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's 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
U.S. 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

and 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 hearts,

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
of 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 U.S. 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 trying
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 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 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 U.S.-produced goods.

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

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