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
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,

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

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.

[ ] 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.

[ ] 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.

[ ] 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!

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