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♪ [music] ♪

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- [Alex] In our previous videos, 
we explained the benefits of trade.

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Today we're going to evaluate 
some of the arguments

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that one often hears 
about limiting international trade.

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International trade is 
a controversial subject.

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There's a lot of arguments
surrounding it.

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We're not going to go through all 
of them by any means.

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But here are some 
of the most common:

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That trade reduces the number 
of jobs in the United States.

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That it's wrong to trade 
with countries that use child labor.

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That we need to keep certain jobs 
at home for national security.

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We need to keep certain 
key industries at home

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because of beneficial spillovers 
onto other sectors of the economy.

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And we can increase 
U.S. well-being, the argument goes,

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with strategic trade protectionism.

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So we're going to evaluate, say,

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a few things about each one 
of these arguments.

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Let's consider trade and jobs.

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What happens when 
a tariff is lowered?

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Well, imports will increase, 
and there will be fewer jobs

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in the import competing industry.

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For example, if we have a tariff
on shoes and we reduce the tariff,

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we'll have imports of more shoes 
from China and from Vietnam,

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and that will mean fewer jobs

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in the American 
shoe-producing industry.

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That's what people see when 
they think about reducing a tariff.

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They're worried about losing those 
jobs in the American industry.

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However, we want to see 
the issue in a deeper way,

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in a more fundamental way,
and a key question to ask is,

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"Why do people send us goods? 
Why would workers in China

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and Vietnam work long hours 
to send us shoes?"

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It's certainly not from 
the kindness of their heart.

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Ultimately, they want goods 
in return, goods or services.

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They are working -- they are 
producing in order to consume.

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They are sending us goods 
because they want goods in return.

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They are not doing it out 
of the goodness of their hearts,

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but out of self-interest
as Adam Smith said.

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And that leads to a fundamental 
insight about international trade.

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Namely, we pay 
for our imports with exports.

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When we import more, 
we will ultimately export more

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because we pay for our imports 
through our exports.

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What this means is that trade 
doesn't destroy jobs overall.

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Trade moves jobs 
from import-competing industries

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to export industries, and overall, 
wages increase on average

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because of comparative advantage.

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Because we pay 
for our imports with exports,

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when we import more, 
we will export more.

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Jobs will reduce in the import
competing industries and increase

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in the export industries.

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Now, this process is 
not always easy.

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Problems can occur when we lose
jobs in low-skill import-competing

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sectors and gain jobs 
in high-skill export sectors.

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Overall, when the United States 
imports goods, we typically

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import goods produced by low-skill,
because America on average

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is a high-skill economy, 
has high-skilled workers

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on a world level, but we do have
some low-skill workers,

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and imports tend to compete 
with the products

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produced by low-skilled workers.

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Everything will be fine 
if our education system is

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working well, and if those 
low-skill workers can increase

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their skills and move 
to high-tech --

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or high-skill, not necessarily 
high-tech -- high-skill sectors.

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Of course, that's a big "if," 
and the transition can be difficult.

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We have to put this 
in context, however.

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In a growing economy, jobs are 
appearing and disappearing

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all the time, not just 
or even fundamentally because

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of international trade, 
but because of changes

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in preferences 
and changes in technology.

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Let's take a look at that.

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It's important when thinking

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about trade and jobs 
and jobs in general

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that the American economy succeeds 
precisely because jobs are being

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created and destroyed 
all the time.

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Job destruction is often a sign 
of progress and growth.

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Think about Thomas Edison.

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He destroyed the whaling industry 
with his invention of the light bulb.

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CDs -- some of you may not even 
remember compact discs --

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they destroyed jobs 
in the record industry.

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MP3s destroyed jobs 
in the CD industry.

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This is the way progress 
often occurs.

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Employment and the standard 
of living overall keep rising

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over time, and the reason they're 
rising is precisely that old jobs

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are being destroyed, 
new jobs are being created.

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Overall, in the churn,
there's a trend towards richer jobs,

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higher-paying jobs, higher wages.

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Overall technology, trade, 
these benefit the U.S. economy.

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Child labor is something 
which no one wants,

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but it's important to understand
that child labor is something

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which happens when people are poor.

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Child labor was common 
in 19th century Great Britain

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and the United States.

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Child labor declined 
in the developed world

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as people got richer.

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Forces that reduced child labor 
in the developed world are also

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at work in the developing countries.

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As countries become richer, 
child labor declines.

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What this graph shows is that 
as real GDP per capita increases,

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the percent of children ages 10 
to 14 in the labor force decreases.

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So increases in real GDP reduce

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the percent of children 
in the labor force.

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The circles, by the way, are 
proportional to the absolute number

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of children in the labor force, 
so in China, for example,

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there are about 12 percent 
of kids in the labor force,

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but because there are so many 
Chinese children, that's

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a large number of children 
in absolute numbers.

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Again the key here is really

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that economic growth 
reduces child labor.

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So if you want to reduce child labor 
you want a country to become rich.

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The question is, "Can one 
accelerate this process by banning

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child labor or by refusing to trade 
with countries that use child labor?"

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That's really refusing to trade 
with the poorest of countries.

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Do we really want to do that?

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Do we really want 
to say to poor countries,

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"We're not going to trade with you."

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There are many opportunities 
here for unintended consequences

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of laws which may have been trying 
to do a good thing but backfire.

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So, for example, when India
banned child labor,

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one of the effects of that was 
to reduce the wages of children

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because now you have 
to hire them under the table.

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Because their wages were lower,
the families were poorer,

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and because the families 
were poorer,

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they had to rely 
even more on child labor.

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So it is very easy to create 
a policy which backfires.

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It is not, in my view, a good idea 
to use international trade

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as a weapon or as a tool 
against child labor.

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A much better idea would be 
to help poor countries,

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would be to offer free schooling 
in poor countries,

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to offer lunches for schools 
in poor countries.

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This increases the incentive 
to send the children to school

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because then they are fed.

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So there are lots of things we can 
do to reduce child labor

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in poorer countries,
but to say to those countries,

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"We're not going to trade with you
because you're poor

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and you're using child labor
just exactly the same way

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we did in the 19th century."

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That is really not in my view
a productive policy.

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Trade and national security.
Yeah, some industries probably

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should be protected 
to protect national security.

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The problem is this argument 
is subject to great abuse.

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Almost every industry can 
and does make the claim

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that they're essential 
for national security.

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So let's give some examples. 
Vaccine production?

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Yes, probably a good idea for us 
to have some domestic capability.

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We don't always want to buy our 
vaccines from abroad, just in case.

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Angora goat fleece? Am I serious?

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Yes. Believe it or not, 
we have protected Angora goats

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with the argument 
that their fleece is necessary

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to produce military uniforms.

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Yep, some people think goats 
are vital to national security.

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I'm not kidding.

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The key industries argument is very
popular among the high-tech crowd.

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The argument is, is that there are 
some industries, which for a variety

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of reasons, are especially important 
for a nation to have a foothold in.

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"Biology, microbiology is going 
to be the future,

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therefore we need 
to have this type of industry."

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Or, "Computers are the future,

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therefore we need to have 
this type of industry."

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The argument is that 
these industries create spillovers

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for other industries.

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They create learning, they create 
research, they create workers,

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high-tech workers, which spread out 
to other areas of the economy

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and benefit the economy in ways
which go beyond the GDP

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produced by those
particular industries.

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Ross Perot famously made 
this argument when he said,

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"Producing computer chips is
better than potato chips."

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In some ways this may be true,

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but it's overall not 
a compelling argument.

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For example, today 
most computer chips are

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cheap, mass-produced products.

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They're not something we really 
want to be producing at all.

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They're not even produced 
with a lot of labor.

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They're mostly produced 
in big factories which don't

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actually make lot of money.

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Much better to design the product
the way Apple does,

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making lots of profit, 
than to buy the chips which Apple

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uses in its iPhones, which don't 
make a lot of money at all.

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In 1990, Walmart contributed 
more to the boom in productivity

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than Silicon Valley.

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So it's always difficult 
to say exactly which are

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the most important industries.

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You wouldn't think 
that Walmart retail is

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a hugely important industry,
and yet, Walmart is

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the world's largest firm,
and it has done a huge amount

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to make the American economy 
more productive.

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So no one really knows 
which industries are the ones

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with the really important 
spillovers, and when we add

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in political economy, the tendency 
for politics to often choose

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based upon the wrong reasons --

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this argument is really 
not very compelling.

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Here's an argument 
which again works in theory,

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but is less likely 
to work in practice.

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It's possible for a country 
to use tariffs and quotas

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to get a larger share 
of the gains from trade.

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The argument here is that 
if you can limit or tax exports,

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not tax imports, but tax exports,

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then you can let domestic firms
act as a cartel,

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so it's a way of helping 
domestic firms to be more

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like a monopoly, 
to act like a cartel.

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So the government 
plus the domestic firms put --

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creates a tax, or limits exports, 
in order to raise the price

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of those exports on world markets 
and in order to grab up

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more of the gains from trade.

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It can work, especially 
if there are few substitutes

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for U.S.-produced goods.

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On the other hand, if there are 
substitutes for U.S.-produced goods,

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or if we push the price
of our goods up too high,

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and that creates the substitutes, 
we may in the long run

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really reduce our market.

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Moreover, these arguments 
for strategic trade protectionism

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are not such a great idea 
if other countries can retaliate.

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If every country tries to do this, 
then world trade as a whole will

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shrink and no country 
will be better off.

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So in trying to grab up 
a larger slice of the pie,

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we have to always be worried
about making the pie smaller.

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Again, the argument works in theory.

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A very clever government might 
be able to do it, but in practice,

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this is really not a very good 
reason for limiting trade.


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So to sum up, restrictions 
on trade waste resources

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by transferring production 
from low-cost foreign producers

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to high-cost domestic producers.

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Restrictions on trade
also prevent domestic consumers

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from exploiting all 
of the gains from trade.

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There are some good arguments 
for restricting trade.

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Some arguments are
valid, but they're usually

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of limited applicability.

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Overall, I think free trade is 
a robust policy in the sense

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of it's a policy which works 
well in most circumstances,

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and protectionism will work well

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only in a limited number 
of circumstances.

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Thanks!

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- [Narrator] If you want to test 
yourself, click "Practice Questions."

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Or, if you're ready move on, 
just click "Next Video."

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♪ [music] ♪