Friday, February 20, 2009

Which Way on the Trade Road?

This post relates to the following Keystone Economic Principles:
2. There ain’t no such thing as a free lunch.
4. Economic systems influence choices.
6. Do what you do best; trade for the rest.
8. Quantity and quality of available resources impact living standards.

There are many roads one can venture down if you use the current economy as a starting point. That’s part of what makes this an interesting time to be an economics teacher.

One of these roads is named "international trade." And it one can travel in one direction and discuss globalization and free trade, or one can travel the other direction and discuss tariffs, protectionism and "buy American" sentiment. Either way gives you the opportunity to introduce topics of comparative advantage, growth and development, and markets and prices - to teach the fundamental ideas of economics.

There are a number of recent resources that one can use to map out your journey. This is my attempt to bring a few of them together for your consideration.

The first (chronologically) is a piece by regular contributer to The New York Times, and the most recent winner of the Nobel Prize for Economics, Paul Krugman. In it, he discusses the circumstances (current) that would be appropriate for introducing protective trade legislation, specifically "buy American." He also points out that it is a "second best approach," but also puts opines that the best approach - coordinated action to increase economic activity including trade - may not be feasible. In short, buy American is not a free lunch. But it may have lower opportunity cost than the preferred "lunch." It may be the best route available to policy-makers. I think there are other institutions that may be weighting the decision-making process of those policy-makers. And while Krugman notes there are externalities to a more open trade policy at this point in time - I'm not convinced that there aren't other, more serious externalities to managed trade.

The second resource is from last Sunday's edition of the CBS weekly news magazine, 60 Minutes, and dealt with the "buy American" clause in the stimulus package. The arguments put forth by a steel company executive interviewed in the piece are interesting. They should provide ample opportunity for discussion and debate. But other executives are interviewed as well and their points are worth noting. Certainly, "buy American" could have an impact on their products and their customers, both here and abroad. And while the steel company exec dismisses the idea of a trade war with an assertion that "they (China) need us as much as we need them," his charge of dumping lacks credibility if we are to believe that the cost of other countries' steel is half the cost of U.S. steel. Again, there's no such thing as free lunch. To portray barriers as having no cost may be viewed by some as naive or self-serving. Or it may be somewhere in between. But one principle remains. The quantity and quality of available resources affects living standards. If we pay more for something, that means we must give something else up. The question may be "what is it?"

Another economist and Nobel Prize winner, Joseph Stiglitz, presents a more cautionary view. He notes that many of the countries of the world have long had to compete with a U.S. that provides numerous subsidies, barriers, and guarantees. The most salient point in Stiglitz's piece comes in the form of a question at the end. "America led the world in globalization. With American-style capitalism and America's financial markets in disrepute, will America now lead the world into a new era of protectionism, as it did once before, during the Great Depression?" One certainly hopes not.

And that brings us to the final item. It is an op-ed piece from today's issue of The Wall Street Journal. The title, "Protectionism Doesn't Pay", would at first seem to be an expected line delivered by a stereotypical member that paper's subscriber-base. But it's not. It is a well-written and well-reasoned essay from Chen Deming, the Minister of Commerce of the People's Republic of China. He uses data and history to great effect. And while some would dismiss this on the basis of "his country stands to lose." I counter with why would that make opposing views more credible? Don't those on the other side of the argument have something to lose?

These last two pieces remind us that "economic systems influence choices", and "do what you do best and trade for the rest." If we choose a system that provides choice and allows resources to flow more efficiently, that can have benefits. Are there costs? Yes. But the costs are the same as those that are imposed when you stop at one gas station while passing others by; or shopping for groceries at one store and bypassing others.

Regardless of where your students align on the topic, these resources will provide you with something to consider before or during discussion. I look forward to your comments.


Mike Fladlien said...

The Economist last week had on the cover a hand emerging fromt the grave to show a return to protectionism...let's hope not.

Pete Murphy said...

Trade is a wonderful thing but an enormous, persistent trade deficit is not. Since our last trade surplus in 1975, our cumulative trade deficit is now $9.1 trillion. It's been financed by a sell-off of American assets and has left us bankrupt as a result. It is this enormous imbalance in global trade that lies at the root of the global financial melt-down.

Regarding the "buy American" provision of the stimulus package, a strict "buy American" rule would have been a clumsy, sledge hammer application of protectionism in reaction to the results of an equally clumsy application of free trade. When it comes to correcting our trade deficit, we need to preserve the many truly beneficial trade relationships the U.S. enjoys - the relationship between the U.S. and Canada chief among them.

We need an overhaul of trade policy that focuses on the real root of the problem - the large disparity in population density* betweeen the U.S. and countries like China, Japan, Germany, Korea and others, while leaving trade between the U.S. and many countries like Canada barrier-free.

Pete Murphy
Author, "Five Short Blasts"

* For info about how population density drives the trade deficit, please visit my web site at

condos Toronto said...

Interesting thoughts, indeed. I prefer free trade, because I believe everybody has freedom to buy and bring product from China or Germany and no authority has moral right to stop him.
On the other hand, I don't have big problem with "buy American" conception, if it's just psychological. We are choosing among variety of products with different characteristics - function, design, color...and the country of origin is one of them. So it's ok to buy some product, just because it's from USA (or Canada...). But it has to bee voluntary.