Thursday, June 10, 2010

Trade is good, free trade is best. by Tim Bastian

Of all the bad policy moves during the 1930’s, probably the most damaging were the trade protectionist acts designed to “protect American producers and workers”. The Great Depression started out as a really deep recession, but isolationist policy makers started an ever-escalating series of trade restrictions and as other countries retaliated with moves of their own, world trade collapsed. Just in case you’ve never heard why it is so good, even necessary for prosperity, or if politicians of today are coaxing you into thinking new import restrictions are needed, or that America needs to be more self-sufficient, I wanted to share some basics about the greatest human economic invention in the history of the world: trade.

Trade is simple, yet the benefits are enormous. As you probably know I’m on the faculty at Creighton University where I teach undergraduate economics classes. I particularly enjoy teaching trade theory in my microeconomics classes because students from many different academic majors and backgrounds come together in the same room. It’s one of the few courses where I’m just as likely to have pre-med students as I am to have philosophy, finance, theology, or even physics majors.

Inevitably, when I start to discuss international trade more than a few students immediately fall into the “America first” protectionist camp. Others lean toward the idea of “Fair Trade”, or paying more than market price to producers in developing countries to presumably help them attain a higher standard of living. While telling both sides they’re dead wrong doesn’t make me the most popular guy in the room, it is a rush to watch them drop their biases toward free trade as I explain its benefits.

As you know, trade involves two parties; one party who makes something and another party who wants what the other made. As long as the party who made it values it less than the party who wants it, an exchange is made. The beauty of such an exchange is that both parties end up better off. Over thousands of years, mankind has realized that if we all produce what they’re best at, and then trade that good or service for things that we really want, our prosperity will be maximized. For example, I could change the oil in my car, but I don’t. I’m better at other things, and my time is better spent doing them. I use the money I earn to hire someone who’s really efficient at changing oil. That frees me up to do what I’m best at, presumably to maximize my income.

Let’s take this to the national level. I keep hearing political pundits talk about limiting international trade to “protect American jobs and industries”, and that trade is, somehow making us poorer. To demonstrate why this is such a silly statement let me posit the following: If trade is not good between nations, then it could not be good between states. If trade were not good between states, then it would not be good between communities, and if trade were not good between communities, it must not be good between individuals. Now, imagine what it would be like to live here in Omaha: we’d all live in mud huts since we have very few trees here in Nebraska; we’d most likely have a lot of hungry people, since we’d all grow our own food; we’d almost certainly not get to know one another very well, because we’d all have to build our own form of transportation; and a lot of us would freeze to death next winter because the only thing that would keep us warm would be to burn our corn!

Trade is good, it is very good. More trade is better than less trade, more trading partners are better than fewer trading partners. The key is for producers to make what they are best at making. Too often inefficient industries lobby government for special protections, usually in the name of “protecting American jobs”. This behavior hurts our economy in two ways: 1.) consumers pay more for the products produced by the protected industry, and 2.) resources used in the protected industry are not allowed to naturally flow toward the more efficient industries, lowering profits there (not to mention available jobs in that industry).

Step back for a moment and consider this: World trade allows consumers to purchase goods at the very lowest prices possible, giving them more while spending less. For producers, world trade opens up new markets with more willing buyers and allows producers to sell more of their products at the highest price possible. In other words, you get to consume more at lower prices while being able to sell more at higher prices. Could it get any better?

Tim Bastian


Anonymous said...

Health Care comprises 1/5 of GDP ($2.5T annually). Over half of this expense is paid for by Medicare and Medicaid each year (i.e. government). More regulated health care markets across the ocean produce better health care per capita at half the cost.

Banking is heavily regulated. Freddie and Fannie May guarantee 50% of all home mortgages. The government has taken active positions to guarantee the housing market doesn't go into a further dive.

The Goldman Sachs CEO was correct when he testified to congress saying the investment banking industry needs regulation.

Regulated markets seem to work best as the provide the security to pursue opportunity for a bigger pool than a winner take all syetm.

Anonymous said...

I agree with your blog here Tim.

But in some cases getting more for less isn't always best.