Who Benefits From Trade?

Column 2018-10 (12/17/18)

There is more insanity about trade in the air today than there is snow in the air during a Michigan winter. Much of that insanity flows from a person named Trump. I’ll let you guess which Trump. It seems, to me at least, that it is time to again visit the matter of trade. Why do we trade? How important is trade? Who benefits from trade? Who is hurt by tariffs? Who benefits from tariffs? Is it, as that Trump claims, easy to win a trade war?

Who benefits is easy. Everyone who doesn’t want to struggle to survive on subsistence agriculture benefits substantially from trade. The specialization that makes our high level of productivity and standard of living possible couldn't exist if everyone had to make all of his own stuff. Without trade most people now alive couldn’t survive.

Both parties to a trade expect to benefit. Neither would make the trade if he didn’t expect to benefit. Sometimes the benefits don’t materialize. This risk isn’t limited to trade. Due to uncertainty about the future, any choice we make may turn out to be wrong. In most trades the benefits flow and we keep on trading.

There is a common myth that where our trading partners live is a big deal. It isn’t. Long distance trades are more difficult. Still, we wouldn't make the trades if we didn’t expect to benefit. This is as true in trades with people in Asia as in a trade with your neighbor.

All trades affect other people. If you switch grocery stores, one loses business, the other gains business. Trading can eliminate some jobs, but it creates others. The new jobs better serve consumers. That is why consumers switch suppliers.

The creative destruction eliminated 700 thousand or so jobs in Michigan last year. It also created more than enough new jobs to replace the old ones.

Some are concerned that when we buy shirts from China, the new jobs are in China. That is only half of the picture. To pay for the shirts, we send aircraft, soy beans, etc. to the Chinese. That creates jobs in the US.

Government borrowing isn’t a good thing; however, when the government borrows from China and spends in the US, it creates jobs in the US. If the US government gives the money to foreign countries, don’t blame China. We are still as well off as we would be if the US government had borrowed the money in the US.

US tariffs are paid by the buyers in the US. If the tariff stops imports, buyers then pay higher prices resulting from the elimination of the preferred supply. The only beneficiaries are the suppliers that can charge higher prices because of the tariffs.

As for winning trade wars, at the moment I can’t think of even one case where gains exceeded losses. The same as in shooting wars, trade wars are about how much you can hurt the other side.

The initial tariff reduces trade which means both sides are losers. The retaliatory tariff further reduces trade, again harming both sides. If someone breaks your left leg, Does it make sense to retaliate by breaking your own right leg? The closest thing to winning a trade war is ending it.

It might be worth noticing that various economists have from time to time warned that if goods don’t cross borders, solders will. Nations that don’t trade with each other are much more likely to go to war than are those that trade.

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Copyright 2018

Albert D. McCallum