23. The Importer

0:00Chapter 23. The Importer. The International Ladies' Garment Workers Union, ILGWU, has recently launched an unusual, extensive and costly advertising campaign. For racist, jingoistic appeal, it is unparalleled. The theme of the campaign is that foreigners, dishonest and undeserving, are taking jobs away from Americans, honest, upstanding and forthright. Perhaps the most famous ad in the series is the one which depicts an American flag above the caption, Made in Japan. Another presents a picture of a baseball glove, with the caption, The Great Un-American Game.

0:46The accompanying copy explains that baseball gloves and American flags are imported. The raison d'etre we are told for these scathing attacks on imports is that they create unemployment in America. And on a superficial level, the argument seems plausible. After all, every American flag or baseball glove that could have been produced domestically but was instead imported, represents work that could have been produced by Americans. Certainly this means less employment for American workers than would otherwise be the case. If the argument was limited to this aspect, the ILGWU's case for the restriction, if not prohibition, of imports would be well made.

1:381. The argument, however, is fallacious, and the consequences to which it logically leads are clearly unsound. The premise which justifies protectionism on the national level also justifies it on the state level. We shall ignore the political impossibility, unconstitutionality, of one state setting up tariffs between it and other states. This is, after all, irrelevant to the economic argument of the anti-free trade ILGWU. Theoretically, any one state could justify its policy in exactly the same way that a nation can. For example, the state of Montana could bar imports from other states on the grounds that they represent labor which a Montanan could have been given, but was not.

2:31A Buy Montana program would then be in order. It would be just as illogical and unsound as the ILGWU's Buy American campaign. The argument, however, does not end at the state level. It can, with equal justification, be applied to cities. Consider the importation of a baseball glove into the city of Billings, Montana. The production of this item could have created employment for an inhabitant of Billings, but it did not. Rather, it created jobs, say, for the citizens of Roundup, Montana, where it was manufactured. The city fathers of Billings could take the ILGWU position and patriotically declare a moratorium on trade between the citizens of their city and the foreign economic aggressors in Roundup.

3:26This tariff, like those of the larger political subdivisions, would be designed to save the jobs of the citizens. But there is no logical reason to halt the process at the city level. The ILGWU thesis can be logically extended to neighborhoods in billings, or to streets within neighborhoods. Buy Elm Street, or stop exporting jobs to Maple Street, could become rallying cries for the protectionists. Likewise the inhabitants of any one block on Elm Street could turn on their neighbors on another block along the street. And even there the argument would not stop. We would have to conclude that it applies even to individuals.

4:12For clearly every time an individual makes a purchase he is forgoing the manufacture of it himself. Every time he buys shoes, a pair of pants, a baseball glove or a flag, he is creating Closing employment opportunities for someone else, and thereby foreclosing those of his own. Thus the internal logic of the ILGWU's protectionist argument leads to an insistence upon absolute self-sufficiency, to a total economic interest in foregoing trade with all other people, and self-manufacture of all items necessary for well-being. Clearly, such a view is absurd.

4:57The entire fabric of civilization rests upon mutual support, cooperation and trade between people. To advocate the cessation of all trade is nonsense, and yet it follows ineluctably from the protectionist position. If the argument for the prohibition of trade at the national level is accepted, there is There is no logical stopping place at the level of the state, the city, the neighborhood, the street or the block. The only stopping place is the individual, because the individual is the smallest possible unit. Premises which lead ineluctably to an absurd conclusion are themselves absurd. Thus, however convincing the protectionist argument might seem on the surface, there There is something terribly wrong with it.

5:50Specifically, the essence of the fallacy is a misunderstanding of the nature and function of free trade. Trade, we believe, outstrips fire, the wheel and the opposable thumb in explaining man's superiority over the animals, for it and it alone makes specialization and the division of labor possible. In their daily lives, people consume virtually hundreds of thousands of different items every year. If not for specialization, each person would be forced to manufacture these items by himself. This would be an impossible task. As a matter of fact, people would not even be able to produce enough food for themselves, let alone produce all other goods which they might desire.

6:43The production of food involves the production of many other things, including capital equipment. The production of these things would involve every person in the manufacture of all the items that are now distributed over an entire population. It is quite true that without fire, the wheel and opposable thumbs, mankind would find itself in a sorry state indeed. But without specialization, since it would be impossible for virtually anyone to even feed himself, everyone would be faced with the prospect of starvation and death. With specialization, each person can limit his productive efforts to those areas he performs best in.

7:29But trade is the linchpin that holds this system together. Without the possibility of trade, people would amass enormous quantities of unusable safety pins, paper clips, or whatever. Without the possibility of trade, the incentive for specialization and the division of labor would be gone. Everyone would be forced back into the suicidal attempt to become self-sufficient. is sufficient. Two. Another significant reason for rejecting the protectionist argument is that it fails to take exports into account. It is true that for every American flag or baseball glove imported into this country, some domestic jobs are lost.

8:17But what the protectionists conveniently forget is that for every job lost in a domestic industry Let us assume that the states of Vermont and Florida are self-sufficient. Both produce, among other things, maple syrup and oranges. Because of the differing climatic conditions, maple syrup is scarce and expensive in Florida, and oranges are scarce and expensive in Vermont. And oranges have to be grown in greenhouses, and Florida maple syrup comes from maple trees grown in large refrigerators. What would happen if trade were suddenly begun between the two states?

9:06Vermont would, of course, begin to import oranges, and Florida would import maple syrup. Were the ILGWU or any other protectionist pressure group on the scene, it would quickly point out that importing maple syrup into Florida would ruin that state's small maple syrup industry, and the importation of oranges into Vermont would ruin the orange industry there. The protectionists would ignore the fact that jobs would be gained in Florida in the orange industry and in Vermont in the maple syrup industry. They would focus our attention on the jobs lost due to imports and would completely ignore the jobs gained because of exports.

9:53It is of course true that jobs will be lost in Vermont in the orange industry and in the maple syrup industry in Florida, but it is no less true that jobs will increase in the maple syrup industry of Vermont and in the orange industry in Florida. There may well be fewer jobs available in both industries in both states, since orange growing can be done with less manpower in Florida than in Vermont, and maple syrup can be manufactured more efficiently in Vermont than in Florida. But far from being a bad effect, this is one of the gains of trade. The workers freed from these industries become available for projects that could not be undertaken before.

10:43For example, if a modern system of transportation did not exist, and industry had to rely on individuals carrying 100-pound loads on their backs, hundreds and thousands of people would have to be withdrawn from other fields to fill the needs of the transport industry. Thus, many projects and industries would have to be abandoned. With modern methods, fewer workers are needed. The extra workers are thus free to move into other areas, with all the consequent benefits to society. Whether or not there will be fewer jobs in the orange and maple syrup industries in Vermont and Florida in the final analysis depends upon the way the people wish to spend their newfound income.

11:33It is only if these people decide to spend all the newfound income on extra oranges and and Maple Syrup that the total employment in these two industries will not change after trade begins. Then the same number of workers will produce more maple syrup and oranges. More likely, though, the people will decide to spend some of their newfound income in these two goods and the rest on other goods. In that case, employment in these two areas will decrease somewhat, although this decreased workforce may still be able to produce more than before. But employment will increase in the industries whose products are most wanted by the consumers.

12:21Viewed in its totality then, the opening of trade between the two regions benefits both of them. Although employment will fall in the industries supplanted by imports, it will rise in export industries and in the new industries developing because of the availability of workers. But the protectionists are not entirely wrong. Trade does create problems in the industries supplanted, and some workers will suffer in the short run. There will, for example, no longer be a brisk demand for Vermonters who specialize in the production of oranges, or for Floridians who produce maple syrup. There will be jobs for these people in other industries, but since they will have to enter these fields as beginners, they will probably have to accept a salary cut.

13:15They may also need considerable retraining. So the question arises who is to pay for the retraining and who is to bear the loss associated with the lower salaries in the new industry. The protectionists, of course, would advocate that the government or the capitalists should pick up the tab. But this is not justified. First, it should be noted that only skilled workers face a cut in wages because of a move to a new industry. The others will enter the new industry on much the same level as that in which they functioned in the old. Instead of sweeping the floors of a maple syrup plant, they will sweep the floors of perhaps a textile factory.

14:00The skilled worker, by contrast, has specific skills, which are of greater use in one industry than in another. He is not equally useful in the new industry, and cannot command the same salary. Second, it should be understood that the skilled worker is an investor, just as the capitalist. The capitalist invests in material things, and the worker invests in his skills. All investors have one thing in common, and that is that the returns on their investment are uncertain. In fact, the greater the risk involved, the more the investor may gain. In the example given, part of the reason skilled orange growers in Vermont and skilled maple syrup producers in Florida were earning high salaries before the advent of trade between the states was the risk that someday such trade might begin.

15:00Should the skilled orange growers, now that they must leave the industry in which they were highly paid specialists, be subsidized for retraining and for the salary cuts they they must accept in the interim? Or should they bear the expenses and losses themselves? It seems clear that any subsidy would be an attempt to maintain the skilled worker in the style to which he had become accustomed, without asking him to bear any of the risk that made such a high standard of living possible in the first place. In addition, such a subsidy, coming out of tax revenues which are paid mainly by the 3. Now consider a situation which, on the surface, seems to be the protectionist's nightmare come true. Imagine that there is one country which can out-produce the others in all industries.

16:05Suppose Japan, the ILGWU's bugaboo, can produce everything more efficiently than America. Not only flags, baseball gloves, radios, televisions, cars and tape recorders, but everything. Would the ILGWU's contention that we should forcibly restrict trade be valid then? The answer is that it is never justifiable to restrict trade between two consenting adults, or even nations of consenting adults, certainly not on the ground that the trade will harm one of them. For if one party to the trade thought it was harmful, he would simply refuse it. Prohibition would not be needed.

16:51And if both parties consent to the trade, what right would any third party have to prohibit it? would be tantamount to a denial of the adulthood of one or both of the trading parties, by treating them as juveniles who did not have the sense or the right to enter into contractual obligations. In spite of all such moral arguments, the protectionists would still want to prohibit trade on the grounds that a disaster would follow if it were not done. Let us trace the situation which would exist between the United States and Japan under the nightmare conditions that have been stipulated. Supposedly, Japan would export goods and services without importing anything from the United States.

17:42This would bring prosperity to Japanese industry and depression to our own. Eventually, Japan would supply all our needs, and as there would be no exports to counter This description may sound a bit absurd, yet the history of protectionism in the United States and the success of the ILGWU campaign indicate that such nightmares have more currency than might be imagined. Perhaps this horrid dream prevails because it is easier to shrink back in horror from it than to confront it head on.

18:31In contemplating this nightmare, the question arises as to what the Americans will use to buy the Japanese goods with. They cannot use gold or any of the other precious monetary metals because gold is itself a commodity. If Americans used gold to pay for the imports, they would, in effect, be exporting gold. This would counter the loss of jobs due to imports, and we would be back to the prototypical situation. Americans might lose jobs in radio and television, but gain them in gold mining. The American economy would resemble that of South Africa, which pays for its imports largely with exports of gold.

19:16The only other means of payment would be in the form of United States dollars, but what would the Japanese do with dollars? There are only three possibilities. They could return these dollars to us as payments for our exports to them, they could keep these dollars, or they could spend them on the produce of countries other than the United States. If they opted for the last alternative, the countries with whom they traded would have the same three options, spending in the United States, hoarding, or spending in other countries, and so on for the countries these nations trade with in turn. If we divide the world into two parts, the United States and all the other countries, we can see that the three possibilities reduce to two.

20:06Either the paper money we send out comes back to buy our goods, or it does not. Assume that the worst possibility happens, that none of the money comes back to stimulate our exports. Far from being a disaster, as the protectionists allege, this would actually be an unmitigated blessing. The paper dollars we would be sending abroad would be just that, paper, worthless paper, And we would not even have to waste much paper. We would simply print dollars with extra zeros added on. So, in this ILGWU nightmare, Japan would be sending us the products of their industry, and we would be sending Japan nothing but pieces of green paper with many zeros printed on them. It would be a prime example of a giveaway. The refusal of foreigners to To cash in their dollars would amount to a large gift to the United States.

21:10We would receive the products, and they would receive worthless paper. Contrary to the fantasies of the ILGWU and other protectionist groups, the recipients of large gifts do not usually suffer untold agonies. Israel has received reparations from Germany for many years, and gifts from the United States without any obvious deleterious effects. The recipient country does not have to discontinue its own production, for the desires of any populace are infinite. If the Japanese gave a Toyota car to every individual in the United States, they would soon want two, three or many Toyotas. Clearly it is inconceivable for the Japanese or anyone else to be so self-sacrificing as is to even try to satiate all the desires of the American people without recompense.

22:08Yet only if they succeeded in this impossible task would domestic industries collapse, because then everyone would have all he wanted of everything. But in this imaginary case, the collapse of domestic industry would be something to be praised, not condemned. People in the United States would discontinue all production only if they felt they had enough material possessions and would continue to have enough in the future. Such a situation is not only not horrible, it would be welcomed by Americans as the closest thing to a utopia. In reality, of course, the Japanese and others would not be content to pile up the dollars we gave them as payment for their products.

22:58As soon as their dollar balances went above the level they chose, they would turn the dollars in, thereby stimulating export manufacturing in the United States. They might buy American goods and thus directly stimulate American exports, or they might demand gold for their dollars, attack the dollar, necessitating a devaluation which would make American exports more competitive in the world markets. Either way, the dollars would come back to the United States, and our domestic export industries would be stimulated. The employment lost due to imports would be countered by increases elsewhere, just as in the Vermont, Florida case.

23:45Why would the Japanese trade with a country whose manufacturing was less efficient than their own? Because of the difference between what is called absolute advantage and comparative advantage. Trade takes place between two parties, countries, states, cities, towns, neighborhoods, streets, persons, not in accordance with their absolute ability to produce, but in accordance with their relative ability. The classical example is that of the best lawyer in town who is also the best typist. This person has an absolute advantage over his secretary in the provision of both legal and typing services. Nevertheless, the lawyer decides to specialize in the profession in which he has a comparative advantage, the law.

24:39For suppose he is one hundred times as good a lawyer as his secretary, but only twice as efficient a typist. It is more advantageous for him to pursue the legal profession and to hire, trade with, a typist. The secretary has a comparative advantage in typing. She has only 1% of the effectiveness in law compared to her employer, but she is fully one-half as good as he is typing. She is able to earn a living through trade even though she is is poorer at both skills. The Japan we have been imagining has an absolute advantage in the production of all goods. But when the Japanese return our dollars to us in return for our goods, America will export the goods in which it has a comparative advantage.

25:34If we are half as good as the Japanese in the production of wheat, but only one quarter Thus, no matter what situation is envisioned, even the most extreme, the protectionist argument proves inadequate. But because of the emotional potency of its appeal, importers have long been vilified. For their persistence in a task which is inherently helpful, importers should be looked upon as the great benefactors they are.