If you listen to the conversation about international trade, it is apparent that Americans are not well versed on this topic. Although we are a nation of traders, have supported reduced trade barriers since the end of World War II, and have prospered beyond any nation on the planet, we have somehow come to the point of believing that we are being “cheated” by our trade partners.
This perception is reinforced by the fact that free trade does, in fact, destroy domestic industries. There are many steel workers who have lost their jobs to foreign competition. On the other hand, there are many more workers in this country who owe their jobs to free trade.
Every sheet metal tradesman, metal fabricator, body shop, roofing contractor and car manufacturer will likely see a jump in materials cost, a reduction in after-tax profit and layoffs as a result of the new tariffs on steel and aluminum imports President Donald Trump announced this month. Moreover, we will pay more for anything constructed of steel or aluminum. Whatever gains can be made in the steel industry from the tariffs will be more than offset by the losses to all of us.
Free trade allows us to be far more wealthy than we would be without it. This is because of comparative advantage. Every nation has some product or service that it can do better than anyone else. It might be because of wage levels, availability of raw materials, climate, access to transportation, good communication infrastructure or a thousand other factors.
If a nation trades a product over which it has a comparative advantage for another product, it ends up with more of each. It’s really a simple mathematical relationship used in every introduction to economics class in this country.
Our economy isn’t very good at producing steel, but is at producing things like jet engines and software command-and-control systems. If we focus on trading our jet engines and software for steel and clothing, we will end up with more of each. This is not a partisan platform, but a well established and confirmed characteristic of free international markets.
We also tend to forget that the only place where an America dollar is legal tender is America. This means a country like China that has a trade surplus with the U.S. ends up with a lot of American dollars. Although the usual procedure is to use those dollars to buy American products, most Chinese who live outside coastal trade areas are too poor to buy American products. As a result, the Chinese central bank (and any other sovereign bank in a country with a trade surplus) ends up with a dollar surplus.
They invest these dollars back into the American economy by purchasing debt. Presently, about $6.3 trillion — or 45 percent — of our national debt is held by foreign investors, the largest of which are China ($1.18 trillion) and Japan ($1.06 trillion).
Now this is not a desirable situation, but it means that the cost of our borrowing is held lower because of our trade deficit with foreign nations. This is quite significant considering our new tax code is going to create somewhere between $750 billion and $1.5 trillion of debt.
Finally, much of our trade imbalance is due to the strength of our dollar, which is to say our economy. Compared to most other currencies, the dollar, and the American economy, is a bedrock standard. It is so respected that over half the American currency in existence is held outside the borders of the U.S. as a security blanket by millions of people. That respect comes with a price tag.
The dollar is just like a product on the market — when the demand is high, the price of the good goes up. When citizens in other nations consider buying an American good or service, they have to pay prices quoted in dollars. This means that even in a free-trade environment, buying American goods will cost more than buying comparable goods from our international competitors.
Economies change over time, and so should our trade agreements. Changing comparative advantage, purchasing power and currency values make constant renegotiation a necessity. But unless we are willing to live more austere lives, throwing up nationalist trade barriers and rejecting free-trade agreements will only make us all worse off.
Alan Haley writes about economics and Maine life from his home in Skowhegan. He can be reached at ahaleywshs@gmail.com.
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