Trade Autarky: Do It For the Children!

Walking out of the grocery store today I saw this sticker:

 

What was impressive about this sentiment is that it doesn’t even focus on a trade deficit. No, just the brute fact of buying imports per se is (apparently) enough to doom our children.

Before unpacking the specific problems with it, let’s warm up by listing some equally plausible questions:

==> If we continue to buy groceries, where will our children garden?

==> If we continue to buy oranges from Florida, where will New Yorkers work?

==> If we continue to buy from people outside the family, where will our cousins work?

==> If we continue to buy from stores where our children don’t work, where will our children work?

For the complete newcomer to arguments over international trade, I strongly recommend Lesson 19 in my (free online) textbook. But for our purposes in this blog post, let me briefly explain why the above sticker is so misguided.

In the grand scheme, trade patterns don’t affect the level of domestic employment. So long as wages are flexible, everybody who wants to get a job can get one. Even in the “worst case” scenario where American (or Canadian, etc.) consumers decided to send half of their money overseas by buying imports-and not a single penny of that money came back when foreigners purchased U.S. (or Canadian) exports in return-that wouldn’t throw half the U.S. labor force out of work. No, what would happen is that U.S. prices would fall, and as long as U.S. wages fell proportionately, workers would continue as before. They wouldn’t be adversely impacted by the change, because their smaller paychecks would go farther at the local shops with the now-cheaper U.S. goods.

So even in this “worst case” scenario, what actually would happen-relative to a situation where every American spends money only on American-made goods-is that U.S. workers would still produce the same amount of stuff as before, and still get to consume just as much, but on top of that Americans would consume all of the foreign goodies that they imported by sending some of their cash abroad. Therefore, it turns out that this isn’t a “worst case” scenario at all-it represents a strange world where Americans print up green pieces of paper, and send them to foreigners in exchange for computers, cars, and sweaters. Sweet deal if you can get it.

In the real world, a country ultimately pays for its imports through its exports. Although foreigners do hold large balances of U.S. dollar denominated assets, even so there is a connection between U.S. imports and U.S. exports. In short, if foreigners are going to buy, say, U.S.-produced wheat or computer software, they need U.S. dollars to do so. And how do they get the dollars? Well, one major mechanism is by shipping goods into the United States.

What this means, then, is that if more Americans started following the advice on the sticker, it’s true that some U.S. workers might see their industries expand. However, at the same time other U.S. workers would see their industries contract. For example, if all Americans decided to boycott foreign-made cars, and only “buy American,” this would obviously raise employment in the U.S. auto sector. But with the big drop in imports, intuitively there would be fewer dollars flowing abroad into the hands of foreigners, so that they could no longer buy as much wheat from U.S. farmers. So U.S. farmers (and other exporters) would be hurt, offsetting the gain to U.S. auto workers.

As the ironic questions I listed above were meant to illustrate, the “logic” of protectionism is absurd when put into any other context. An individual household, for example, could guarantee itself “full employment” by refraining from trade altogether, and producing everything internally. It would also hover on the edge of starvation.

The people who created that sticker in the photo understand that it helps Americans when we buy goods from each other. The division of labor allows for specialization and higher productivity, enriching everybody in the process. There’s nothing magical about that principle only working domestically. On the contrary, just as it makes Americans richer to trade internally, it makes the world richer-including Americans-when the whole world is opened to free trade.