The Truth About Free Trade, Free Markets and Capitalism

by | Jun 24, 2016 | Trade

Americans will most gain from whatever trading opportunities that may offer themselves around the globe if the U.S. government follows a strict and principled policy of unrestrained and unrestricted free trade with any and all nations of the world.

The current political campaign for the U.S. presidency has brought out the worst in both the personalities and the policy positions among many of those running for that high political office, and this has been especially the case with international trade and the global economy.

Listening to the presumptive Republican and Democratic candidates for the White House, the average voter would think that international trade and investment is a zero sum game in which there is a “winner” and a “loser.” Their economic policy assumption is that other countries are gaining at the international trade game at the expense of the United States.

The fact is America is economically interconnected and interdependent with the rest of the world. About 20 percent of the American work force is employed in foreign trade and investment related jobs, and represents more than 25 percent of the U.S. Gross Domestic Product.

American Trade with the World

In its latest update released on June 3, 2016 on America’s import-export trade with the rest of the world, the U.S. Bureau of Economic Analysis reports that for calendar year 2015, the total market value of imports and exports came to over $5 trillion. The U.S. exported over $2.26 trillion of goods and services to other countries, while America imported more than $2.76 trillion in goods and services from the rest of the world.

For a point of comparison, total U.S. Gross Domestic Product for calendar year 2015 was about $18.5 trillion. So the total trade in imports and exports between the America and the rest of the world was equal to more than 25 percent of the total market value of all finished goods and services produced in the United States last year. International trade, clearly, represents a huge part of the economic well-being of the United States.

American Jobs Interconnected with Global Trade

In its May 31, 2016 report, the U.S. International Trade Administration (ITA) estimated that in 2015, exported-related employments accounted for 11.5 million jobs in the U.S., about 6.7 million jobs connected with exporting goods to the rest of the world, and 4.8 million jobs relating to selling services to other countries. At the same time direct and indirect foreign investment in the United States supported 12 million more jobs, according to an ITA report in February 2016.

With over 150 million Americans employed in 2015, this means that over 15 percent of all jobs in the United States were dependent on export trade with and investment from other nations around the world.

But this underestimates the employment affect from trade. Due to the wrong-headed belief that the primary benefits from international trade come from exporting to the rest of the world, while imports are somehow a “drag” on the country’s economic betterment, it is far more difficult to readily get the numbers for imported-related employments in the U.S.

But it should be kept in mind that every good manufactured in another country requires a business selling it to potential American consumers, with supply-chain related jobs having to be filled from the dockworkers unloading the ships bringing those goods to an American port to the sales people selling them in retail outlets in cities or towns all across the United States.

Thus, it would not be too unreasonable to presume that nearly as many jobs have been created selling imported goods to American consumers and enterprises as estimated to exist because of America’s export trade in goods. Then, the total number of jobs in the U.S. that are related to both exports and imports as well as foreign investment might well come to almost 20 percent of all employment in the American economy, or one out of every five jobs in the country.

America is interconnected and interdependent with the rest of the world. Anything that impedes or breaks these global connections, therefore, would inevitably have devastating affects on enterprises and employments here at home in America.

But what the Republican and Democratic candidates for the presidency are offering are policies that would make the maintenance and growth of international trade more difficult for the U.S.

Trade Benefits All Those Who Peacefully Participate

Let us remember why people trade. The fact is that none of us has the ability to produce for ourselves all the necessities and conveniences to make our life as livable and comfortable as we would like it to be. Our knowledge and knowhow is limited. The resources at our personal disposal to produce these desirable things are insufficient in their quantities and qualities. And our own human labor is incapable of doing all that would need to be done.

But human beings have discovered and seen the opportunity in improving their circumstances by trading with their neighbors. Of course, you could try to rob from or even kill your neighbor to get what you want, but you run the risk of failing in your attempt and find yourself robbed or injured or even murdered by the person whom you assaulted.

It is far better and safer, in the long run, to appeal to your neighbor’s self-interest by offering to him something that he wants in trade for what he possesses that you desire to obtain. Reaching mutually agreeable terms of exchange, both you and your neighbor walk away from the trade viewing yourselves as equally better off.

Violence has been avoided, peaceful relations have been established between you and your neighbor, and each of you will have helped create a social environment of trust and confidence for future trading opportunities.

As more and more people enter into and successfully participate in these trading opportunities and benefits, the associating individuals begin to specialize in the production and sale of those goods and services in which they discover they have a comparative advantage over the growing number of trading partners.

Specialization Raises the Standards of Living of All

Soon, these people find themselves linked with each other in an expanding social system of division of labor. One is the butcher, another is a baker, a third is the brewer, and a fourth is the candlestick maker. Historically, this all developed over thousands of years in different parts of the world, in different social circumstances. But the end result in the world in which we all live today is that we are increasingly active and mutually benefitting participants in the global division of labor of market exchange incorporating billions of human beings.

Almost 250 years ago, the famous Scottish moral philosopher and political economist, Adam Smith, already pointed out how a simple workman’s course wool coat was the product of a multitude of human efforts involving production processes in various parts of the world, all of which were integrated and coordinated by the market forces of the 1770s to make the modest outer garment that kept the unskilled laborer warm in the winter months.

Today, the complexity and integrated interdependency of those billions of human beings is light years advanced from what seem to us the primitive production methods of more than two centuries ago, in Adam Smith’s time. Communication and trade has gone from the horse drawn wagon and the sailing ship to near instantaneous written, audio and video interactions between people on opposite ends of the planet.

And the ideas, technologies and innovative capital at our disposal has enabled a growing portion of humanity to attain standards of living unimaginable by even the most wealthy of past ages. All of this has been made possible through that simple but essential system of division of labor through which each of mankind’s members finds his niche to earn a living and then enjoying the cornucopia of improved and new goods and services that the rest of humanity offers to him in trade for what he specializes in and offers to everyone else.

What has sometimes confused a better appreciation of all this is that an understanding of how we all fit into this global network of human association is not always easily grasped by many of our fellow economic citizens of the world. As a result, fallacies and fables are too readily accepted. Let us review some of them.

The Fallacy that “Exports” are Good and “Imports” are Bad

For centuries, the fact that what you sell earns you money, while what you buy costs you money, led many to say that exports are the source of riches, but imports drain away part of a person’s or a country’s wealth.

However, the only reason we, ultimately, produce is to consume. The only reason we specialize in some trade, profession or occupation in the division of labor is to earn the financial wherewithal to, then, use our earnings to buy what others can offer to us that we cannot make for ourselves, or not at as low a cost as they can offer it to us, or in types and qualities beyond our own abilities. In other words, we produce and “export” our own good or service as the means to “import” those things that others offer to us.

As a professor of economics, I “export” my teaching services in the classroom to the institution of higher learning that has hired me, and I use the salary that institution pays me to “import” into my own household the goods I desires to use and consume. My teaching services “exports” are the means to acquiring the “imports” of all the goods I want to buy.

Therefore, the gains from trade for any individual are the desired goods they buy from others – the imports – and the goods sold to acquire the money income to buy them – the individual’s exports – are the means to that end.

The money earned from selling a good is merely the necessary and essential intermediary step or stage to attaining the end goal, that being the goods that money can buy. What we ultimately want in trade is not money, but what that money can buy once it has been earned.

This is no less true for a nation, which in a free market economy is merely the cumulative trade of all the individual members of that country among each other and with those individuals who may be a buyer or seller in another country.

The Fallacy that Imported Goods Cost American Jobs

But, the doubter or critic may ask, do not imports cost the jobs of those American workers who are employed in industries that cannot successfully match the foreign competitor’s price or quality advantages? Is this not a case in which the foreign producer’s gain of American consumer business is at the cost of American jobs and industry?

It is true that if a foreign rival can successfully sell a good in the U.S. at, say, a lower price that his domestic American competitor, the American producer can lose business and in the extreme be competed out of business. And employments in that American producer’s enterprise may be lost.

But that does not mean that alternative employments will not emerge to replace those lost. If, in fact, the foreign rival can seller his product for less than his American competitor, this will improve the financial circumstance of the consumers of that product. Suppose that the American producer had been selling his produce for $10 per unit. And now the foreign seller offers it in America for $5 per unit.

The American consumers now can buy a desired product at half the expense as before. This improves their real income, because they now have the wanted product for $5 and have $5 left in their pockets compared to what they used to pay the American suppler for this good. This enables each of them to increase their demands for other goods they previously could not afford to buy by the amount of $5.

This greater demand for other goods and services that consumers can now buy in the market offers part of the alternative employment opportunities for some of those who may have lost their positions in the business of the American producer who had cut back his enterprise or gone out of business in the face of the more cost-efficient foreign competitor.

Also, those foreign suppliers of goods do not give them away to American consumers. They, too, are interested in selling their products to earn the income that enables them to buy other goods that they want to buy. The dollars they may earn in the U.S. normally cannot be used to buy goods in their home country. They wish to earn those dollars precisely, in most instances, to have the financial means to buy goods they are interested in purchasing in the United States.

Thus, foreign sellers’ demands for American goods open employment opportunities in the U.S. exporting sectors of the economy. Since, as was explained, American exports are the means by which Americans are able, ultimately, to buy the imports they want to acquire. If the foreign earner of those dollars does not, himself, wish to buy American goods or investment in American industry, he will sell his unwanted dollars on the foreign exchange market to those who do wish to have the dollars to make desired purchases in the U.S. or investment directly or indirectly in the American economy.

Thus, the composition and types of jobs in the U.S. economy may change over time due to the changing buying and selling opportunities in the global economy, but the total number of jobs need not be negatively affected in the long run. Plus, all will have gained as consumers by having more, better, and less expensive goods and services available from participation in the global market.

Finally, it may be asked, don’t other countries sometimes play by “unfair” international trading rules? Don’t governments subsidize some products to artificially sell their goods in America below “real” costs of production? And don’t those same governments try to protect their domestic industries and jobs from American competition through import restrictions or regulations that limit the ability of American companies to compete in those foreign lands?

“Punishing” Foreign Countries Harms American Consumers

The answers to all these questions are: Yes, foreign governments sometimes do such things. But if a foreign government is, in fact, subsidizing one of their national industries to sell its goods in America below their actual costs of production, it is the taxpayers in that foreign country who should be complaining, because it is their taxed pockets that are being picked by their own government to transfer the amount of the subsidy from the hardworking income-earners in that nation to the privileged businesses receiving the government handout. Their the ones being plundered to benefit a special interest group.

Who benefits from this subsidy? The American consumers who find it attractive to buy that good at that subsidized price. Again, they are able to purchase a less expensive (foreign) version of the desired good. Again, they save on the cost of buying it, meaning there are dollars left in their pockets that were not there before. And alternative jobs and export opportunities emerge, just as if the foreign import had been selling for less due to market-based cost-efficiencies on the part of the foreign rival rather than a subsidy from its government.

American consumers are given a “gift” of a higher standard of living at the expense of the taxpayers and consumers in that foreign country from which the subsidized import is coming.

It is also the case that foreign governments guided by some of the same economic fallacies that have been heard this year on the American presidential campaign trails have imposed trade barriers or import restrictions on goods coming from the United States. But there is nothing that any administration in Washington, D.C. can do about this that would not entail harming American consumers and producers here at home.

If a retaliatory import barrier is imposed against some goods imported from that foreign country, this makes some goods more expense or less available for members of the American consuming public. They are made the victims by their own government due to some foreign government trying to protect one of their industries from American competition. The sins of a foreign government fall upon innocent American consumers, when the U.S. government follows such retaliatory trade policies.

The benefits from international trade and global competition are too great, even when some governments attempt to intervene and regulate trade within their countries to advantage some domestic special interest group, to fall into the types of economic fallacies discussed.

Regardless of the misguided and wrong-headed policies that other countries may follow in the arena of international trade, commerce and investment, Americans will most gain from whatever trading opportunities that may offer themselves around the globe if the U.S. government follows a strict and principled policy of unrestrained and unrestricted free trade with any and all nations of the world.

Dr. Richard M. Ebeling is the recently appointed BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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