David R. Henderson  

Marco Rubio: Trade Agreements Are About Producers

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One of the hardest ideas for non-economists to get is the idea that a government's unilateral elimination of trade barriers create a net benefit for the people in the country whose government makes the unilateral move. I pointed this out in a "What Clinton and Gore Don't Say," Fortune, May 1, 2000.

Here's an excerpt:

Economists have shown that because consumers gain from exchange, a country is actually better off dropping its trade barriers even if other governments keep theirs. But unilateral free trade, though an economic winner, is often a political loser. The consumers' gain doesn't come across more clearly in reports of trade negotiations because it is spread across millions of people. The losses from opening trade, however, are often shared by a small number of companies with a few thousand shareholders and workers. They hire lobbyists and make hefty campaign contributions based solely on a candidate's views on trade barriers.

Therefore, to pass free-trade legislation, politicians have to woo powerful organized groups that favor it. How do they do it? They find low-cost domestic producers that, because of other countries' trade barriers, miss out on the chance to compete in big, lucrative markets. Then they hold meetings at which, say, U.S. farmers lobby for other countries to cut their barriers to U.S. farm exports. In return, the U.S. negotiators cut U.S. barriers to, say, imports of shoes and clothing. (Those are two of the imports against which the U.S. has the biggest barriers.) So the domestic exporters are left to voice consumer concerns. Unfortunately, they don't.

In the negotiation process, the U.S. treats cuts in its trade restrictions as concessions rather than as the benefits they are. That's why the consumers' gains get lost in the shuffle. Economists like U.S. Treasury Secretary Lawrence Summers understand that. But U.S. Trade Negotiator Charlene Barshefsky and Vice President Gore? I'm not so sure.

I'm not so sure Senator Marco Rubio (R-Florida) gets it either. Look at what he said in a recent interview. Now, if by "in exchange for nothing," he means that the U.S. government gets no reduction of trade barriers in return, then I get it. But if he means that Americans get nothing, he's wrong. Does he understand consumers' gains from eliminating trade restrictions? As with Barshefsky and Gore, I'm not so sure.

HT to Sallie James.

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CATEGORIES: International Trade

COMMENTS (9 to date)
Richard A. writes:

If the US government dramatically increased the price of bananas with quotas on banana imports, we could have a thriving banana industry in this country. This would be good for banana producers but bad for everyone else. The cost to everyone else would exceed the gain to the banana producers.

BigEd writes:

There are different kinds of 'trade barriers'; Many are harmful to the national interests of the nations imposing them, but some are not.

A good example of the latter are the customs duties that were the major source of revenue for the Fedl Govt for its first 150 years or so.

Tom West writes:

I'm pretty much a fan of free-trade, but I have to say that I find the straight economic description both correct and yet, since we're dealing with human beings, terribly incomplete when actually portraying the costs and benefits of free trade as they are actually felt by the population.

To take a made-up example, free trade may result in wide-spread job losses in a particular geographic area, while producing economic gains everywhere else. The trouble there is that concentrated unemployment tends to produce other social ills (drugs, gangs, domestic violence, etc.) that make it increasingly unlikely that the rest of the economy will pick up these newly unemployed workers.

Even if we have a left wing policy and *fully* compensate those who lost their job (and we still reap the benefit of trade specialization) so that they do not suffer financially, there's a world of difference between earning one's money and being given it.

The economic model can show a net gain for *everyone*, yet in terms of people's lives, many lives are now sharply worse.

Now, I don't think this scenario or others like it, necessarily plays out often, but its enough to make me realize that simple economic models of trade are by no means the last word on whether they're actually a net social benefit.

Tom E. Snyder writes:

Tom West writes:
"The economic model can show a net gain for *everyone*, yet in terms of people's lives, many lives are now sharply worse."

The same thing happens with the "creative destruction" of technological innovation. The advent of the automobile put a lot of cartwrights and wheelwrights out of business. Should the automobile have been prohibited or heavily taxed to protect these industries and their employees? I think not.

The proper response to these lost jobs is "That's life." There are no guarantees. Life happens and those that adapt best succeed best.

H. Truong writes:

I'm for free-trade since I believe it is good for countries to import what it will waste energy and time or can't produce. Not only will this allow more options for its consumers, this will open up exports connections as well. However, with any sort of "freedom" comes a cost; therefore, trade-barriers might actually be useful. Then again, it needs to depend on what the circumstance is. This is why the government has branches for these specific problems. My only hope is they know what they're doing.

Pedro writes:

Most new trade theory implies unilateral free trade is bad for a country, unless you complicate the model with endogenous trade policy. Lowering tariffs causes firms to relocate to high-tariff countries. Empirical studies, meanwhile, seem to suggest that tariff reductions are good (on the whole).

allen writes:

David Henderson writes: "One of the hardest ideas for non-economists to get is the idea that a government's unilateral elimination of trade barriers create a net benefit for the people in the country whose government makes the unilateral move."

That's because of the asymmetry of interests that drives the politics of trade protectionism.

The one dollar reduction I see in the cost of a new washing machine, because it's made from imported steel, doesn't spur me to the sort of effort that the loss of a job spurs a steel worker. I'm looking at a gradually improving lifestyle as free trade inevitably drives down prices and the steel worker's looking at an immediate and total loss of income. The modest, immediate benefit of free trade is unlikely to inspire me to advocate for free trade the way the catastrophic loss of a job will motivate that steel worker to oppose free trade.

There are other factors at play in the politics of free trade such as a reflexive defensiveness that results from our countrymen suffering at the hands of foreigners and cheating, conniving foreigners at that.

All that sort of stuff obscures the real benefit of free trade whether it's a legitimate trade or trade supported by subsidies.

But that asymmetry of interest, and the lack of understanding of the benefit of free trade, is largely a function of information and its availability.

As a consumer I have to take it largely on faith that free trade is a benefit since the immediate and specific benefits are small although cumulatively the benefits are huge. But "cumulatively" is somewhere in the future and if I don't have some credible reason to believe the long-term benefit is worth pursuing, or the long-term benefit trumps the short-term loss, then I ignore the question. As a beneficiary of trade restrictions the benefit is immediate and tangible.

But as information flows more freely the consumer enjoys increased awareness of the world beyond their immediate world and in the big, wide world freedom is rarely a bad thing hence freedom to trade is increasingly seen as a good thing absent a compelling case to the contrary. There isn't compelling evidence to the contrary as long as the context is broad enough and as communication technology improves and gets cheaper the context of everyone's life gets broader. That erodes the value of the asymmetry of interest by making the larger, society-wide context more easily accessible. It's easier for me to understand the price I pay for trade restrictions and thus am better able to decide whether the price is worth whatever value I receive.

Since trade restrictions are inevitably sought by specific constituencies most citizens won't see any benefit and will incur a cost. The more widely that's understood the more difficult it becomes to enact trade restrictions.

Joe Cushing writes:

You could do a thought experiment with this and imagine a most extreme case. Imagine that all the countries of the world decided to dump here. Imagine that they dumped so hard that everything was free and they even paid for shipping. Then they sent workers here to pave our roads, build houses, run our stores, wait tables, heal the sick, etc all for free. Imagine that foreigners provided so much to us that there were zero jobs here and everything money can buy was free.

Wouldn't we be way better off?

Tom West writes:

Tom E. Snyder:

The proper response to these lost jobs is "That's life." There are no guarantees. Life happens and those that adapt best succeed best.

If that's the absolute philosophy, then the same could be said to victims of theft or violence. I (and I think most people) would prefer a government that actually had some concern for its citizens, lest it be overthrown and replaced by one that does.

While again, I think that most of the time free-trade is probably a good thing, a policy of paying no attention to the effects on its citizens is unlikely to survive in the long term. Either the policy or the government will go.

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