The One Minute Case For Free Trade

Why not be self-sufficient?

Do you make your own shoes? If you invested some time learning shoemaking, you could save the money you regularly spend on new shoes. What about butter – why not churn your milk? If, like cavemen, everyone was entirely self-sufficient, our monthly spending would be zero. That would be fortunate, because our income would be zero as well, since no one would buy anything from us either.

Everyone outsources

We don’t make everything ourselves because we don’t have the time to produce everything we want. Humans learned long ago that it is beneficial to trade our specialized labor in one field for the labor of others in another, with money as the means of exchange. The difference between the short hardscrabble lives of a hunter-gatherer society and our relatively luxurious existence is due to the gains in efficiency made possible by voluntary exchange.

Everything is outsourced

In “I, Pencil”, Leonard Read writes that there isn’t a single person on earth who knows how to make a pencil. The process of acquiring and assembling the cedar, lacquer, graphite, ferrule, factice, pumice, wax, and glue that compose a pencil are performed by thousands of people all over the world. No one individual is capable of understanding all the processes involved or arranging all the transactions that deliver the necessary supplies to the right step. Voluntary exchange between individuals who know only their immediate trading partners makes possible a process that no central planner could design. None of the participants engage in it because they need a pencil, but because they want the goods and services others produce in order to buy a pencil.

A policy of free trade is beneficial even when it is unilateral

Some isolationists argue that foreigners have “unfair” advantages due to lax labor or environmental regulations, industry subsidies, or restrictions on imports abroad. But such arguments miss the whole point of trade. Capitalism is not a zero-sum game where profits are redistributed from one producer to another. Consumers who buy cheap foreign goods make their money available to buy other products, increasing everyone’s living standards. Domestic producers who lose sales to cheaper foreign goods benefit from increased consumer spending at home, and foreigners with dollars clamoring to spend them on domestic industries.

Governments that subsidize export industries only rob their taxpayers to pay foreign buyers. When France subsidizes steel exports, American steel foundries lose money, but Americans get cheaper consumer goods, and “free” Euros to buy goods that would have belonged to French taxpayers. Ultimately, restrictions on trade based on international borders are arbitrary and just as destructive as internal barriers.

Trade deficits and surpluses are natural states of economic development

The U.S. has a trade deficit when foreigners accept more U.S. dollars for their products than vice versa. If a deficit were to continue indefinitely, Americans would have a permanent supply of “free” foreign goods, since dollars are worthless if they are never spent. Foreigners trade at a deficit with America because they are confident that the we will have products they want sometime in the future. Likewise, we accumulate foreign currency in the belief that foreign goods will be valuable. Surpluses and deficits are natural states that every nation experiences as it varies between being a net recipient of investments or a net investor.

Further reading:

18 Comments

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18 Responses to The One Minute Case For Free Trade

  1. Pingback: The One Minute Case Against Interventionism | The One Minute Case

  2. Wiley757

    Where do you get the money you need to pay off the loans you have and to purchase that pencil and the box of crayons when your job has been outsourced to Mexico or India?

    Not everyone in this country has the skills to be a Wall Street Trader, a doctor or a computer engineer. What do we do with the others? Do they sell pencils on your local corner?

    • Ne12sd8

      Wiley757
      I just wanted to congratulate you for hitting the nail on the head with your approach on the matter. Heroiclife seems to have a republican outlook without consideration of the consequences of his approach. Even more ridiculous, our economy already proved its failure from the very same approach he has mentioned. Amazing how brainwashed people can be. By advocating free trade, he is indirectly saying that we as americans should not have any problems competing with underdeveloped countries lifestyle.

      • Michael Groves

        Ne12sd8,
        The US economy failed because the governments and the people spent more than they earned over a long period of time, borrowing wildly to make up the difference.

        Free trade does mean competing, yes. If an Chinese guy can do your job, and is prepared to do it cheaper than you, by what moral principle are you wanting to be protected?

        But actually, the main reason why free trade is a good idea is not a moral one – it’s economic. On average, the citizens of both countries will be better off if they trade, than if they try to do everything themselves. Trade works because Person A can produce Item A more efficiently, and Person B can produce Item B more efficiently. So it makes sense for each of them to concentrate on what they do best, and share the savings.

        The key is that both parties must, at least in the long term, produce something the other wants. The suggestion implicit in your fear of competing with the lifestyle of under-developed countries, is that Americans want to maintain a superior lifestyle, but can’t produce any goods that the Chinese want. How do you expect to maintain your high standard of living if you can’t produce goods that are better value for money than the Chinese? Even if you did close your borders to all trade, you’d all be paying more for your goods – in many cases a LOT more – without any increase in earnings.

        Either way, in the long run, the guys that make the best value-for-money goods get the best lifestyles, whether they trade or not. Trading simply adds a huge bonus level on top of that because it’s efficient.

  3. Wiley757 :

    Not everyone in this country has the skills to be a Wall Street Trader, a doctor or a computer engineer. What do we do with the others? Do they sell pencils on your local corner?

    You don’t have the moral right to coerce other based on their place of birth. You don’t have the right to stop an American from doing business with an Indian just because the Indian does not live in your country. You have to compete with a global marketplace for jobs.

    You can acquire the skills you need in a global market, or you can use guns to prevent people from trading – but in the latter case, you will only be condemning you and country to relative poverty and stagnation.

    Furthermore, don’t forget that goods in a global market are much cheaper, since the Indians who are competing with you to make that pencil are also competing to sell it to you for less. International trade means lower wages for inefficient jobs in countries that produce things at a relative disadvantage – but it also means even lower prices for the things those jobs produce.

  4. Wiley757

    Heroiclife

    I do not think you have thought this “Free Trade” thing through.

    In order to purchase those “cheap” Indian pencils we must first create the wealth with which to do so. When we ship all our manufacturing jobs overseas and idle our workers we no longer create wealth locally. We now borrow the wealth needed to purchase those pencils from overseas from people who are expecting us to pay them back. That trust is evaporating as we speak. Once our overseas lenders realize we are no longer creating wealth just borrowing it, they will lend their money elsewhere. China is threatening to do so as we speak. We are propping up companies like AIG because China owns much of AIG’s debt.

    You are going to pay for those pencils one way or the other there is no such thing as a “free” lunch. With “Free Trade” you get to foist much of the true cost of that pencil off on your neighbors through higher taxes needed to bail out AIG and inflation while while you get to feel smug about getting a “great”deal.

    I am curious. What are these “skills” you keep talking about that are needed by the newly disenfranchised to “compete’ in the global economy? It seems to me one of those skills you speak of is the ability to live and survive in a place like Dharavi, India.

    You are content know, because you have the wealth needed to “purchase” those pencils. You might not be so smug when you find yourself living in a gated community afraid to go outside. Downtown Detroit for instance. @ HeroicLife

  5. Ron

    Wiley,

    Your comment about “borrowing wealth” has nothing at all to do with free trade. It has everything to do with government spending and reserve (fiat) currencies. The free market did not create the problem we have now, and bailing out AIG and others is a government attempt to fix a government-created problem. In the end, it will only make things worse.

    The fact is that hundreds of millions of people are acquiring skills on a daily basis. That is the nature of freedom…we all learn to adapt to an ever-changing landscape of ingenuity and innovation. Far from idling workers, shipping low-paying jobs overseas frees labor for other, more productive domestic ventures.

    I recommend you read up on David Ricardo’s Theory of Comparative Advantage. Manuel Ayau’s book, Not A Zero-Sum Game, does a wonderful job of explaining it.

  6. Wiley757

    Heroiclife

    You failed to address either of my questions.

    1. We import more than we export. Where is the money coming from to support this “Free Trade”.

    A graph showing the imbalance of cargo containers coming into and going out of two Los Angeles area ports can be viewed here.

    http://images.google.com/imgres?imgurl=http://paul.kedrosky.com/WindowsLiveWriter/TheU.S.ShippingCollapseContinues_10DA2/PortTraffficDec2008_3.jpg&imgrefurl=http://paul.kedrosky.com/archives/2009/01/the_us_shipping.html&usg=__BGgT-ymcnhqDnn2Sol1GD9EA4UQ=&h=372&w=539&sz=58&hl=en&start=13&sig2=IvkPRv7Dg8zPAGeRymwksg&tbnid=ly7oOFAcAjgsMM:&tbnh=91&tbnw=132&ei=1nW4SbbSKYrMsAP2_Lw3&prev=/images%3Fq%3Dshipping%2Bcontainers%2Blos%2Bangeles%26gbv%3D2%26hl%3Den%26sa%3DG

    I fail to see the good that is coming from this “Free Trade”.

    2. You keep telling me that citizens are learning new skills so as to compete in the world’s market place. Please explain to me or give some examples of what those skills are instead of waving your hands in the air.

    “Salon Magazine” ran a great article with the title, “The World in an iPod”. (http://dir.salon.com/story/tech/feature/2005/06/03/portalplayer/index.html)

    A small team of engineers designed the iPod here, it is manufactured there. The world is rapidly learning how to manufacture their own iPods. Soon we will not be able to make our own iPods or design them either. The foreign brain trust we used to design these iPods are going home to where the iPods are being manufactured to design their own next generation iPods. You cannot just skim the cream off the top and succeed.
    To be a success you need the whole enchilada from the ground up.

    “Free Trade” is an accounting scam.

    If the price you place on a box of pencils is your sole judge of the success of “Free Trade” you are lost in the wilderness.

    When Hershey Chocolates sends their Peppermint Patty plant to Monterey, Mexico everybody looses. US workers loose their jobs. Mexican workers are hired as cheap labor to last only long enough for the next cheap labor haven to come along. The US tax payer subsidizes Hershey because the company continues to reap the benefits of being an American Company and access to its markets while at the same time reducing the taxes they pay to support their home. We are all losers, only the accountants, tax attorneys and a few CEOs make out.
    @Ron

  7. Ron

    Y’know, Wiley, now that I’ve thought it through (wink, wink) I realize you’re absolutely right. It is all a big scam!

    I just realized that I’ve been running a huge trade deficit with the grocery store down the street. I bought over $6,000 worth of their products, and they didn’t buy a single thing from me. In fact, there are businesses all over town with whom I run a huge trade deficit. All told, I spent nearly $70,000 dollars last year importing goods and services, and not a single business bought any of my services.

    I’ve outsourced my life, Wiley! Any minute now, my wealth is going to completely dry up because I’ve shipped my personal manufacturing jobs out to people outside my own house. What’s more is that I’ve never actually had a manufacturing job. I’ve never made anything and sold it to anyone. I export nothing, Wiley! How do I survive?

    I must have stolen all the furniture in my house from other, hard-working Americans who grow their own food, make their own clothes, cook over an open fire, trudge to work (in an automobile or textile plant, no doubt) in horse-drawn carts, and read books written by American authors by candlelight. Otherwise, where did it all come from?

    It’s odd, because somehow a significant amount of money shows up in my bank account every month. But because I’m an IT professional, and so don’t actually manufacture a single thing, I must be destroying wealth by getting paid for simply providing a service. But somehow, my actions must be creating wealth for other people because the business is profitable, it employs a lot of people, and others who purchase our services end up better off than they were before. How could that be?

    Are you starting to get an idea of the silliness of all the mysticism about “manufacturing jobs” and “trade deficits”? Thinking there’s something magical about manufacturing and that it somehow generates wealth while other activities do not exhibits an extraordinarily static worldview. You assume because “the world is rapidly learning how to manufacture their own iPods” that there will be nothing left for us to do once everyone owns an iPod. The fact is that human wants are unending. The free market provides the best framework for meeting those wants.

    Here’s something else to keep in mind: Even though I run a trade deficit with all the businesses from whom I purchase goods and services, I run a trade surplus with my employer. They buy tons of my services, and they never expect me to buy a single thing from them…and we’re both better off for the exchange.

  8. Wiley757

    Heroiclife

    It is amazing that two people can see the same thing and draw mutually contradictory conclusions.

    I see your analogy like this. If you ran your personal affairs like America does, you would have outsourced over $90,000 worth of goods and services yet only bring home $70,000 in wages from your employer. Your deficit gap would be made up with credit card debt and home improvement loans.

    Even worse, instead investing in professional courses to update your resume, expanding your infra structure by upgrading from dial-up to broadband and purchasing an up to date computer you continue to do your printing jobs at Kinko’s and tap Broadband service at your local library because it is cheaper. Your current contract is doing fine but when the your employer says we need an IT guy for a new project you will be unprepared.

    The example of the iPod is trying to say that the next generation of products will most likely be designed in centers were there is a large manufacturing base and superior educational institutions. If graduates of our local Universities can not get a job at home why bother to get the education.

    Ford Motor Company just brought online a new 1 billion dollar highly automated auto factory in Brazil. Why are we bailing out the Big 3 Auto Makers when they are doing infrastructure investments overseas. We are outsourcing our entire economy. In the meantime the overseas manufacturers are “selling” stuff to us by first loaning us the money to complete the deal. We are selling our sovereignty. Our biggest exports are debt and military weapons.

    “Free Trade” is a book keeping scam. The costs associated with “Free Trade’ are not properly accounted for. Our accounting system has not kept up with the modern economy.

    Detroit has freely admitted that one of the reasons they manufacture cars in Canada is to take advantage of Canada’s National Healthcare system. Take it further and move your business to India and you no longer pay healthcare or retirement. This system works for a while and makes a few individuals very rich but we have created the highest disparity in wealth among our citizens of any country in the Western World.

    AT&T just announced it was moving more IT jobs to India and any AT&T employee who wants to follow their job to India is welcome to do so. In the abstract this may sound great for me the AT&T customer.

    Please notify me when you have your garage sale so I can pick up on some goodies before you leave with your family for Bangalore. Personally I thought you and your family were wonderful neighbors and great fun at the annual block party, we will be sorry to see you go.

    Finally, many companies move overseas so they do not have to pay taxes here in the US and carry their fair share. Haliburton moved its headquarters to Dubai and runs something like 29 subsidiary’s out of tax havens in the Cayman Islands. They then subcontract work to Bangladesh and the Philippines. This is a one way flow of money. Haliburton scams the American taxpayer and we have established a system that is not self sustaining.

    The word “Freedom” is a hollow word worth inclusion in George Orwell’s Newspeak Lexicon. I want a system where everybody plays by the rules. The rule of law is enforced for everybody not just the little people. I want a government that is beholden to the people not to large corporations.

    The story goes that soon after Benjamin Franklin signed the Constitution he was asked what kind of government he and his compatriots had created for America.

    His reply was; “A Republic, if you can keep it”. I think we have lost it.

    @Ron

  9. Michael Groves

    Wiley, you have not addressed the issue of why trading with other people outside the country should be any different to trading with other people inside the country.

    At the end of the day, individuals, American or otherwise, have to be competitive, in the sense that they have to be able to provide *something* that other people want, at a price and quality that is better than offered by other sellers. Why would Americans be unable to do that? Yes, Americans have a high standard of living, so they might not be able to (or wish to) compete for low paid, basic jobs that anyone can do. But the high standard of living also means better education and access to technologies and opportunities, so they are more than adequately equipped to compete in more sophisticated markets.

    Reserving menial jobs for Americans means that Americans will continue to do menial jobs. Yes, they’ll get paid a higher wage than their Indian or Mexican counterparts, just as they used to get paid higher wages than the Japanese. But eventually, Indian and Mexican cars will be better value than American cars. So what’s next? Relinquish exports, because America can’t compete. Protect the local market by banning or surcharging foreign cars. American cars now don’t have to compete, so innovation goess out of the window. American consumers – the same guys doing the menial jobs – are now buying more expensive (but probably inferior) cars, offsetting their slight wage advantage.

    Come to think of it, maybe the indivdual states should adopt the same policies? After all, why should cheap labour in Ohio be allowed to erode wages in California? Maybe there should surcharges for inter-state transactions, so that there are no nett inflows or outflows of money or goods…?

  10. Wiley757

    Heroiclife

    We both know that the “World is Flat”, and the problems we face are not new.

    We both know the solution to our problems is an economic system called “Capitalism”.

    I think “Free Trade” is a failure of Capitalism while you think “Free Trade” is doing just fine.

    I would agree with you on the “Free Trade” idea if we really practiced “Free Trade”. We don’t.

    The very last thing large International Corporations want is true “Free Trade” and to compete in a real capitalist market place. Instead, International Corporations get governments to subsidize their operations and discourage their competition. We get our pencils cheap but pay for a military to guard our overseas pencil factories, ignore the forests that are chopped down to make pencils, loose our jobs as they are shipped overseas and pay extra taxes becaause pencil companies do not pay theirs. The pencil making business is a part of a complex system and to understand its costs you have to look at more than the cost of a pencil sitting on a shelf in a store.

    There is an interesting film out called “The Corporation”. The premise is that since Corporations have all the rights of persons why not look at the Corporation as a person to find out what kind of persons they are.

    The director’s guide book is psychiatry’s handbook of mental illness. He finds that corporations are sick puppies with many pathologies. You would not want a Corporation to be your brother-in-law especially when they are too big to fail.

    The Alabama company makes cheap pencils and sends them to California and the California pencil company is faced with a dilemma.

    The CA Pencil Co has a number choices. They can continue to do business as usual and loose market share and go bankrupt. They can invest in new capital equipment and train their workers to make better pencils cheaper, capitalist competition. They can decide to make colored pencils and move into a new market or exercise option three.

    Option three. The CA Pencil Co fires all it’s workers and moves their pencil company to Mississippi. Before leaving CA the CA Pencil Co lobbies the State of California to make new rules just for them so they need not pay CA taxes. Their lobbyists go to Mississippi where they talk the citizens of Mississippi into giving them a local tax holiday, lots of free land for their old factory and allows them pay wages at or lower than the Alabama workers. This puts unfair strain on other CA pencil makers who are trying to compete at home.

    Back in California, laid off Pencil workers loose their $25/dollar pencil wage and go to work at minimum wage of $8/dollar.

    They should retrain but I have yet to hear from anybody as to what they retrain for, since all the other local companies are following in the CA Pencil Company’s footsteps overseas. In addition, not everyone is equipped to be an IT guru anymore than the average IT guru is equipped to be a professional athlete. We need a variety of jobs for our citizens.

    The California pencil workers can no longer afford pencils (remember Henry Ford who believed a Ford autoworker should be able to afford a Ford car?)

    CA wants its citizens to buy pencils and still needs money for its economy. Since CA no longer makes anything to sell it decides to sell Bonds to the Chinese who oblige because they know we will pay them back.

    But we are not good for it. Instead of being forced by the Capitalist market system to solve our pencil making problems on the spot and develop new industries we just delayed and diverted our pencil problem while running up debt. And, due to the wonders of compound interest, our debt problem grow exponentially over time.

    The owners of the CA Pencil Co are making gobs of money because they have reduced their wage expense to nothing, pay no taxes and their Boards think they deserve it. Most of their money sits in bank accounts earning interest not buying pencils because you can only own so many Porches and ski Chalets in Aspen.

    Meanwhile the Chinese are worried because the CA Pencil CO’s laid off workers who are no longer making anything can no longer pay off their debts. The Chinese want their money back and here is where it gets interesting. Today’s news ( http://news.yahoo.com/s/ap/20090313/ap_on_bi_ge/as_china_us_economy ).

    The workers in California are getting angry because they have no jobs, have a problem getting food and eventually they will show up at the houses of the CEO/CFO of the CA pencil Co with torches and pitchforks and burn their houses down.

    If back when this all started the CA Pencil Co looked into moving to Mississippi they might have found that without all those subsidies they could not make pencils for a profit. The law of comparative advantage tells them that pencil making is no longer in the cards. Instead the CA Pencil Co would go on to invent the Kindle and employ a bunch of their workers making Kindles instead of Pencils.

    The “Free Trade” myth is coming home to roost. Now when the CA Pencil Co tries to build a Kindle they find there is no money to finance the Kindle factory and the only people who can design and build the new Kindle are in China.

    Instead of building Kindles we go back to scratching messages on rocks with a bone tool and China builds the Kindles for their own citizens. Their citizens visit California because it is now a cheap third world country where the Yuan goes far.

    @Michael Groves

  11. Michael Groves

    Wiley, the original article was the One Minute Case for Free Trade, meaning just that – Free Trade. The counter arguments you’re raising all assume that the Trade won’t be Free, but will be caught up in a web on international bureauracy. Which is a different discussion altogther.

    The enforcement of Free Trade has always been a bugbear – most governments have been guilty of creating clever regulations that have the effect of blocking foreign imports, despite trade agreements that are supposed to allow unfettered trade. And as soon as any govenrment gets its spanner in the gears, or its fingers in the till, then the voluntary trades start become increasingly skewed, and therefore increasingly inefficient.

    The point of the original article was that free international trade would be beneficial to all parties, and is therefore a worthwhile *objective* to pursue. A prerequisite of Free Trade would be that the parties could trade as if they were local to each other – with no additional regulation. Strictly speaking, that would also imply that people could move freely between locations too, if they wanted.

  12. Wiley757

    You got me. Thanks for the discussion. I think we both made our points. I think we will both agree that the months ahead will be interesting for many areas of trade and finance. @Michael Groves

  13. Minie Powero

    thanks for the article, didnt realize that was happening, were leaning towards a soft tyranny

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  15. terrie

    I can see it now, one or two countries do paperwork only, another grows food, another makes clothes ect…

  16. What you call Globalization was began in 1965; although global trade has existed for hundreds if not thousands of years, what the Captains of US corporations had been working on since the 1930s was to create a US version of the Dutch East Indies colonial operation. The Rockefeller’s, Ford Foundation, Bechtel, and others believed the Dutch had made easy money for three hundred years by selling the produce of Java & Sumarta to Europe on the cheap; so the ambition was to replace the Dutch with American corporations.

    That’s why the US news and history books wrote the Axis leader Sukarno out of the US version of history, that’s why the US issued orders that Sukarno and his militia were NOT to be arrested or disarmed at the end of the Pacific War, that’s why the Ford Foundation in ’45/’46 began flying the elite of Java to US universities for re-education, that’s why the Ford Foundation in ’49 ramped up it’s presentations telling US businesses that backing Sukarno would give the US easy access to the wealth of South East Asia (and the world’s largest gold mine in Papua which the US would re-define as part of Asia so it could be claimed as a Indonesian colony for the Freeport mine also built by Bechtel; etc. etc.)

    That’s also why these corporations had to cripple the CIA, to prevent it reporting the corporation’s overseas affairs to the DoJ, DoS, and DoD; the Pearl Harbor disaster proved the need for an Information agency to ensure the government experts knew such information, but the Rockefellers & Ford etc. needed to stop the US government plans for discovering such information. The solution was to expand the role of the CIA to include it’s own Foreign Affairs policies (outlined by the Ford Foundation duriing the 1950s), so that the CIA would now have to classify all of it’s information as too secret for the US government to know. The CIA was in effect hi-jacked by the 1949 CIA Act.

    During the 1950s the Ford Foundation and associates discovered Sukarno was just as corrupt as they were, and Sukarno wanted the lion’s share of the profits of harvesting “Indonesia”; then they discovered the Indonesian generals like General Suharto were also just as corrupt but wanted quick profits, they would happily sell out the female population of Java as sweatshop workers & kill people from Sumarta to Borneo to the Celebes to Papua so that Exxon & NewMont & Freeport could have their mines built by Bechtel.

    That’s why Eisenhower warned the US of the “industrial military complex” – not even the US President dared to name Robert Lovett and company as the puppet masters pulling the strings; and Lovett already had manipulated Kennedy into appointing Bundy as the US National Security Adviser.

    THAT’s why the US sold them there black people of Papua to Indonesian rule, to prevent world recognition of the Papuan elections in Jan/1961 and the New Guinea Council that took office in April/1961; that ‘s why the US refused to acknowledge the Council and instead blackmailed the Netherlands into signing the New York Agreement trading a million Papuan people to foreign Islamic military rule of Indonesia.

    But Bundy did too good a sell job on Kennedy, who had been told that Sukarno was vital to US interests, so Kennedy did the logical thing of designing a fiscal package to help stabilise Sukarno’s government in Indonesia. . . Kennedy did not know about the Gold mine or that the CIA since ’57 had been planning on replacing Sukarno with General Suharto. But a magic bullet fixed that Presidential difficultly for the Freeport mine & US access to the “wealth of Asia”

    So in 1965 General Suharto took over, and the US clothing industry got CHEAP labour.

    That’s the start of “globalization” as you know it today.

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