The Wide, Wide World Of FOREIGN TRADE
Two blocks directly south of the Mega-Mart Discount Emporium we'll find that Natural Ned's Nursery and Garden Center is having a grand opening celebration. I'd like to saunter over to check out their sundials -- a valuable, and long sought after acquisition for my backyard garden. In fact, Natural Ned's Nursery and Garden Center has a new shipment of sundials imported from the sundial capital of the world -- the Republic of Northwest Queoldiola. If I'm going to get a sundial, I should get the best, right? Northwest Queoldiola produces the finest, least expensive, and most technologically advanced sundials in the world. However, Mega-Mart Discount Warehouse Super Center has an ample supply of good old American-made sundials. They're a little more expensive and not quite as good, but they're made in the U. S. of A. by good old Americans. What a dilemma!
Trade is the Name of the Game
Before making this all-important sundial purchase, let's consider some basics:
- In our modern, complex economy, few people, if any, come close to what we might call self-sufficient -- producing everything consumed.
- This means, as a general rule, that each of us specializes in producing some stuff then exchanging for other.
Why do we do this? Why do we forego self-sufficiency in favor of specialization? Because we want to! Specialization makes us a lot better off than self-sufficiency.
As we saw in Fact 3, Our Unfair Lives, specialization lets us become really, really good at one thing rather than being sort of good or even mediocre at a lot of different things. Becky the carpenter makes a nice china cabinet for Phil the gardener. Phil the gardener grows some zucchini for Becky the carpenter. Both end up with more stuff than they could have produced individually. When everyone in the economy specializes, we have a larger economic pie which (depending on how it's divided) can make everyone better off.
This little specialization and exchange fact of economic life helps explain why we humans are willing to associate with each other in a civilized society. We need others to buy what we produce and others to produce what we want to buy.
Foreign Trade -- Same Game, Different Countries
If Phil the gardener and Becky the carpenter are better off by specializing and trading, does it make a difference where they live? No! Becky and Phil are better off if they both live in the same town of Shady Valley in the good old U. S. of A. We get the same benefit from trade if Becky plies her trade in Norway and Phil grows his vegetables in Mexico. The benefits of specialization and exchange have no regard for country of residence. The only real difference is that we don't just call this trade we call it foreign trade.
In that foreign trade is foreign trade only because it crosses national boundaries, let's pause momentarily to ponder this concept of nation. A nation is best thought of as a group of people who have a common central government and common currency or money. Many nations also share common heritage and culture, but that's not particularly critical.
Common money is pretty important to foreign trade, however, because that's what we use for buying and selling. When we buy stuff from another nation, we also have to trade one currency for another.
Common government is also critical, because it can, and often does, control what comes into a nation (imports) and what goes out (exports). As we'll see in a few paragraphs, governments seldom pass up the opportunity to use their powers of control and most nations take an active role in restricting foreign trade. Before we get to the how of government meddling in foreign trade, let's consider the why.
Some Win, Some Lose
There's one thing that almost all economists have agreed on since the dawn of economic time -- the overwhelming benefits of foreign trade. Everyone is better off with foreign trade. Well, not quite everyone. The benefits of foreign trade are not equally dispersed among the peoples of a nation. Let's think about buying those sundials from Northwest Queoldiola to see why.
- Imports are good for consumers. When the United States imports sundials from the Republic of Northwest Queoldiola, U. S. consumers are better off because they have a greater sundial selection. Because U. S. sundial manufacturers have competition from Northwest Queoldiola, the price of sundials tends to be lower -- a definite plus for sundial consumers.
- Imports are bad for producers. However, what's good for consumers is usually bad for producers. Faced with greater competition, U. S. sundial producers get lower prices. Some of the U. S. producers that are barely able to eek out a profit with no foreign competition are very likely to close up shop with it. This will send U. S. sundial workers into the ranks of the unemployed. U. S. sundial producers and their employees would rather not see any imported sundials from Northwest Queoldiola.
Now let's look at those imported sundials from a different perspective -- the Republic of Northwest Queoldiola.
- Exports are good for producers. When Northwest Queoldiola begins shipping sundials to the United States, Northwest Queoldiolan producers have a larger market and more potential buyers. Greater business means higher prices and more profits for the Northwest Queoldiolan producers.
- Exports are bad for consumers. When producers gain, consumers lose. The higher prices and larger market for sundials is a definite minus for sundial consumers in Northwest Queoldiolan.
If so many are hurt by foreign trade, how can pointy-headed economists smugly say that it's good?
It's good because more people benefit -- and benefit a lot -- than are harmed. The good that comes to consumers from imports is more than the harm that hits the producers. The good that comes to producers from exports outweighs the harm that befalls consumers.
How, can I be so sure? In large part because the bad stuff is short termed and more apparent than real. A closed factory, or a lost job is clearly bad for those involved. It is, however, also an opportunity to reallocate resources into something that is more productive. If jobs are lost in the U. S. sundial industry, then the workers have the opportunity to seek employment in another industry. They end up making stuff that consumers would rather have and thus value more. As such, they also get more income.
Foreign trade is much like a trip to the dentist. Sure it may hurt a little bit now, but it can prevent a whole lot of suffering -- like a ROOT CANAL -- later on. Unfortunately, those who suffer the most in the short-term from foreign trade also -- producers -- tend to have the most political power. That means, our economy seldom visits the dentist even though cavities have eaten away our teeth and we've grown delirious from infection.
Keeping Those Un-American Imports OUT
As we've seen, business leaders of the second estate tend to have more income, wealth, and political power than consumers of the third estate. The second estate also tends to be hardest hit by imports. Now, if you were the President of Omni Conglomerate, Inc. -- the leading U. S. producer of sundials -- and you faced competition from Northwest Queoldiola, why would you do?
Two options are:
- Make better, less expensive and more technologically advanced sundials.
- Eliminate the foreign competition.
The second option is usually the action of choice. The President of Omni Conglomerate, Inc. is likely to take up this topic with a duly elected government leader. The Omni CEO is also likely to mention in how much money was donated to a the leader's re-election campaign and how many voters' jobs are at the sundial factory in the politician's district. The politician, doing what politicians do, is then likely to have government restrict those un-American, job-destroying imports. Unfortunately, very little attention is paid to the interests of the sundial consumers of the third estate -- most of whom aren't in the politician's district.
While the variety of import restrictions is almost as great as there are politicians with constituents who face foreign competition, the two most common are:
- Import quotas. These simply restrict the amount of stuff that can be imported from a country. For example, Omni Conglomerate, Inc.'s favorite politician might be able to get a law passed saying that Northwest Queoldiola can ship no more than 27 sundials to the United States each year.
- Tariffs. These are taxes on imported goods that are intended to raise prices and reduce sales. Even though Northwest Queoldiola can produce better sundials at a lower cost than Omni Conglomerate, Inc., a 2,000 percent tariff might convince me to buy the lower quality U. S. made one at Mega-Mart Discount Emporium.
A country also discourages imports with devious restrictions on production, such as mandating the use of ingredients, parts, or inputs that can be found only in the home country. European countries have set the standard for these sorts of standards. For example, France mandates that wines sold in the country must use grapes grown in France. Germany does similar things with sausages.
Are these sorts of restrictions justified? In some cases, yes. While health, safety, or other such benefits may be had by placing rigid standards on imports, the motive is usually to keep imports out and eliminate competition.
Making the World Safe for Exports
Exports are as good for second estate producers as imports are bad. When exports rise, so do second estate profits. Omni Conglomerate's favorite politician is not only likely to support import restrictions on sundials, but also to devise some method of promoting or subsidizing sundial exports. The quaint and courteous Republic of Northwest Queoldiola might be threatened with are sorts of diplomatic sanctions (and perhaps nuclear annihilation) if they don't make a concerted effort to buy more U. S. sundials. After all, we buy theirs, they should buy ours.
You might notice a problem that's likely to arise when every nation in the world tries to export more and import less. If everyone exports, who imports? Those nations with the most global political power often "force" others to do the importing. Would it be a surprise to know that the politically powerful nations tend to export to the not so powerful ones? I didn't think so.
Yet this "politicizing" of foreign trade usually does little more than add our world's existing conflicts. In fact, most wars and conflicts throughout history had a significant foreign-trade component. The American Revolution was as much about foreign trade with Europe as it was about political independence from England. The Civil War also emerged as much from trade between the North, South, and Europe as from the question of slavery.
Where does this foreign trade business leave us as consumers, workers, and taxpayers? Here are a few tips:
Foreign Trade Tips for Consumers, Workers, and Taxpayers
- As a consumer, you're better off with a wider variety of lower priced stuff. Imports are your ticket to happiness. The more imports coming into the country, the better.
- If you work in an export industry, that's great. Let's just hope, though, that you're company exports stuff because it's a better producer than other nations and not because government has blessed it with favorable, but inefficient, policies.
- If you work for a company that's heavily besieged by better quality, lower priced imports, then keep your career options open. Sure, your industry might get government to restrict imports, but our economy is better off if you get a job in another industry that doesn't need government help to stay afloat.
- As a voter and taxpayer, your interests are best served by unrestricted foreign trade. Your tax dollars shouldn't be wasted on government policies that promote an export here or restrict an import there.