Paul

Ibrahim

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May 26, 2008

Memo to the Democrats: We Need Free Trade with China

That a basic understanding of economics is severely lacking in the halls of Congress is no secret to anyone who does understand economics. For decades, congressional policy on taxes, regulation, spending, Social Security and a myriad of other economic issues have demonstrated an ignorance, often willful, of how the free market works.

But perhaps the most blatant denial of economic reality has come from American politicians’ – mostly Democrats, but some Republicans as well – blind opposition to free trade. If there is one issue on which good economists overwhelmingly agree, it is the fact that unhindered international trade is beneficial not only for the United States, but for the rest of the world as well. In other words, free trade raises the standard of living for humanity in its entirety.

Enter the politicians who either do not understand the basics of free trade, choose not to do so or do understand them yet purposefully ignore them in exchange for votes. Of course, every electoral season introduces a fresh pool of such politicians. This year, the leading voices happen to be those of Barack Obama and Hillary Clinton, who have spent much of the primary season competing for the title of anti-free trader #1. In the process, of course, China, this decade’s preferred boogeyman, has been unfortunate enough to take the heat.

The primary argument against free trade with China is that such free trade allows the Chinese to sell us many of their products cheaply, thus putting some U.S. manufacturers of the same products out of business. To some degree, it is true that some workers lose their jobs when faced with cheaper output from other firms in the same industry, or from the same industry in another country. But overall, the American people experience a net benefit from the same set of transactions. And if we are to put emotion aside, as reasonable Americans we must think of what is best for the entire country, as opposed to what is best for specific industries, and inefficient ones at that.

Importing cheap products from China means that every single American gets to spend less on the products he or she needs. If I spend $2 on a pair of Chinese-made socks instead of $5 on American-made socks, I have an extra $3 left to buy something else, and I am richer for it. And since Chinese imports comprise a large number of products that are basic necessities, such as clothing, kitchen pieces or standard household items, it is lower income Americans that benefit most from the savings, since they tend to spend a larger percentage of their income on such products than richer Americans do.

Another way to think of it is that, although the U.S. sock industry might need to lay off or reduce the wages of hundreds or even thousands of workers, at the same time we have 300 million Americans whose real wages have been essentially increased, in the sense that they can get more for their money. Thus, when the likes of Obama and Clinton claim that free trade policies are urged by “special interests,” they have it oh so very wrong.

Free trade benefits the general interest, while it is the special interests, such as the U.S. sock lobby, who get temporarily hurt by free trade, and thus ask for special protection for their industry. When the politicians are influenced by such powerful lobbies, they are tempted to, and often do, impose tariffs on imported Chinese products such as socks. Although such a move might temporarily retain the wages of workers in a limited number of companies, it would also essentially reduce the purchasing power of all Americans. And of course, the politicians would get away with it. The loss of sock industry jobs is clearly tangible, while the loss of consumers’ purchasing power is nowhere near as lucidly visible.

Is it unfortunate that thousands of workers have to be laid off in exchange for the improved standard of living of all Americans, not to mention the Chinese? The immediate effect of course is sad for these particular workers. But in the long run, these workers will be absorbed by industries that are efficient and that do not need special protection in order to survive foreign competition. In such an industry, they will become more productive and, as such, will contribute to even further improving the standard of living for people around the world.

To use an example from the real world, one might look at the tariffs imposed on wire hangers imported from China. Although the tariffs have allowed for the retention of literally a couple of hundred jobs in the U.S. hanger industry (but more notably, the profits of their bosses), it has increased the operating costs of 30,000 dry-cleaning businesses and the expenses of millions of their customers. As this unfortunate anecdote demonstrates, little net good can come out of interfering with free trade.

This is especially true when we are trading enormous volumes with an enormous country that is giving us enormous benefits. And this is all not to mention that every U.S. dollar we pay the Chinese in exchange for their products must come back to America, the one place where it could be spent, if not in the form of payment for U.S. exports, then through investment, tourism or other such ways.

This truth, however, remains inconvenient for Obama, Clinton and their friends in the most inefficient U.S. industries. And until Americans wake up to this unfortunate reality, their standard of living will remain much lower than it could be.

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