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Saturday, October 15, 2016

No, Free Trade Does Not Hurt the Economy

A trade involves cooperation between the individuals making the exchange. No one is "beaten."

Economists have known that international trade enhances the wealth of trading nations since the publication of Adam Smith’s The Wealth of Nations in 1776. In fact, probably no other topic commands as much agreement among economists today.

Donald Trump and Hillary Clinton not only fail to grasp this basic point, they also turn the logic of international trade on its head.

On Trump’s campaign website he claims, “We’re losing $500 billion a year to China. Losing billions and billions to Japan, and Vietnam, and India, and Mexico is beating us … in trade.”

What the heck does “losing” and “beating us” even mean?

A trade involves cooperation between the individuals making the exchange. No one is “beaten.”The United States imported nearly $500 billion in goods and services from China in 2015. But those imports are gains, not losses. Each one is a valuable good or service that an American enjoys. To obtain the benefits these imports provide, Americans send their own goods, services and assets to China in exchange.

A trade involves cooperation between the individuals making the exchange. Each party trades only because they believe they will be better off as a result. No one is “beaten.”

But what if other countries don’t play fair? Clinton claims she will “stand up to foreign countries that aren’t playing by the rules – like China is doing right now with steel.” The Chinese government subsidizes steel production, but so what?

When the Chinese government does this, it taxes wealth away from its citizens in order to send Americans steel at a lower price than it otherwise could. Americans benefit from the steel imports and send fewer resources to China in exchange. That makes Americans wealthier.

Of course when America imports goods, its mix of jobs changes. Americans who work in industries that compete with imports can face layoffs. However, when US industries shrink because of imports, American labor and capital are freed up for other industries where they can be more productive. The mix, not the number, of jobs changes.

In fact, the classic case for free trade stands on this reshuffling. Without it the gains from trade disappear.

Trading to Create Jobs

Both candidates would have us think that trade has destroyed American manufacturing. Nothing could be further from the truth. American manufacturing output is near an all-time high. International trade and improvements in technology have made greater productivity possible.

It is true, however, that the number of manufacturing jobs has decreased. But that means it takes fewer workers to produce more goods. The workers freed from manufacturing are now available to create valuable services elsewhere in the economy.

The increase in manufacturing jobs in the middle of the 20th century was only possible because the increase in agricultural productivity freed people from the farm while still enabling us to fill our bellies. Similarly, increases in manufacturing productivity allow our economy to create more valuable services jobs.

Unfortunately, as a Bloomberg poll indicated early this year, 65 percent of Americans believe the government should restrict trade even more and that this would protect American jobs. Unless we improve economic literacy, demagogues from both major political parties will continue to pander to people’s prejudices.

Economists need to help break this vicious cycle by better communicating to the public that international trade is a win-win scenario.

This first appeared at Independent Institute.

  • Benjamin Powell is the Director of the Free Market Institute at Texas Tech University and a Senior Fellow with the Independent Institute. He is a member of the FEE Faculty Network.