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Wednesday, August 25, 2010

Mad About Trade: Why Main Street America Should Embrace Globalization

Free trade is the consumer’s best friend and a great contributor to peace. Pressing those ideas home is Cato Institute trade expert Daniel Griswold’s challenge in this book. He is mad for trade, while too many others are mad against trade.

As an example of the latter, consider radio host and writer Lou Dobbs, who dismissed concern for consumers in his book Exporting America, where he wrote, “I don’t think helping consumers save a few cents on trinkets and T-shirts is worth the loss of American jobs.” Similarly, then-Senator Barack Obama told a stadium filled with cheering union members in 2007 that “people don’t want a cheaper T-shirt if they’re losing a job in the process.” The idea here is that desire of consumers to save money should be trumped by the supposed need to “save jobs.”

Griswold points out that politicians generally favor “the noisy producer interests over the silent, suffering consumer” and reminds the reader that life itself depends on consumption. To that end, he quotes Adam Smith in The Wealth of Nations:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promotion of the consumer. The maxim is so perfectly self-evident that it would be absurd to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production and not consumption, as the ultimate end and object of all industry and commerce.

The problem, of course, is that there is usually political advantage in running a “mercantile system” that benefits some domestic producers at the expense of consumers—and other producers who need the “protected” goods to make their own products.

Griswold’s tour de force explores and documents the many ways in which import competition benefits American consumers, enabling them to improve their standard of living with a greater range of choice, lower real prices, and better quality. Those are not insignificant benefits. When the likes of Dobbs and Obama ridicule free trade as merely a matter of saving a small amount on T-shirts and trinkets, they’re giving a deliberately distorted picture of reality.

Big-box retailers, such as Walmart, Home Depot, and Best Buy, that purchase much of their inventory from overseas producers and ship it to stores in the United States, managed to hold their sales fairly steady or even increase them during the current recession. But what was good for those chains and their customers was sour news for organized labor. Unions often demand a “level playing field” and claim that foreign producers enjoy various “unfair advantages” such as a lower wage scale and export subsidies. When they call for tariffs, they say they don’t want special favors but only “fairness.”

Our author begs to differ. He explains to readers David Ricardo’s 1817 insight about comparative advantage—that each nation (or better still, each person or firm) will tend to discover where it has comparatively lower costs and then concentrate on producing those goods. Whether a producer’s cost advantage is “fair” or “unfair,” the best policy, Griswold argues, is for the government not to interfere with trade. Instead of further building up trade barriers, as various special interests advocate, he urges that we drop the barriers that separate us from the peaceful global marketplace.

But what about American manufacturing? Won’t free trade reduce us to a “service economy” consisting of mostly low-paying jobs? Politicians and pundits have been saying that for years, but Griswold replies that it isn’t true. The number of Americans working in manufacturing has indeed fallen, but that is due more to increases in productive efficiency than to “unfair competition.” While protectionists like North Dakota Senator Byron Dorgan wring their hands over the demise of some household name products like Huffy bicycles and Swingline staplers, they neglect to mention that American manufacturing has significantly increased in real terms since 1970.

Furthermore, Griswold explains that the U.S. government is responsible for a huge “swindle” of consumers—our Harmonized Tariff Schedule, filling nearly 3,000 pages. Our sugar tariff, for example, compels Americans to pay two to three times the world price for sugar. In turn, that has caused American food producers to shift production to Mexico or Canada to escape the cost. Protectionist politicians never mention the flip side of their “save jobs!” coin.

The book’s closing paragraph states: “Free trade unites us with other people in an ever-widening ‘community of work’ that provides a powerful alternative to conflict and war.” I strongly recommend Mad About Trade.

  • William H. Peterson (1921-2012) was an economist, businessman and author who wrote extensively on Austrian Economics. He completed his PhD at New York University in 1952 under the supervision of Ludwig von Mises.