Due to the Presidential Election and the Trans Pacific Partnership negotiations, Free Trade is in the news again. Not since the North American Free Trade Agreement have so many folks had free trade on their mind – and it’s a constant topic on stump speeches on the campaign trail and at the debates. Free Trade is, strangely, a controversial topic in America – while Economists (and results!) agree that free trade undoubtedly improves the welfare of the country as a whole, some subsets of workers are worse off when previously American jobs are moved to cheaper overseas locales. With that in mind, would you pay more for American made goods?
Free Trade vs. Paying More for “Made in America”
Let’s back up to the benefits of free trade and globalization for a second.
The two really go hand in hand – free trade being, of course, trade over international borders with (ideally) no friction in the form of quotas, tariffs, or restrictions.
Globalization is an outcropping of that idea – if everything from commodities to finished products can be traded across country boundaries, why not employment itself? You can think of globalization (or at least economic globalization) as the interconnections and interdependence of foreign economies which grows from the trade of not just goods but knowledge, skills, and good old cash.
And, as a whole, Economists agree that both free trade and globalization are net benefits to countries that practice it. As detailed by Greg Mankiw, they are #2 and #5 on the list of ‘Things Economists Agree On”:
2) Tariffs and import quotas usually reduce general economic welfare. (93%)
5) The United States should not restrict employers from outsourcing work to foreign countries. (90%)
… And the benefits of free trade are many. Here’s a partial list:
- Cheaper goods and services as work and manufacturing moves to areas better able to provide manufacturing or skills
- Larger markets as goods can be sold across political boundaries
- A peace dividend as interconnected economies are less likely to go to war
- Cultural spread as trade partners share in various cultures in other countries
- Increased competition as global markets mean more potential workers
- Higher growth as scarce local resources can be imported
That’s not nearly a complete list, but the benefits of free trade and globalization are numerous. There are also moral arguments in favor of free trade – India and China, in particular, have benefited from free trade and globalization as many in their populations have climbed out of poverty in the last 30 years:
(There is an interactive feature here, please click through if you are in a feed reader)
The Dark Side of Free Trade
Before you think that free trade is unambiguously a good thing, spare a few thoughts to the downsides of free trade – not all classes and industries benefit equally from globalization and free trade.
Specifically, the working class often suffers from distributional effects of free trade with poorer countries.
For a well-known example, when we liberalized trade with China, it could do comparable or similar work for a much cheaper price than America so some industries in the United States were devastated. While that means we can get steel for much cheaper than we could in the 70s, the benefits of that cheaper steel accrued to American purchasers of steel… but not our steelworking industry.
And so it goes with many products previously made in America: you can find examples in everything from kitchen utensil manufacturers to pharmaceutical companies which have left our fine shores for some reason or another. And lest you think it’s only physical and manufactured goods moving, knowledge based industries like High Tech have also been part of the trend, with High Tech enclaves popping up everywhere from India and Israel to China and Mexico.
Again, it’s a net benefit to a country as a whole to receive cheaper goods and services, but the benefits and the disadvantages aren’t equally distributed – every slightly cheaper job moved overseas is a few cents in savings for customers, but in many cases a lower paying job for the American worker. And, more often than not, that displaced worker had been part of the working class – while it’s hard to outsource some services and trades, manufacturing in particular has lost jobs which will probably never return.
It’s worth thinking about how better to spread the disadvantages of trade – retraining and continuing education are a great start, but it’s worth taking a look at alternative solutions like a negative income tax which could ease losses due to globalization with a national safety net.
Is It Patriotic to Pay More for American Goods? Would You?
Another solution to the problem might be to throw out the economic consensus in some circumstances. A recent Bloomberg poll (albeit, a poll in a charged election season) asked whether people would be willing to pay more for American, “Made in the USA” goods, or if they would always try to seek out the cheapest price. Here’s what respondents claimed:
82% Made in the U.S.
13% Lowest possible price
5% Not sure
Now, a verbal answer to a poll isn’t binding, but it was interesting to see just how many folks, across all ideological bands, answered the question.
It’s pretty obvious that our peers would pay at least slightly more for American goods if given the choice… and (I won’t mention names!) there are a number of companies which explicitly call out their Made in America status to explain higher priced products. In many cases brands are successful with that strategy – lending credibility to the poll results as people actually vote with their cash (and credit cards) and do choose to pay more for American goods.
Freeish Trade, “Globalizationishness”, and Paying More for American Patriotism
Free Trade and Globalization are unequivocally beneficial to a country as a whole, but we don’t need to work on averages and sums all of the time. It’s obvious that the benefits certainly don’t accrue equally to everyone, dislocations can happen quickly, and previously high paying jobs might suddenly no longer exist in an area.
If we’re truly in the midst of a protectionist movement as the other (original) PK Paul Krugman says, we should always think about the distributional effects of free trade and strategize on how best to help American workers in industries most disadvantaged by cheaper overseas competition.
While I wouldn’t defend full redistribution to solve the issue, we’re on record here at DQYDJ of being pro-cash transfers in the form of a Negative Income Tax to any lower earning worker, not just those with jobs displaced by globalization (see our Negative Income Tax cost estimator here). I’m also not in agreement that we should actively spike any future free trade negotiations and agreements – the benefits to low trade barriers are too numerous. I’m just interested in the best way to ease the burden on our disadvantaged peers.
So let’s open it up to you fine readers – what are your thoughts on globalization and free trade? Would you, too, pay more for American made products? Is there a solution which allows us to ease the globalization burden on specific industries? Will finance web sites soon be viable only overseas?