Five Most Common Myths about International Trade

0:00Okay, so what I'm technically talking to you about today is the five most common myths of international trade. These aren't going to be arranged in terms of the most common, but I think the five, as I go through them, you'll agree, these are things that often come to mind when the common person talks about international trade. And the relevance, of course, to this topic of imperialism is that once you agree that free trade and the government just standing back and when it comes to economic matters between different groups of people, once you agree that that would lead to disaster and impoverishment and so the government certainly has a role to protect our jobs, to promote our economic growth, to regulate trade when it comes to these insidious foreigners, that sort of mentality pretty soon leads to more aggressive tactics once you grant the government that freedom. So to the extent that those views are just plain wrong, let alone immoral and violations of abstract rights, it's worthwhile for us to go over

0:57So the first myth, it's a pretty simple one, we'll get through it very quickly, is just that right now we have free trade. I think a lot of people believe that President Bush is for free trade, and therefore to the extent that you think the economy is in trouble right now, it's because of free trade. Paul Craig Roberts has been really on the bandwagon for this type of view, and he'll say things, he'll cite all these statistics to show, and I'm not putting words in his mouth, we're going to be a third world nation in 20 years and it's because of President Bush's free trade policies. So it's hard to know where to begin with a statement or a claim like that. So for one thing the statistics a lot of them are misleading that I don't think the situation is nearly as bad. A second thing is we don't actually have free trade and a third problem is if we did have free trade it wouldn't be the cause of those problems.

1:48So there's like a triple negative involved so I think that on net means he's still wrong. Another way to look at it, people talk about NAFTA. I believe NAFTA is literally that document was over a thousand pages long. If it were really a free trade document, if it were just going to say the US and Mexico will have lower tariffs, forget about actually having free trade, but if it were just going to really roll back government, get government off our backs, government is the problem, not the solution, but the Republicans are going to bring us right, to bring us right, you wouldn't think that document would be over a thousand pages long. So it's really hard to argue with these people because the politicians that are allegedly on your side as a free trader, they talk the talk and it's hard to say, okay actually no I'm for free trade but I'm against the free trade agreement because it's not free trade.

2:40And so it gets really difficult to, and so for example if someone is against NAFTA because Because it destroys jobs, you have to say, well, you might be right, I'm not sure, but it's not free trade that's doing it. So it's really difficult, and if the politicians would just stop lying, it would make our jobs so much easier. All right, the next myth I'd like to address is a very common one that trade deficits are bad. You hear this all the time. I don't know what the reason is. An economist one time said that the single most difficult thing to teach undergraduates is the benefits of free trade and why protectionism is bad and I found that to be the case when I was teaching at Hillsdale I in my in my macro classes would just hammer for weeks as to all the different reasons the free trade is good all the things that are just crazy about protectionism you know listing nine different ways to see how

3:31protectionism is silly and then on the test you know to the point where the students were just bored out of their minds and you know yeah we get it we get it let's go on and then on the test you know this is an exercise to see who was Paying attention, I'd ask him to calculate the deficit. I'd say, what a question. Suppose that Americans buy a thousand cars from Japan at $10,000 each, and the Japanese buy so many TVs from us, or vice versa. What would be the trade deficit or surplus? And one of my students put, we would have a $10 billion trade deficit with Japan, period, sucks, exclamation point. And so, for one thing, that wasn't a complete sentence, so I had to take points off of that. But you see what I'm saying. The Theory of Money and Credit

4:42So all it means if you have a trade deficit is that the group that you're talking about are buying in terms of dollar expenditures or whatever the monetary unit is, that number in terms of their expenditures on the other group's goods is higher than their expenditures on your goods. But the thing that's tricky is you restrict it to certain types of expenditures. In some cases it's just on merchandise goods, not even services, which is particularly strange. And then in other measures when they talk about what's our trade deficit with Japan, they'll include the trading of services also. So the idea is if we have a trade deficit with some country, that means that we're buying more of their goods and services than they are of ours. But again, it's narrowly defined.

5:29And so, again, there's all sorts of ways to see why that's sort of an arbitrary, meaningless statistic. One way I try to bring the point home is to say, unless you're running your own business and you have all sorts of different paying customers, if you're just working for some company, I bet that you have a huge trade surplus with the city in which your job is located and that you have a trade deficit with every other city in the world, all right? The theory is that if you, for example, occasionally go on vacation to a neighboring state, probably you have a huge trade deficit with that state, meaning you buy more goods and services from businesses located within those geographical boundaries than they buy of your services, whatever your job is, whereas you probably have a huge trade surplus with the city in which you live because that's where your employer is, and so if every month, for example, you calculate and say, okay, I got this much of people buying my services who live in this region, namely your employer,

6:24Let me add up how much money I spent on merchants in this city and probably the number you got paid from your employer would be bigger than what you paid out and so you'd have a trade surplus with that city, you'd do the same calculation with other neighboring regions and you would have a trade deficit with them because more money is flowing out to them than they're flowing into your wallet and so you're going to go bankrupt, right? You better start washing dishes every time you go to a restaurant outside of your city because otherwise you've got to get rid of these trade deficits with the neighboring town. So if you start thinking about it like that, you say, It would be silly to worry about trade deficits with various regions on an individual level, but that's all the trade deficit is when it comes to national levels, which is you take those calculations for each person in the U.S. and add them all up, and then compare it to, say, the Japanese and add all those numbers up, and the net is the trade deficit vis-a-vis Japan.

7:14OK, so that's one way to see it. Now, a sophisticated critic could come back and say, OK, but there's a flaw in your reasoning there, because chances are, unless you really are going bankrupt, you have a big enough trade surplus with your employer so that it balances out, and so on net your wealth is growing. but again that's you got to be careful because here the conventional trade statistics they only look at certain things so for example just to give you an example to show why they could be misleading let's say an American entrepreneur wants to start a new business and he let's say it's going to be he needs to buy an office and equip it with computers and so on and all the plugs and keyboards and everything that you need the office equipment lighting and so forth that you need copy machines for a new office and let's suppose he needs to raise some capital for that and so somebody in Japan has saved up money and wants to invest and so the agreement they reach is he says oh the American entrepreneur says all right if you lend me you know he's got yen initially he converts into dollars you lend me a hundred thousand dollars to start my business I'm going to use that to buy all sorts of office equipment maybe some of which he's buying from Japanese producers and then in exchange you will own

8:30Let's say 50% of my company, all right? So you're not actually getting anything tangible for me today, I'm giving you stock certificates or I'm giving you some sort of agreement that says you'll get 50% of any future net income that this firm generates. All right, so that transaction, once all is said and done, once he gets the money and then uses it to buy office equipment, some of which is from Japan, that would have increased the American trade deficit with Japan because if you think about it, there would have been, if you stand back and look at that, what would have happened, There would have been copy machines and computers flowing across the ocean from Japan to the United States, and there wouldn't have been any Japanese people buying U.S. products. And so they'd say, oh man, these Americans, these profligate Americans are crazy, they're just getting a wash in debt here, that they're just buying goods today in promising away future earnings to pay for it.

9:22So that's, whereas if you're looking at the individual transaction, it doesn't seem that that's actually very short-sighted, it actually seems that's productive and that's what we All right, now having said that, it doesn't mean anytime there's a trade deficit that that's a good thing and I'm not saying that Americans shouldn't save more. I think probably they should in terms of if I want to be paternalistic and give people free advice that's worth the price that I'm charging for it. Yeah, I would say you probably should save more, you know, but it's not that a trade deficit per se is a signal of something bad. One last observation on trade deficits to try to see that is that if you look at, if you go to these websites like FRED, the St. Louis Fed website or these other, the BEA, and you look at the trade deficit over time and you see the graph from your view, it looks like this, and a lot of times if you're familiar with these economic charts, they have columns that are shaded and then it'll say in the legend, you know, shaded regions indicate recession as defined by the BEA or whatever. And if you look at the trade

10:23Trade Deficit, that number, the line, typically goes down in those shaded regions and goes up when it's not shaded. So what that means is the trade deficit historically drops during recessions and rises during growth. And not only is that sort of irrelevant, it's actually that makes sense because what happens for a sort of capital-intensive country like the United States is when our economy is booming, when people feel like they have more disposable Income and they're willing to make more purchases naturally that's what you would expect is that we buy more manufactured goods and services consumption services from the rest of the world while they're investing more in the United States right that happens during periods of growth when there's a recession people are afraid to spend that's when we buy less from the rest of the world and so the trade deficit drops okay so it's not really that the trade deficit is harmless from a certain point of view at least for capital rich countries a trade

11:18Trade deficit might actually go hand-in-hand with economic growth. A lot of, I think, the reason that the trade deficit is considered to be a bad thing is just the term, deficit. But a trade deficit, the way these accounts are calculated, is equivalent to a capital surplus, a capital account surplus, a way to see it. It's easier if you think about it in terms of gold, because with different currencies changing against each other, that's one more thing you got to keep track of. Just imagine the world used gold, and foreigners wanted to invest more in U.S. companies than we wanted to invest in foreign companies on net. Well, what would that mean? That would mean more gold was flowing in than flowing out in terms of investment. And so that means Americans, if they wanted to, could use that gold to buy more manufactured goods and services from the rest of the world.

12:07And that could happen year after year, and it's not that all of a sudden we would run out of gold one day. Forget for the moment that gold isn't the measure of your wealth anyway, but even if it were, it's not that you would all of a sudden run out of gold, it's just that, oh, on the manufactured and services side, your deficits were being counterbalanced by the fact that foreigners were investing more in your country. Okay, so the man on the street, if you said, do you think the U.S. should have a trade deficit or a surplus, he'd say, oh, a surplus, and then if you said, okay, and would you prefer that foreigners invested more capital in here or that on net capital was flowing out of our country, he'd say, oh, I want capital flowing in. The Theory of Money and Credit

13:11is that a lot of people think trade only helps the poorer countries, so that there's two countries trading, and I think most people would admit, okay, somebody's better off when people voluntarily trade things, but it's the poorer party, and that the rich country is somehow worse off. I think a good illustration of this viewpoint was when Pat Buchanan was, I think it was when he was running for president the first time, and I think it was when he was still on Crossfire

14:07I wouldn't because it would merge our economy with Mexico's and that would lower American living standards. So I really think he encapsulated there this fear people have. They think that having a wall between us, just an imaginary wall in terms of economic policy, between us and really poor countries somehow shields us from their poverty and it keeps us richer. There's an idea that there's a certain amount of heat in the world and we've got to keep it in if we mix with a really cold country that there's going to be a leveling out. and I think that's the mentality. Now there's, again, with the time I have I want to leave some time at the end for question and answer. I can't get into it too much but just a few ways to see why that's silly, just on an individual level.

14:53Can you imagine you're talking with your friend who's a lawyer and you say, hey, you want to go to Taco Bell? And he says, no, sorry, I can't go in there. Do you know what the average wage of the people in there is? Right now I make $180,000 a year. If I go in there, my salary might get cut in half. So we can see how that's silly, but how is that any different from, you know, Mexicans are poorer than we are if we trade with them, it's going to pull down our wages. Now I don't know this because I'm a good imperialist American that I have been to very few foreign countries. I haven't been abroad and I'm just curious, maybe some of you later on can enlighten me, is it the case that in truly poor countries, are they all ardent free traders?

15:42Do they have the same economic fallacies we do, but they think, since we're poor, why don't we screw all these rich countries by trading with them and suck some of their wealth? I don't know, my guess is probably since they're poor and backward that they have bad economic ideas and they're probably afraid of free trade as well. And you could get into it, just to give you a hint as to, okay, we can see the absurdity in the view, but what actually is wrong with it? It's that it's not just low wages, for example. It's not that, oh, the reason, you know, if we trade with, if we allow Mexican firms to send us products Since they can pay their workers so little, therefore our wages all have to sink. It's not just the pure wage level, it's also the productivity. And so if our workers are twice as productive as an average Mexican worker, let's say in some particular occupation, well then it doesn't mean that we have to therefore get paid the same.

16:35That means we can get paid twice as much, the U.S. worker, as that worker, in order to remain competitive. So it's precisely because U.S. productivity is high that our wages are higher. Okay, moving along, the fourth fallacy or myth that I want to talk about is probably, it's related to what I was just mentioning, and that's that free trade destroys jobs. All right, so this is probably the single biggest objection people had, the single biggest fear. fallacy or myth that I want to talk about is probably it's related to what I was just mentioning and that's that free trade destroys jobs alright so this is probably the single biggest objection people had the single biggest fear and again economists have just spent so much time trying to show all the different reasons that this mentality is wrong I'll just summarize some of the more popular arguments so again an easy way to do it is to just use a reductio ad absurdum and just say okay well let's put it on the individual level. Does it

17:35help you know suppose you you said in your family say okay in our family we're gonna have protectionism we're gonna create jobs here in our household and so you know you thought you were gonna get your oil changed no you're not have your sister do it you know because she needs employment okay and then you know you thought you're gonna run to the supermarket and we're gonna reduce our cash balances have a trade deficit with the grocery store I don't think so why Don't you grow tomatoes in the backyard? Why don't we do it here at home and boost jobs for the family? Don't go buy a dress. Make it here. If you think about it in the household level, of course that's crazy. You'd just be reduced to utter poverty, but you'd be employed. You'd be really busy. There would be no shortage of work. You could find work. So you wouldn't be unemployed. That would be good.

18:21Okay, so you see the point there. And then you could expand it. It wouldn't be as absurd to do it, you know, to have people say, okay, what about our state, right? What if Alabama had high tariff barriers, because we don't want to lose jobs to Texas, things like that. And people say, yeah, okay. And, but then for some reason, once we draw that boundary around the US, all of a sudden, it seems different. And part of it, I think, is just pure, I hate to use the term racism, or I don't know what you call it, xenophobia, just because that's such a loaded term, and people throw it around a lot. But I I think a lot of it really is I don't mind losing jobs to somebody in Texas, but I don't want to lose a job to a Mexican. That would really annoy me, but it's okay if I'm unemployed because of a guy in Florida. That doesn't bother me as much.

19:03So I think it's not so much the inconsistency in the economics. I think it's more the value system that it's okay. It's just like when you see the news from Iraq and it's like a hundred people died and an American got his arm hurt. Oh man, that was a bad day, you know, but, okay, I should probably move on. Another way of seeing, okay, another, of another popular, very famous illustration of this idea of how silly it is to worry about free trade destroying jobs, Bastiat had a really famous article or a piece called The Petition of the Candlemakers, and here, just for those to those of you who haven't heard it, it was a satirical piece, and he was pretending that he was representing the candle makers, the people who made candles in France, and he was writing to the French legislature, I imagine, and was saying that we had this unfair competition from this unscrupulous adversary that we can't possibly compete against, it's namely the sun, and so what we propose is that you make it illegal for people to have their blinds open during the day, that if everyone had to shut the shutters and so forth and keep things dark,

20:46in terms of domestically produced light. That would be dumb, and by the same token then, if the Japanese are willing to sell us really cheap cars and it would cost us more to make the same thing here of comparable quality, it would be just as silly, well not as silly, but it would be somewhat silly to turn down that because of their natural advantages, or it would be silly, you technically could probably grow oranges in Alaska, you could have greenhouses and so on, but they'd be very expensive. So instead of doing that, people living in Alaska The Theory of Money and Credit

21:46Friedman said, okay, that's one way to look at it, but look, there's actually two technologies for creating cars. One is you have people show up at plants in Detroit, they have steel and rubber come in and all these other things and they churn out cars. That's one technology we have. Another technology is you have farmers in Iowa and other states, they grow corn and other types of goods like that. They put it on a boat, they send it over to Japan, a little time passes, and then the boat comes back and those crops have turned into cars, and then we get them that way. And so from a technological point of view, from an economic point of view, we know that's not really what's happening, it's not that they're physically turning into it, it's that they're being traded for, but from a technological point of view, suppose that really were what happened, suppose there was something magical over that literally turned the rice into cars or the corn into cars,

22:38The Theory of Money and Credit

23:08It's tricky with fiat currencies, so it's easier if you think about it in terms of gold. If we're all on a gold standard, it wouldn't change the issue, it's just easier to think about it. And we put up high tariff barriers so that American consumers can send less gold to foreign producers. Well, then that means they have less gold to then spend on the products of American exporters. Another way economists like to talk about it is that ultimately the way a country pays for its imports is through exports. The rest of the world, why are they sending us all these goodies? Why are they sending us TVs and cars and so forth? It's ultimately because we're sending something to them in return. It's not just because they're stupid. Whether it's they're getting equity in American firms or whether they're getting other products and services, ultimately the reason these foreigners are sending us products is that we must be sending them something.

24:01to artificially hamper how many products they can send us, then that interferes with the business of American exporters. Okay, and then finally, the last thing, and then I'll, there's a few minutes for question and answer. The last one I'll talk about is that free trade creates jobs, right? So here I'll take a little dig at the pro-free trade crowd. That a lot of times, you know, you spend so much time saying how free trade doesn't destroy jobs, In the last couple of years, advocates of free trade will say, NAFTA from this date to this date created 600,000 new jobs. Free trade is the way to boost us to grow the economy, and they'll talk using this language. Strictly speaking, that's not quite accurate. Free trade really isn't about jobs per se, it's about real wages. As long as wages can float freely, anybody can get a job.

24:51Alright, it's not an issue about creating jobs, there's always something that an extra person can do, that if someone needs work it's not as if we're just going to be satiated and there's nothing that anybody can do, that no one can find work, there's always something you can do, so whether we have tariffs or perfectly free trade, everybody could be employed so long as wages are free to move, so that everyone can be hired who wants to work at the prevailing wage rate. So in that sense free trade really doesn't create jobs, it just means that jobs would tend to pay more because people will go to where they have to compare to the Advantage. All right, now there's a little caveat there to the extent that actually we don't have a perfectly free labor market, that there's social security, there's all these deadweight costs imposed, so that you actually have to have a minimum productivity before it's worthwhile for anybody to hire you.

25:36In that sense, if free trade raises everyone's productivity, more people get over that minimum bar, but I think a lot of free trade economists, that's not what they mean when they say, oh, free trade creates jobs. You were right when you said people from four countries might oppose free trade. I had a student from Egypt about 20 years ago tell me they could not afford free trade because they couldn't compete with the highly productive American workers. Do you comment on our growing deficit with China in terms of the massive amounts of dollars we're shipping over them, the massive amounts of goods they're shipping us with? Is it fair to say that one of us needs the other more than the other?

26:47question and again the it's hard to to talk about these things it makes the appearance that I'm saying oh everything's fine and there's not gonna be any problems and no it's entirely possible that the dollar could fall next week and that we could be thrown into a huge recession the the point I would emphasize though is if that does happen it's not because oh we had free trade and that led to all these imbalances as far as trying to go is yes my understanding and I don't claim to be an expert is that the Chinese government is certainly using non laissez-faire means to accumulate huge reserves of dollars that they're keeping their currency artificially cheap in terms of the international markets so that favors their exporters. So it's basically just the Chinese government is impoverishing its own people to favor certain exporters. Now it's not a good thing in terms of their own people but in the Is it hurting us? I don't think so, at least in the short term. If the Chinese government wants to just use its equivalent of tax dollars or slave labor to send us free goods, that doesn't make us poorer.

27:56If they're sending us stuff that's artificially cheap, again, we're getting presents. That's not actually hurting us, but to the extent that people become complacent and rely on that, that would be a bad thing. but again it's not something government policies are going to alter that's just we might as well get the cheap goods while we can and then just be aware that that situation might change pretty soon. Okay, thank you very much Bob.