The Mercantilist Fallacy
By Adam Platt
The Central American Free Trade Agreement (CAFTA) is in trouble. It is so because Congress and the public have forgotten that imports are a benefit of trade, not a cost.
Economists have long recognized the gains realized from imports as well as exports. Nobel laureate Milton Friedman maintains that “our gain from foreign trade is what we import. Exports are the price we pay to get imports.” Similarly, the 19 th century economist David Ricardo’s theory of comparative advantage showed that trade benefits nations by allowing each one to focus on producing those goods and services for which it can create the most value. Without imports such a benefit would be impossible, as we would have to produce every good or service our nation consumes no matter how inefficient it is to produce domestically.
So why do policy makers denounce imports as a burden and tout exports as the ultimate prize? The answer begins with a misperception that dates back to colonial times.
Mercantilism was the economic system of the major trading nations during the colonial era, based on the fallacy that exports increase national wealth while imports represent a decrease. The mercantilist fallacy has proven an extremely useful tool for domestic producers unable to compete with foreign firms, and for the politicians who seek to protect them at the expense of consumers and the broader economy.
On CAFTA, Senator Kent Conrad (D-ND) says that our message to Congress should be, “Don't trade away our farms, don't trade away our jobs, don't trade away our economy". According to Senator Byron Dorgan (D-ND), "Senators are going to ask why we should ratify another trade agreement…when the old agreements are producing nothing but record trade deficits."
They have invoked the mercantilist fallacy in this case in order to protect the sugar producers in their state. In Senator Dorgan’s own words “Any additional sugar imports can only hurt North Dakota sugar producers.” The only way they can continue to force U.S. consumers and businesses to pay multiples of the international market price for sugar is by convincing people that cheap sugar imports would damage our economy, and of course, cost jobs.
In fact, artificially high sugar prices have forced confectionary producers to move abroad or shut down, costing thousands of jobs. The number of jobs lost due to sugar protectionism far exceeds the total number of sugar farmers in the United States, yet Senator Dorgan and Senator Conrad maintain that they are protecting jobs.
Members of Congress in situations like these have found mercantilist thinking so convenient that they are blinded to the basic economics of trade. In turn they have been quite successful in blinding the voters as well. Public support for free trade has collapsed over the past 5 years due to increased attention to trade deficits. In this climate, it is widely deemed that CAFTA does not have enough votes to pass either house of Congress.
It’s a shame for which supporters of free trade bear some responsibility. Arguments in favor of free trade agreements from both the Clinton and Bush administrations have been framed within the mercantilist paradigm, focusing on the benefits of increased exports and downplaying the effects of the corresponding imports. Such arguments will no longer work in an era of trade deficits, and they make matters worse by legitimizing mercantilist rhetoric. If you accept that imports are bad for our economy, you will have to accept that almost any free trade agreement is a bad idea. A mercantilist argument for free trade is doomed from the start.
For trade agreements such as CAFTA to gain public and congressional support, champions of free trade must make the case that opening our markets to imports will be good for the U.S. economy. Only through this economically correct prism can free trade regain acceptance.
Adam Platt is a Research Associate at the Competitive Enterprise Institute (www.cei.org)
The Central American Free Trade Agreement (CAFTA) is in trouble. It is so because Congress and the public have forgotten that imports are a benefit of trade, not a cost.
Economists have long recognized the gains realized from imports as well as exports. Nobel laureate Milton Friedman maintains that “our gain from foreign trade is what we import. Exports are the price we pay to get imports.” Similarly, the 19 th century economist David Ricardo’s theory of comparative advantage showed that trade benefits nations by allowing each one to focus on producing those goods and services for which it can create the most value. Without imports such a benefit would be impossible, as we would have to produce every good or service our nation consumes no matter how inefficient it is to produce domestically.
So why do policy makers denounce imports as a burden and tout exports as the ultimate prize? The answer begins with a misperception that dates back to colonial times.
Mercantilism was the economic system of the major trading nations during the colonial era, based on the fallacy that exports increase national wealth while imports represent a decrease. The mercantilist fallacy has proven an extremely useful tool for domestic producers unable to compete with foreign firms, and for the politicians who seek to protect them at the expense of consumers and the broader economy.
On CAFTA, Senator Kent Conrad (D-ND) says that our message to Congress should be, “Don't trade away our farms, don't trade away our jobs, don't trade away our economy". According to Senator Byron Dorgan (D-ND), "Senators are going to ask why we should ratify another trade agreement…when the old agreements are producing nothing but record trade deficits."
They have invoked the mercantilist fallacy in this case in order to protect the sugar producers in their state. In Senator Dorgan’s own words “Any additional sugar imports can only hurt North Dakota sugar producers.” The only way they can continue to force U.S. consumers and businesses to pay multiples of the international market price for sugar is by convincing people that cheap sugar imports would damage our economy, and of course, cost jobs.
In fact, artificially high sugar prices have forced confectionary producers to move abroad or shut down, costing thousands of jobs. The number of jobs lost due to sugar protectionism far exceeds the total number of sugar farmers in the United States, yet Senator Dorgan and Senator Conrad maintain that they are protecting jobs.
Members of Congress in situations like these have found mercantilist thinking so convenient that they are blinded to the basic economics of trade. In turn they have been quite successful in blinding the voters as well. Public support for free trade has collapsed over the past 5 years due to increased attention to trade deficits. In this climate, it is widely deemed that CAFTA does not have enough votes to pass either house of Congress.
It’s a shame for which supporters of free trade bear some responsibility. Arguments in favor of free trade agreements from both the Clinton and Bush administrations have been framed within the mercantilist paradigm, focusing on the benefits of increased exports and downplaying the effects of the corresponding imports. Such arguments will no longer work in an era of trade deficits, and they make matters worse by legitimizing mercantilist rhetoric. If you accept that imports are bad for our economy, you will have to accept that almost any free trade agreement is a bad idea. A mercantilist argument for free trade is doomed from the start.
For trade agreements such as CAFTA to gain public and congressional support, champions of free trade must make the case that opening our markets to imports will be good for the U.S. economy. Only through this economically correct prism can free trade regain acceptance.
Adam Platt is a Research Associate at the Competitive Enterprise Institute (www.cei.org)
3 Comments:
I find myself in agreement with Adam Platt on what he writes with the exception of his argument about free trade increasing the number of jobs. Free trade will have little effect on the total number of jobs in the economy, what it will do is move those jobs around. Trade will replace bad jobs, in areas where we don't have a comparative advantage, with better jobs, in areas where we do have a comparative advantage. As Paul Krugman has written "[i]t should be possible to emphasize to students [and everyone else] that the level of employment is a macroeconomic issue, depending in the short run on aggregate demand and depending in the long run on the natural rate of unemployment, with microeconomic policies like tariffs having little net affect. Trade policy should be debated in terms of its impact on efficiency, not in terms of phony numbers about jobs created or lost."
Adam Platt says "...economist David Ricardo’s theory of comparative advantage showed that trade benefits nations by allowing each one to focus on producing those goods and services for which it can create the most value."
While this is a common interpretation of David Ricardo's Theory of Comparative Advantage it is not what the theory says. What the theory says is that if certain conditions of comparative costs exist between two nations trade benefits both by allowing both to shift production resources from goods each is less efficient at to those goods each is more efficient at. The theory does not suggest benefit from trade that results in idle production resources.
CAFTA trade, like NAFTA before it, will result in idle resources. For example, American taxpayers subsidize farm products which are sold to Mexico below the cost of production. That creates unemployed Mexicans who, because offsetting trade does not create enough jobs, illegally immigrate to the United States and depress wages of Americans. Creating an additional subsidy to American farmers.
Illegal aliens fill our emergency rooms, costing hospitals millions of dollars in unreimbursed care and raising the price of health care for the rest of us. They overburden our schools, increasing class sizes, requiring extra attention because of poor English skills and stealing teacher time from other students. They overcrowd our jails and prisons, costing us millions more. They clog our streets and freeways, driving without licenses and insurance. They take jobs that should go to citizens. They drive down the wages of citizens. One economist reckons that as a $1700 a year pay cut for every American.
None of this happen in a trade arrangement that meets Ricardo's criteria. Under Ricardo wages in both countries should rise. Clearly that did not result from NAFTA and will not from CAFTA.
The other effect of CAFTA/NAFTA that does not pass muster with Ricardo is the outsourcing. American factories abroad for the purpose of using cheap foreign labor. Ricardo assumed that capital would not cross a border as it does with NAFTA/CAFTA. As he put it:
"The natural disinclination every man has to quit the country of his birth and connections and entrust himself to a strange government and new laws, checks the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profit in their own country, rather than seek a more advantageous employment for wealth in foreign nations."
In fact most of these agreements are not about trade but the protection of capital. Making it save to do what Ricardo assumed would not happen. After the Mexican Revolution of 1910 and the Cuban Revolution of 1959 a lot of American property was confiscated by local governments. Most of the CAFTA/NAFTA agreements are about making sure that does not happen again.
Free Trade is first and foremost a misnomer. It suggests that there is no inherent cost in trade with other nations when in fact there is. See the owners of small and medium manufacturing companies which are largely family owned and operated are being put out of business by corporate behemoths that use investor resources to steal everything including people's jobs and they do not care because they have there's and that is all they care about. I suggested on my message board that people not buy corporate bonds or stocks in companies which engage in criminal behavior or selfish and self serving behavior. IF they succeed in nullifying sharreholder lawsuits the joke is on the rich who will stand to lose the most. But you may want to know because it says made in America it may not be because the components may be made elsewhere and put together in somewhere like American Samoa.
The deficit comes from the FACT that the US does not produce as many exports as it accepts in imports. Manufacturing typically helps to raise income levels and standards of living unlike service or retail jobs. This means less income, sales or other taxes available to government for the benefit of society. It also means a lower standard of living and a disparity of income and resources for society at large. These are proven facts. Less income and resources means people cannot afford housing, goods or services which sustain any economy. This means a greater reliance on charitable or governmental resources to provide services which prevent poverty, homelessness, etc. It's a vicious circle.
I doubt this will change though because everyone is selfish and self serving and will lie to protect themselves and because they are deluded in the belief that the status quo is better than change.
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