With the presidential campaign of Donald Trump comes much discussion about trade with foreign nations. A common theme is the notion that trade needs to be restricted, or at least heavily taxed, in order to protect domestic production. The line of thinking goes that if foreign companies are able to compete on even footing with American companies, their access to cheaper labor and fewer environmental regulations gives them an unfair advantage. This advantage could harm domestic businesses and cost American jobs. This fact is nearly undeniable. Jobs in manufacturing sectors competing with foreign producers will undoubtedly be displaced by these cheaper alternatives.
However, the impulse to restrict and tax imports is misguided. The French economist, Frederic Bastiat, demonstrated the absurdity of domestic protectionism in a satirical piece called The Candlemaker’s Petition. In it, the producers of light-emitting goods lobby the government for special laws restricting their unfair competitor, the sun. Another Bastiat work, That Which is Seen and That Which is Not Seen, presents the idea that the direct and obvious consequences of a policy or action are not the complete picture, and sometimes, the secondary and tertiary effects can outweigh the initial results. The effects of cheap imports is one of these cases. The increased access to goods for all consumers outweighs the loss of employment.
Let us imagine there is a giant magical box in the center of the United States. This magical box creates food completely from the ether. This food comes at no cost to the consumer and completely displaces the need to produce food for American consumption. This will surely eliminate the jobs of farmers, fishermen, and others involved in the production of food. Given that, however, what reasonable person would argue that truly free food for the populace is not a boon to the economy despite the harm it may cause to those from that particular industry?
One day, the magic box changes. It will now only produce food if a small amount of money is thrown inside, but the money required is only a percentage of the current market price. This would still represent a much smaller dedication of resources toward the acquisition of sustenance. Would this still not denote an improvement to people’s lives?
Suddenly, the box begins to fly. It takes to the sky and lands in another country. It still produces the cheap food, but it must be shipped to the US. The price is still dramatically lower than real-world prices, but it has increased slightly due to shipping costs. At this point, does the magic box not continue to help the American people?
At some point, the people in the new country learn that if they add raw materials to the box, it will create goods other than just food. If they add metal, it will create vehicles. The addition of wood produces furniture. When they add oil, the box spits out toys. The people of this country then ship the new goods to the United States. Considering they are using their own raw materials, labor, and energy, they charge enough for the new goods to recoup their costs and retain a small profit. Keep in mind, the price the Americans pay for the new products is still far less than it would cost to produce it themselves.
Eventually, the magic box runs out of magic and is no longer able to create the goods the Americans have become accustomed to. Fortunately, the people who were sending goods to the U.S. realize that by redirecting the resources previously fed to the box toward manufacturing, they could manufacture the goods for a price very similar to that which the magic box required. They are able to continue supplying the United States with the same goods as the magic box for the same price they had always charged.
Because of this, the United States has large amounts of resources, both material and labor, that would otherwise be dedicated toward the production of food, vehicles, furniture, and toys, free to be directed toward the creation of other goods. Would this not represent a large improvement in overall wealth of the United States?
Now, at what point during the parable of the magic box did the U.S. economy not benefit from the access to cheap goods? At what point did the comparative advantage of the exporting country not increase the wealth of the United States?
The introduction of a new stream of goods may appear to hurt the individual sectors of the economy that produce those goods, but one must look at what is not seen. While few are involved in any given field of production, all are consumers. The increased access to goods is the source of true wealth and, when applied economy-wide, it will more than compensate for any localized harm.