International trade: Real problems, real solutions

As a student of economics, I recall my first encounter with the concept of Pareto Optimality – i.e., the idea that we can find a state in which any further change would benefit one party only at the expense of another party. International trade offers a nice lens with which to consider this concept.

I’ve argued before that free trade is mutually beneficial, in that both parties of a trade improve their standings by doing the deal. A reader of one of my earlier blogs commented that, while the agent of the trade sees the trade as being desirable, the same can’t be said for all stakeholders. More specifically, the business that outsources some of its required inputs to foreign sources may unambiguously lower its costs; but in doing so, it might also end up shifting production offshore, thereby causing a loss of jobs at domestic suppliers.

Clearly, not everyone benefits from international trade. Obviously, there are winners and losers. From a policy perspective, where should the federal government stand in this calculus? On one hand, we pride ourselves on having a capitalistic system that offers free markets for free men and women – i.e., the idea that people (businesses) should be free to engage in contractual arrangements that serve their interests. On the other hand, to the extent that some are likely to be disenfranchised by those private actions, should those disenfranchised be offered some measure of relief? And if so, at the expense of whom? Should it be the government that supports this disenfranchised population, or should it be the agents that have benefited by the trade. Put another way, do those who directly benefit from international trade bear an obligation to those who suffer from it?

We should be clear that it’s not just the business owners who benefit from the trade. It’s also their customers who enjoy lower prices that derive from the lower cost structure. Thus, the “winners” from trade are a much broader and diverse population than simply the business owners. The winners are just about all of us who enjoy broadly-based lower prices, deriving from trade. The losers, on the other hand, are more easily identifiable. They are specifically those who lose their employment because of jobs moving offshore.

At this point, Trump is using his bully pulpit to characterize the loss of jobs that we’ve seen over from globalization recent decades, particularly in manufacturing, to be a disaster requiring remediation, with tariffs serving that purpose. To my mind, this policy orientation gives far too much credence to the use of tariffs, relative to what it deserves. It’s one thing to apply protectionist policies to products or industries that are central to our national security, but extending these policies more broadly is ill-considered.

Even if we were able to encourage domestic production over foreign production in areas outside of national security interests, we would do so for an exorbitant cost – a cost comprised not only of the fixed cost of building those facilities but also the cost of higher prices sustainable only by applying beggar-thy-neighbor policies that throw workers in other (generally less well-off countries) out of work. Where’s the fairness in that?

I think it’s legitimate to worry about the losers from globalization, but tariffs and trade barriers aren’t the way to address the problem. To be clear, the problem that derives from globalization is trade-induced unemployment; and that can be addressed by providing more generous support and unemployment benefits to those who lose their jobs from international trade. Such aid would likely be of a finite life, whereas trade barriers and tariffs could end up causing all of us to bear higher prices, virtually forever. That latter option doesn’t appear to be a Pareto optimal outcome in my book.

If we are to address the issue of lost jobs due to international trade, we should do it in the most cost-effective manner available to us. Directly assisting those affected would be a much cheaper solution than imposing higher costs and prices throughout our economy, ad infinitum.