Ever since the days of the Renaissance, trade between foreign—and occasionally hostile—nations has been a disputed question: should it be legal or illegal, encouraged or discouraged, and foremost, is it beneficial for both parties involved? As technology makes global trade more prevalent, the objections to unrestricted trade and the complaints against import duties and tariffs have led to complicated trade deals that are difficult to navigate. Typically the trade deals are a boon to the participating countries—but there are some who are inclined to disagree, for understandable, well thought-out reasons.
However, despite the fact that many opponents of globalization have rational concerns about international trade, the matter’s underlying aspects render them invalid.
The trade deficit can, in no wise, actually be harmful. The definition of trade deficit is “the amount by which a country’s imports exceed its exports,” and despite American unions’ protests, this is neither an undesirable effect or a detrimental one.
The free market principle of mutually beneficial exchange illustrates the point: when one purchases a gallon of milk at the store, one values the milk more highly than one values the money used in its purchase; the store values the acquired money more than it values the milk. Assuming that a trade deficit is harmful, unsustainable, or that it kills jobs assumes that one side of a transaction is always coming out behind. Thus, as in the example of the milk purchase, one side or the other will always be harmed or cheated—which is clearly not the case. The assumption that there is always a winner and a loser in a transaction (there isn’t) and that furthermore, the winner is the one with cash (even further from the truth) fuels the socialist ideology and even forms the basis for movements like Occupy Wall Street. Trade deficits are infinitely sustainable and hardly harmful.
Is independence ideal?
A country’s energy independence is likely a wise consideration; however, banning imports of all energy forms would obviously drive up the prices, limit options, and harm the economy by diverting funds from other, more wise, uses and instead squander savings merely to keep the lights on and the heater running—when energy independence may not even be necessary. Of course, no such regulation thus far has been attempted, but it serves to show that restrictions on imports in other areas are also painful to the consumer, but lucrative to the lobbyists and manufacturers who negotiated the trade ban with legislators. (The automobile industry in the past has relied heavily on such deals.)
A general rule accepted by both left-leaning and right-leaning economists is the law of comparative advantage, which holds that participants in the market all benefit when they specialize in occupations and activities where they already hold an advantage. An extremely popular actor who makes $3,000,000 every year, for instance, could still turn a profit and make money if he or she obtained a job at Wal-Mart—in which case the opportunity cost of working at Wal-Mart would cost millions more dollars than the job is worth. Not only is the popular actor defying the rule of comparative advantage (something that is perfectly acceptable to do, but is generally unwise in a financial sense), the actor is taking an economic wallop for choosing to defy it, evidenced by the opportunity cost.
If one’s occupation is one’s specialty (and the most money is made in its exercise) it makes little sense for one’s attention to be diverted from baking, painting, building, or teaching—and returning to the first example—to tend to a cow several hours each day. In the end, a cow would do more financial help than harm, although it would provide a greater degree of independence. But independence is painful. For instance, in the Dark Ages, many people were independent—but they died young, suffered much, starved often, and innovated little. In wartime or in instances of isolation, independence may be necessary; in others, national economic independence is impossible, impractical, and regressive, because usually regions and countries likewise have a comparative advantage in some area and independence would force them to shy away from the specializations. The United States and Russia are two examples of geographically large and varied nations that cannot fit in one category; but regions within these countries have specialties, as do the towns and communities within the regions. The United States could do well as an economically independent nation—although it would not do as well as it does now. If the idea of “national independence” were taken far enough, autarky would apparently be perfection.
Cheap, foreign imports
Cheap, foreign imports are generally portrayed as the “working man’s nightmare” by groups intent on convincing legislators to approve high import tariffs. However, this is more of a talking point than a truth.
When products typically very expensive in Country A are made available by cheap foreign imports from Country B, all parties benefit except for the manufacturers in Country A, who have a strong incentive to appeal to the “law.” When legislators respond, however, this is an indication that competition is undesirable—which indeed, it is not. In the end, Country A’s consumers will get a better deal, their money will be freed up to invest in other at-home objects (meaning more exports), and more economic growth.
If imports increase, exports also increase and accompanying foreign investments also increase simultaneously, and by a similar amount. The inevitable employment reductions resulting from an increase in cheap imports are entirely offset by employment increases in export industries: other industries in which Country A has the advantage are now receiving cash once tied up in the expensive, homemade goods now replaced by Country B’s cheaper, better alternatives.
Nike vs. Carl the Shoemaker
Lastly, capitalism is an unfair economic system: but it most be noted that all other economic systems are exceedingly more unfair than capitalism and free trade. While Carl the shoemaker may lose business whenever Nike imports running shoes into town, shoes will suddenly become available to the village and money once reserved for shoes only can now be put to use in other areas, including investment, entrepreneurship, or education. Should everyone suffer for the sake of one man’s inconvenience? Carl, after all, can either get a job with Nike or he can branch out into a specialty field of dress shoes, or he could move into an entirely different field. Opportunities are numerous in a thriving free market economy.
Whether the question is of trade deficits, financial independence, or cheap foreign imports, what you see at first is not necessarily reality. Looking beyond the first of a chain of reactions is necessary for financial success and economic understanding.