ABSTRACT
How many people in America (or any other wealthy country) would answer “yes” to the question: Would you favor a government policy that reduced your prosperity, and that of your children, to make it more difficult for poor people in poor countries to escape poverty? Surely this is a silly question. Only someone having a very bad day would answer “yes” to this question. Of course, as everyone knows, the answer you get to a question depends on how it is worded. So consider the following question: Do you favor government restrictions on trade with foreign countries paying very low wages to protect the high-wage jobs of American workers? Though the wording is different, the two questions are really the same, as is explained in this chapter. Yet, a large percentage of the American public, often a majority, answer the latter question in the affirmative. The public opposition in America to international trade was reflected during the 2008 presidential campaign in calls from prominent politicians for a “time out” in negotiating new agreements to expand international trade, with some promising to reduce that trade by canceling existing trade agreements (CNN, 2008). The point is not that large numbers of Americans are so callous that they would sacrifice some of their own prosperity to keep people in underdeveloped countries impoverished. They wouldn’t, at least not intentionally. Instead, the point is that there is a widespread misunderstanding regarding the effects of free trade, with many people sincerely believing that without import restrictions high-paid American workers could not compete against low-paid foreign workers, and would either have to accept much lower pay or be relegated
to permanent unemployment. Given this misunderstanding, the resistance to free trade is best explained, not by any hostility by Americans to poor foreigners improving their lives, but by the aversion we all have to becoming worse off. Since the end of World War II, the United States championed increasing international trade. The lessons of the 1930s were very much on the minds of policy leaders after the war. The Smoot-Hawley Tariff Act of 1930 raised tariffs on 20,000 imported goods. U.S. trade partners in Europe and Canada swiftly retaliated. Businesses lost international customers. Consumers lost access to less expensive goods and services. The standards of living were reduced among all of the trade partners, in the midst of the largest economic downturn in history. What about more recent events? The U.S. economy took an historic nose-dive in 2007-2010. It was the worst downturn since the Great Depression. Gross Domestic Product (GDP) declined in five out of six quarters from 2008 to the first half of 2009. At the start of the recession in December 2007, the number of unemployed people was 7.5 million, and the unemployment rate was 4.9 percent. The unemployment rate hit a high of 10.1 percent in October 2009. The number of unemployed people increased to 15.7 million. In February 2010, the unemployment rate was 9.7 percent. The number of unemployed people was 14.9 million. This is a far cry from the 25 percent unemployment rate of 1933, but this generation has never seen anything like it. Should American citizens yearn for a return to the days of SmootHawley? Let’s hope not. In the next section I will use the fundamental concepts of scarcity, opportunity cost, and comparative advantage to explain why international trade increases American incomes and is the most effective way we could help poor people in poor countries increase their incomes as well. Favoring trade restrictions really is the same as favoring making both ourselves and poor people in foreign countries worse off.
