David R. Henderson  

The Benefits of International Trade

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Native American Economics... Economics is held in low reput...

blueberries.jpeg


This morning I made blueberry pancakes, a special treat, using fresh blueberries.

Fresh blueberries. In December. On the shortest, and one of the coldest, days of the year. How could that be?

Here's how: They're from Peru.

When I look at blueberries at our local supermarket this time of year, I never buy them because a small container is priced at about $5. But this container, which contains approximately 4 times as many as the ones at my supermarket, was selling at Costco for a little over $5. So I bought them.

We often hear people say that we're not winning at trade. I have in mind one person in particular who says that a lot and who is about to become a very powerful politician. But people who say that leave out a huge benefit from trade, namely, what we get in return for what we give. In trading my money indirectly to someone who produced blueberries in Peru, I got, drumroll please, blueberries. Yum!


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CATEGORIES: International Trade




COMMENTS (24 to date)
ChacoKevy writes:

I like to use bananas as my example. For as ubiquitous as bananas are in US grocery stores, it's pretty much guaranteed a person has never eaten an "American" banana, save for trips to the Hawaiian islands.

bill writes:

Avocado consumption in the US is up about 7 fold in the last 20 years.

If we put tariffs on foreign steel (for example), every product that uses steel will be too expensive to sell overseas and it will cost more here. We'll gain 20,000 steel jobs and the other 140 million Americans will have the cost of living go up a couple percent, lose things like blueberries, and have far fewer options in all other products. Sad.

Ryan Murphy writes:

An even stronger position on trade would argue that making the pancakes yourself, instead of going out to eat, diminishes the quality of your meal, conditional on cost, in the same way, for the same reasons.

Shane L writes:

One of my favourite historical quotes is from Emperor Ferdinand I of Austria: "Ich bin der Kaiser und ich will Knödel!" ("I am the Emperor, and I want dumplings!"). Ferdinand, who suffered multiple disabilities probably due to royal inbreeding, was complaining when his chefs said they could not make him apricot dumplings because apricots were out of season.

Today most people living in relatively large towns or cities in developed countries can get apricots out of season for a reasonable cost thanks to international trade, refrigeration, etc. In the 1840s the Emperor of Austria couldn't.

dwb writes:

If you have a job and are producing something valuable in the exchange of berries, sure.

If you are unemployed and just selling real estate or using it as collateral top borrow to get the berries, not no much.

If the berries are being made in Peru because they have negligible environmental and labor controls, then the risk of production is merely shifted. Then you are clearly sending the message that it's ok to have high US regulations that idle US farmers while shifting the risk to Peruvian workers and the Peruvian environment.

On the other hand, berries can be grown in Peru in December because it's summer there. Berries can be grown in Peru in California in July, because it's winter in Peru.

So, the benefit of "free" trade depends a lot on whether its fair and whether you are merely shifting externalities of production elsewhere to save money.

Don Boudreaux writes:

dwb:

Can you explain why every country with whom Americans trade should have environmental and workplace regulations that are at least as strict and as costly as are those in the United States? Can you explain why, if Peruvians (perhaps because they, on average, are poorer than Americans) have a lower demand for workplace safety and environmental quality, it is wrong for Americans to purchase berries from Peruvians? (Is it wrong for me, who is quite risk-averse, to hire a less-risk averse person to clean my chimney rather than for me to clean it myself?)

And even if Peruvians' cost-advantage at producing berries comes exclusively from their lower (compared to Americans') risk-aversion and lower demand for environmental quality, why should American farmers not lose market share to Peruvians?

You write of U.S. farmers being 'idled.' But no one has a right to continue in any occupation. Are U.S. farmers entitled to continually enjoy some unreduced market share? Are we to judge the performance of an economy by how convenient and profitable it makes life for producers, or by how well it supplies consumers with goods and services that consumers choose?

David R. Henderson writes:

@ChacoKevy,
I like to use bananas as my example. For as ubiquitous as bananas are in US grocery stores, it's pretty much guaranteed a person has never eaten an "American" banana, save for trips to the Hawaiian islands.
Nice.
@bill,
Avocado consumption in the US is up about 7 fold in the last 20 years.
Interesting.
If we put tariffs on foreign steel (for example), every product that uses steel will be too expensive to sell overseas and it will cost more here. We'll gain 20,000 steel jobs and the other 140 million Americans will have the cost of living go up a couple percent, lose things like blueberries, and have far fewer options in all other products.
Good point, although my guess is that tariffs on steel would drive up the cost of living by closer to 0.1 percent.
@Shane L.,
Good point that makes the point that in some important ways, the average person in Austria and elsewhere in the richer world today is better off than the Emperor of Austria two centuries ago.
@Ryan Murphy,
An even stronger position on trade would argue that making the pancakes yourself, instead of going out to eat, diminishes the quality of your meal, conditional on cost, in the same way, for the same reasons.
Actually not. When you consider my time value, the cost of making pancakes at home myself, especially the way I make them, and freezing most of them in saran wrap for later breakfasts, is much lower than the cost of going out to multiple breakfasts. Driving alone eats up the difference, not to mention the cost of waiting for service.
@dwb,
I think Don Boudreaux has handled your point. But if he hasn’t, tell me specifically how he hasn't and I will answer.

Benjamin R Kennedy writes:
And even if Peruvians' cost-advantage at producing berries comes exclusively from their lower (compared to Americans') risk-aversion and lower demand for environmental quality, why should American farmers not lose market share to Peruvians?

Because American farmers didn't make this choice, American lawmakers did. I like trade, I just don't see "tolerance of pollution" as a true comparative advantage when one side is locked out of the decision.

Perhaps this is more of an argument against environmental regulation, which is a tax on potentially polluting industries in the same way as the minimum wage is a tax on low-skill labor. This is a tax that happens to only fall on domestic producers. Now if we like the tax because it is paying for a clean environment, great! Then why not put a similar tax on foreign-made goods to level the playing field? This seems like basic fairness to me. Tax everybody, or tax nobody - just don't exclusively tax Americans!

dwb writes:

Actually I did not suggest "Every country with whom Americans trade should have environmental and workplace regulations that are at least as strict and as costly as are those in the United States?"

I merely pointed out the trade-offs, and the adjustment costs. There is no free lunch.

It may be true that "no one has a right to continue in any occupation." But everyone does have the right to vote. I realize it is difficult for academic economists to see from the Ivory Tower, but unemployment and adjustment costs are a real thing. A fairly large thing for most people. You cannot just turn idle farmland in the middle of nowhere into something else. Meanwhile, the mortgage needs to be paid.

So while you are eating your berries, remember: happy Peruvians don't vote in U.S. elections, but unemployed US farmers do. Sometimes they vote for Donald Trump.

By the way I am a fan of free trade. But I am also smart enough to know there are trade offs, and that to an unemployed worker, "Hakuna Mata-ta free trade is great I love my cheap berries Yum!" sounds a lot like "Your life is worthless." Unemployed workers are not winning at trade, and Trump just fired economists.

As a gentle reminder of those adjustment costs, picture Donald Trump's head on your berries as you eat them for the next 8 years.

Jon Murphy writes:

@dwb-

If the issue is that regulations increase the marginal costs of blueberries in the US so much so that Peru has a stronger footing, then the issue is with the regulation, not the trade with Peru; in other words, the complaint about free trade is a red herring. Further, why does it extend to international borders, but not domestic? California has much more stringent environmental and labor regulations than New Hampshire. Should Californians be punished from buying New Hampshire products?

My point, perhaps unclearly expressed above, is simply this: using regulatory differences to argue against free international trade is a red herring.

dwb writes:

I am not "using regulatory differences to argue against free international trade" any more than the Ford dealer is using a sticker price of $75,000 to argue against the purchase of a new truck.

I am merely pointing out the price. You can buy the product at that price, if you think it's worth it, or not.

Post-recession, labor in the US is not as mobile as it used to be for a variety of cultural and financial reasons. Immobility, regulations, zoning restrictions, and a myriad of other factors contribute to large adjustment costs. The fact that unemployment U-6 has taken so long to get below the previous peak in 2003 is prima facie evidence that the cost of adjustment in labor market is pretty big.

Voters did not decide free trade was bad, they decided that the cost was no longer worth it.

Jon Murphy writes:

@dwb-

"So while you are eating your berries, remember: happy Peruvians don't vote in U.S. elections, but unemployed US farmers do. Sometimes they vote for Donald Trump."

Ok...so what? That doesn't change anything Don or Prof. Henderson said. It doesn't invalidate anything. 2+2 still equals 4, no matter how many people vote to say it equals 5.

I understand that people are self-interested and can resort to cronyism if it benefits them; that doesn't change the fact cronyism is harmful a lick.

Thaomas writes:

It's all a matter of which instrument for which problem. If you think that safety and environmental regulations are inadequate in Peru, you should want to give foreign aid to Peru to help them achieve their optimal level of regulation. If we are worried that factor mobility had declined, we could try to increase it.

Benjamin R Kennedy writes:

"I understand that people are self-interested and can resort to cronyism if it benefits them; that doesn't change the fact cronyism is harmful a lick."

The only "cronyism" I see here is people seeing their fellow Americans suffering in unemployment and drug addiction because international competition gutted their towns. Free-market advocates (of which I am one) routinely understate the transaction costs of disruptive trade, as if tens of thousands of laid off steel works magically learn java and get back into the workforce. It doesn't happen. There is a reason why Levittown, PA - once the model for middle class living - has over 80 drug recovery houses. Creating sustainable American jobs is a value goal that competes with minimizing prices to American consumers

Jon Murphy writes:

@dwb-

"Voters did not decide free trade was bad, they decided that the cost was no longer worth it."

Hm...I'm afraid I must disagree with your conclusion. If, indeed, voters decided the cost was no longer worth it, then why not simply "buy American?" Their actions would speak much louder than some vote in the ballot box. By taking an action that is considerably less costly (that is, voting) as opposed to one that is more costly (that is, actually taking action) I can only conclude the opposite: that they don't think the cost is too high. They just want others to pay it.

Jon Murphy writes:

@Benjamin Kennedy

Your comment is interesting and true, but ultimately irrelevant. The disruptions in Levittown are not due to international competition so much as automation. And using the government to restrict the choices of other people to benefit you is cronyism.

But let's assume they are for a moment. There is nothing unique about international competition. There are other competitors and substitutes. That's the nature of life.

I feel for the people who lose work due to competition. I truly do. Just as I feel for those taxi drivers losing to Uber, or CD makers losing to digital downloads. That, among other reasons, is why I give to charity and why I support the free market. You're right that these folks can't instantly jump into a new career, but I want them to have the option of being able to do so. if we start saddling the economy with higher tariffs and killing competition, then it limits people's opportunities.

Further, there are lots and lots and lots of people who benefit from lower prices on things. As someone who lives on near-poverty wage, I really love low prices. If i was forced to pay higher prices, my standard of living would drop considerably. And that goes for millions, if not billions, of other people too

Benjamin R Kennedy writes:

"There is nothing unique about international competition."

Of course there is - there is a large difference between someone taking a job away from a person and giving it to a robot (automation) and someone taking a job away and giving it someone else (offshoring). The first doesn't violate any fairness norms in how people ought to treat each other, the second does. If I fired my employee to hire my lame nephew, we would not describe that as "competition", because competing to be the boss's nephew is not fair. This is nepotism. If I fire my employee to hire someone in an area where the prevailing wage is lower, that isn't "competition" either because it is unfair to expect someone to move across the ocean to keep their job.

I hear "but automation... but technology..." all the time. But no, just because the outcome is the same doesn't mean it is fair. Fairness is about norms in the way we treat each other. Norms are also completely in the eye of beholder, it is simply not the place of the economist to say what is and is not fair. That is the domain of the moral philosopher.

Jon Murphy writes:

@Benjamin Kennedy

"The first doesn't violate any fairness norms in how people ought to treat each other, the second does."

Doesn't it? Taxi drivers seem to think otherwise. As do manufacturers. Heck, ask the Luddites.

"If I fire my employee to hire someone in an area where the prevailing wage is lower, that isn't "competition" either because it is unfair to expect someone to move across the ocean to keep their job."

So? It's also "not fair" to ask someone to be a robot or move to a different state.

Again, people face competition all the time for all kinds of sources. There is nothing unique about international trade, and certainly nothing worth making everyone worse off so a few politically connected folks might be made better off.

Benjamin R Kennedy writes:
Doesn't it? Taxi drivers seem to think otherwise. As do manufacturers. Heck, ask the Luddites.

There is a reason why sewing machines and Uber are wildly popular, and there is also a reason why "Made in the USA" is popular. There is most definitely a double standard when it comes to replacing jobs with technology vs replacing jobs with people in other countries.

So? It's also "not fair" to ask someone to be a robot or move to a different state.

...

There is nothing unique about international trade

It's obviously different - Americans have obligations to other American citizens before foreigners. Asking someone to relocate from California to Texas is much much more fair than asking them to relocate to Mumbai. So, supporting "Made in the USA" is a reasonable position if your goal is to create sustainable patterns of trade in the United States. And yes, there is a trade-off of higher consumer prices. If you think that Americans have no special obligation to other Americans, or really don't care about the standards by which products are made, then unrestricted free trade is a perfectly reasonable position to take.

and certainly nothing worth making everyone worse off so a few politically connected folks might be made better off

Oh really? Pennsylvania steel towns are gutted because China is willing to ignore environmental protections, and the cost of living is maybe .1% lower. I'm sorry, but I don't buy it.

Jon Murphy writes:

@Benjamin Kennedy

"There is a reason why sewing machines and Uber are wildly popular, and there is also a reason why "Made in the USA" is popular."

Hm...I find this statement confusing. If "Made in the USA" were so popular, there'd be no need for tariffs and China would not be able to compete. This is the same objection I made when dwb made a similar comment. Revealed preferences suggests that, no, people actually do prefer to trade internationally.

"It's obviously different - Americans have obligations to other American citizens before foreigners."

Why?

"cost of living is maybe .1% lower."

It's actually in the neighborhood of 91.4%-96% lower (since the 1990's) (There are different ways of measuring this. I'm simply taking a basket of goods made with imported goods and comparing their 1994 prices to 2016. I'm not even adjusting for improved quality, which would make the number even higher).

Jon Murphy writes:

BTW, as I mentioned earlier, automation, not China, is the reason for the "gutting" in PA. China is just a scapegoat. And maybe that is the difference. It's just easier to blame a foreigner than a domestic or a robot for one's hardships.

Ryan B writes:

A few comments,
If you think Made in America is important, you should buy Made in America. It will cost you more on some products, on others, it won't. For people that don't have extra money, they should have the option to buy whatever costs less.
If you want everyone that produces products sold in the US to be held to US standards or higher, what about when you want to export products to countries that think they have higher standards than the US? Are you going to allow them to dictate how products are produced here? Who will decide which set of standards are better?
Consumers expect to be able to get anything they want whenever they want it. This is one of the benefits of international trade. Everyone has an opinion on trade policy based on what they view as their own best interests. A few look at it objectively.

Americans complain about not being able to compete with other countries because of being held to a higher standard but live in the richest country in the world and hold the highest paying jobs. Seems a bit contradictory ...

Benjamin R Kennedy writes:

"If "Made in the USA" were so popular, there'd be no need for tariffs and China would not be able to compete. "

Consumers purchase based on price and quality - and, ceteris paribus, prefer local goods versus foreign. Local goods are in fact necessarily less expensive due to shipping. Consumers don't object to international trade where there is true competitive advantage, or even true differences in quality. I have a PS4, not an XBox for a reason.

But, imagine the US slapped, for example, a 30% tax on local goods. Pretty unfair, right? That is what domestic produces are facing with the amount of local regulation.

If steel was killed by automation rather China, then why do we import steel from China rather than automate the production here? Automation was not the issue. You can see the historical rates of steel production around the world to see this.

My argument is not against trade, which I have said many times I am in favor of. My argument is against regulation (such as environmental regulation) that disadvantages local production as compared to foreign producers. And maybe the regulation is good - if so, then we should collectively accept the higher cost of that regulation rather then export the pollution to China and let our local towns decay.

"Why?"

Why do parents have obligations to children? Or friends to friends? This is a moral question with no answer that would ever satisfy you

dwb writes:

"If, indeed, voters decided the cost was no longer worth it, then why not simply "buy American?""

Because the voters in question are unemployed, out of the labor force, feeling declining income and the costs of adjustment are enormous.

It is really not a salve for their wounds to say that they can go buy cheaper foreign berries at Wal-Mart with their government disability check. At Wal-Mart, even the American flags are made in China.

They do not have enough income to escape from the trap. They do, however, vote.

Incidentally, "Buy American" has a large-scale coordination problem. Who is going to get that rolling?

Solving the coordination problem is easy - elect someone who promotes American goods.

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