let’s break this down a little, using my wine example:
- If foreign wine was not allowed into the United States, it’s not that Americans would be better off; rather, it would be certain Americans— domestic wine producers—who would be better off. After all, there are more wine consumers than wine producers.
- Additionally with tariffs and quotas (or an outright prohibition of foreign wine), American wine drinkers would have to pay higher prices and their choices would be limited.
- Moreover, if American wine drinkers had to pay more to buy wine (either because of the tariffs or because domestic producers were able to charge higher prices due to less competition), then those Americans would have less money to spend on other American goods. So, while Americans in the domestic wine industry would be better off, more Americans in other industries would be harmed.
The concept of concentrated benefits and dispersed costs comes into play here. It’s easy to see the winners—the concentrated employees in the domestic wine industry. It’s harder to see the losers–the dispersed millions of consumers who have to spend more to buy wine and, as well as the dispersed American business owners in other industries who would lose money.
I have a Japanese car, but when I need a mechanic, I don’t go to Tokyo.
Another example that I give to my students deals with the automotive industry. I tell my students that I drive a 2015 Honda Pilot, a Japanese car.
To many Americans, I am unpatriotic because I did not purchase a Ford or GM car and I hurt American workers by not buying the fruit of their labor.
However, I tell my students that when my Japanese car needs service, I don’t take it to Tokyo! I take it to the Honda dealership in San Jose, California. Moreover, I don’t think the mechanics at the Honda dealership in San Jose commute from Tokyo every day. So, while people like me perhaps hurt some Americans by purchasing a Japanese car like a Honda Pilot, we help other Americans—the mechanics and other service employees of Honda, as well as the factory workers in Lincoln, Ala., where Honda produces Pilots.
It’s time to look at the big picture. We need to understand that trade with other countries benefits the United States, much like trade among the fifty states benefits Americans. From the American dock workers who unload ships with consumer products from foreign countries to the domestic service employees who work on foreign-made products, Americans win from trade.
Let’s also not forget that Americans have greater choice with international trade, and allowing free trade puts a fire under domestic producers to make better products at lower prices.
To put it bluntly, a business does not have the right to be in existence; it only has the right to try to get customers to buy its products. If a foreign company is outselling an American company, then American consumers are obviously sending a message.
What does “Made in the USA” actually mean?
Finally, I give my students something else to consider: If “Made in USA” is such a great thing, then let’s take that logic all the way to its conclusion. I am from California, so I should be a good Californian and buy only products “Made in California”.
But wait, I am from the San Francisco Bay Area, so I should buy only products “Made in the Bay Area.”
Then again, I am from San Jose in particular, so forget San Francisco and Oakland. I should buy only “Made in San Jose.”
I am not done yet. I grew up on a particular block in San Jose, so I should only buy things made by people on the block where I grew up.
Let’s say I didn’t like my neighbors, though. Perhaps I should just buy “Made by Me!” Does this make sense? When I ask my students, “How many of you made your own clothes, produced the food that you ate this morning, made the car your drove this morning, and made the iPhone in your pocket?”, none raise their hands.
So, if it doesn’t make sense for us to do everything on our own, why does it make sense for the United States to make everything? It doesn’t. Of course, if one is running for political office and is campaigning in an area that has suffered because of foreign competition, then self-interest and politics becomes more important than good economics.
Unfortunately, many Americans voters support anti-free trade rhetoric because of ignorance and lack of economic education. This is why many Democrats and Republicans say that they support the notion that “free trade is fair trade.” What they don’t understand is that true free trade means no government restrictions on our part.
When countries “play unfairly” and do not allow our products into their countries, they hurt American companies. But they also hurt their own citizens. Let’s really take that lesson to heart. It’s time that Americans realize that we shouldn’t “play fair” by hurting our own citizens by restricting their products.