Arguments Against International trade

In this video, we discuss some of the most common arguments against international trade. Does trade harm workers by reducing the number of jobs in the U.S.? Is it wrong to trade with countries that use child labor? Is it important to keep a certain number of jobs at home for national security reasons? Can strategic protectionism increase well-being in the U.S.? Join us as we discuss these common concerns. - See more at: http://mruniversity.com/courses/principles-economics-microeconomics/arguments-against-trade?

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

Today we're going to evaluate
some of the arguments

that one often hears
about limiting international trade.

International trade is
a controversial subject.

There are a lot of arguments
surrounding it.

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

But here are some
of the most common:

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

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

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

We need to keep certain key industries at
home because of beneficial spillovers onto

other sectors of the economy.
And we can increase US well-being, the

argument goes, with strategic trade
protectionism.

So we're going to evaluate, say a few
things about each one of these arguments.

Let's consider trade and jobs. What
happens when a tariff is lowered? Well

imports will increase, and there will be
fewer jobs in the import competing

industry. For example, if we have a tariff
on shoes and we reduce the tariff, we'll

have imports of more shoes from China and
from Vietnam, and that will mean fewer

jobs in the American shoe-producing
industry.

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

about losing those jobs in the American
industry. However, we want to see the

issue in a deeper way, in a more
fundamental way. And a key question to ask

is, "Why do people send us goods? Why
would workers in China, in Vietnam, work

long hours to send us shoes?" It's
certainly not from the kindness of their

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

They are working, they are producing in
order to consume. They are sending us

goods because they want goods in return.
They are not doing it out of the goodness

of their heart, but out of self-interest
as Adam Smith said. And that leads to a

fundamental insight about international
trade. Namely, we pay for our imports with

exports. When we import more, we will
ultimately export more because we pay for

our imports through our exports.

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

from import-competing industries to export
industries. And overall, wages increase on

average because of comparative advantage.
Because we pay for our imports with

exports, when we import more, we will
export more. Jobs will reduce in the

import-competing industries and increase
in the export industries.

Now, this process is not always easy.
Problems can occur when we lose jobs in

low-skill import-competing sectors and
gain jobs in high-skill export sectors.

Overall, when the United States imports
goods, we typically import goods produced

by low-skill, because America on average
is a high-skill economy, has high-skilled

workers on a world level. But we do have
some low-skill workers, and imports tend

to compete with the products produced by
low-skilled workers.

Everything will be fine if our education
system is working well, and if those

low-skill workers can increase their
skills and move to high-tech, or

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

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

put this in context, however. In a growing
economy, jobs are appearing and

disappearing all the time. Not just or
even fundamentally because of

international trade, but because of
changes in preferences and changes in

technology.
Let's take a look at that. It's important

when thinking about trade and jobs and
jobs in general that the American economy

succeeds precisely because jobs are being
created and destroyed all the time. Job

destruction is often a sign of progress
and growth. Think about Thomas Edison. He

destroyed the whaling industry with his
invention of the light bulb. CDs, some of

you may not even remember Compact Discs,
they destroyed jobs in the record

industry. MP3s destroyed jobs in the CD
industry. This is the way progress often

occurs. Employment and the standard living
overall keep rising over time, and the

reason they're rising is precisely that
old jobs are being destroyed, new jobs are

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

higher-paying jobs, higher wages. Overall
technology, trade, these benefit the US

economy.
Child labor is something which no one

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

happens when people are poor. Child labor
was common in 19th century Great Britain

and the United States. Child labor
declined in the developed world as people

got richer. Forces that reduced child
labor in the developed world are also at

work in the developing countries. As
countries become richer, child labor

declines.

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

children ages 10 to 14 in the labor force
decreases. So increases in real GDP reduce

the percent of children in the labor
force. The circles, by the way, are

proportional to the absolute number of
children in the labor force, so in China

for example, there are about 12 percent of
kids in the labor force, but because there

are so many Chinese children, that's a
large number of children in absolute

numbers.
Again the key here is really that economic

growth reduces child labor. So if you want
to reduce child labor, you want a country

to become rich. The question is, "Can one
accelerate this process by banning child

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

really refusing to trade with the poorest
of countries. Do we really want to do

that? Do we really want to say to poor
countries, "We're not going to trade with

you."
There are many opportunities here for

unintended consequences of laws which may
have been, tried to do a good thing, but

backfire. So for example, when India
banned child labor, one of the effects of

that was to reduce the wages of children
because now you have to hire them under

the table. Because their wages were lower,
the families were poorer, and because the

families were poorer, they had to rely
even more on child labor. So it is very

easy to create a policy which backfires.
It is not, in my view, a good idea to use

international trade as a weapon or as a
tool against child labor.

A much better idea would be to help poor
countries, would be to offer free

schooling in poor countries, to offer
lunches for schools in poor countries.

This increases the incentive to send the
children to school because then they are

fed. So there are lots of things we can do
to reduce child labor in poorer countries,

but to say to those countries, "We're not
going to trade with you because you're

poor and you're using child labor," just
exactly the same way we did in the 19th

century, that is really not in my view a
productive policy.

Trade and national security. Yeah, some
industries probably should be protected to

protect national security. The problem is
this argument is subject to great abuse.

Almost every industry can and does make
the claim that they're essential for

national security. So let's give some
examples. Vaccine production? Yes,

probably a good idea for us to have some
domestic capability. We don't always want

to buy our vaccines from abroad, just in
case. Angora goat fleece? Am I serious?

Yes. Believe it or not, we have protected
Angora goats with the argument that their

fleece is necessary to produce military
uniforms. Yep, some people think goats are

vital to national security. I'm not
kidding.

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

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

are especially important for a nation to
have a foothold in. "Biology, microbiology

is going to be the future, therefore we
need to have this type of industry." Or,

'Computers are the future, therefore we
need to have this type of industry." The

argument is that these industries create
spillovers for other industries. They

create learning, they create research,
they create workers, high-tech workers,

which spread out to other areas of the
economy and benefit the economy in ways

which go beyond the GDP produced by those
particular industries.

Ross Perot famously made this argument
when he said, "Producing computer chips is

better than potato chips."
In some ways this may be true, but it's

overall not a compelling argument. For
example, today most computer chips are

cheap, mass-produced products. They're not
something we really want to be producing

at all. They're not even produced with a
lot of labor. They're mostly produced in

big factories which don't actually make a
lot of money. Much better to design the

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

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

In 1990, Walmart contributed more to the
boom in productivity than Silicon Valley.

So it's always difficult to say exactly
which are the most important industries.

You wouldn't think that Walmart retail is
a hugely important industry, and yet,

Walmart is the world's largest firm and it
has done a huge amount to make the

American economy more productive. So no
one really knows which industries are the

ones with the really important spillovers,
and when we add in political economy, the

tendency for politics to often choose
based upon the wrong reasons, this

argument is really not very compelling.
Here's an argument which again works in

theory but is less likely to work in
practice. It's possible for a country to

use tariffs and quotas to get a larger
share of the gains from trade. The

argument here is that if you can limit or
tax exports, not tax imports, but tax

exports, then you can let domestic firms
act as a cartel, so it's a way of helping

domestic firms to be more like a monopoly,
to act like a cartel. So the government

plus the domestic firms put, creates a
tax, or limits exports in order to raise

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

the gains from trade.

It can work, especially if there are few
substitutes for US-produced goods. On the

other hand, if there are substitutes for
US-produced goods or if we push the price

of our goods up too high, and that creates
the substitutes, we may in the long run

really reduce our market. Moreover, these
arguments for strategic trade

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

country tries to do this, then world trade
as a whole will shrink and no country will

be better off. So in trying to grab up a
larger slice of the pie, we have to always

be worried about making the pie smaller.
Again, the argument works in theory. A

very clever government might be able to do
it, but in practice, this is really not a

very good reason for limiting trade.
So to sum up, restrictions on trade waste

resources by transferring production from
low-cost foreign producers to high-cost

domestic producers. Restrictions on trade
also prevent domestic consumers from

exploiting all of the gains from trade.
There are some good arguments for

restricting trade. Some arguments are
valid, but they're usually of limited

applicability. Overall, I think free trade
is a robust policy in the sense that it's a

policy which works well in most
circumstances and protectionism will work

well only in a limited number of
circumstances.

Thanks!

- [male] If you want to test yourself,
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