Kindergarten trade theory

The rhetoric of the outsourcing debate in the USA has never seemed sillier than in this piece from a senior editor of the “Atlantic Monthly(link to the Atlantic on-line)”: bq. But the picture conjured up [of] foreign companies dumping goodson America leaves something new out: U.S. firms relocating to low-wage countries, producing goods or rendering services there, and exporting them here—American corporations dumping on America. Absent a wage-equalizing tariff on those goods (or services), nothing will keep such companies here. Nothing will keep their jobs here. Nothing will prevent the erosion of the American standard of living. Either we will recognize social dumping as a threat to our way of life as grave as product dumping was to America’s effort to industrialize—or the economic base of the middle class will be destroyed. (emphasis added) This talk of ‘social dumping’—by which the author means ‘low-wage competition’ from abroad—is obscure, alarmist nonsense. The gains in the “gains from trade” come from the wealth that imports bring us. When consumers buy the products of foreign labor at lower prices than domestic products they are better-off because they have satisfied one need while keeping more money for other things that they also want. This is not rocket science. Any shopper in Woolworths or Wal-Mart can tell you this much. Now, here’s the part that is apparently too hard for the Editors of the Atlantic. Please look away now if you are embarrassed by kindergarten economics. Access to lower priced foreign goods means that with a given amount in her pocket, the consumer is now wealthier. She commands more purchasing power. But she and every other consumer in the economy spends much more on domestic produce (goods and services) than on foreign produce: the value of imports of goods and services was less than 15% of US final spending i.e. GDP in 2000. So her new-found wealth will be directed mostly to domestic producers. If the consumer is allowed to access the ‘outsourced’ products, the whole country is better off as a result of her greater wealth. So far from leading to a loss of production (or even jobs), the new wealth due to trade leads to higher domestic expenditure, production, and (usually) jobs. Of course, there are a few other small matters that also determine the level of employment: particularly the official interest rate. But, what happens if the Editors of the Atlantic are allowed to run trade policy and attempt to punish companies moving off-shore by taxing their exports to the USA? One of two bad things: either # the companies stay on-shore, produce high cost goods and services behind the new tariff barriers so that the consumers’ wealth and the nation’s wealth actually shrinks because everthing now costs more, or
# the companies go off-shore anyway, increasing the output of foreign economies by producing high quality goods and services at lower prices than they could in the USA, and everyone but the US consumer (the real victim of any US tariff) is better off The only reason to export, is so we can import.

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