China Experience Doesn’t Negate Gains From Trade
The coronavirus has brought many things to light that might not have been obvious before if you weren’t looking. One of them is that the Chinese Communist Party is still a dictatorial communist regime with its eye on world economic dominance. There is a recent trend for companies to pull their operations out of China and move them back to the United States, because of heightened risks of doing business there. At this point, however, an estimated 90% of many important pharmaceuticals, including medicines for fighting the virus, come from China, which has threatened to block them if they feel threatened.
It makes sense for businesses to review trade deals with a potential enemy to make sure strategic supply chains are not held hostage. It makes sense to review the actual costs and benefits of dealing with a political regime that requires partnerships with state controlled organizations that don’t have your best interests in mind. It also makes sense not to blur the distinction between dealing with state actors and normal international trade.
The risk that we face at this point is an overreaction and a push to protectionism. We are already in a difficult situation with the shut down and the economic harm that it is doing. In 1930, Congress passed the Smoot-Hawley Tariff Act, which stifled international trade and dramatically harmed Americans, making a bad depression worse. We don’t want the same type of pullback in international trade, whether or not it is an act of Congress.
The economic case for international trade is just as strong as it always has been. Expanded trade over a wide area allows everyone to gain from an expanded division of labor and the benefits of comparative advantage. These principles have been long understood and are the basis for the prosperity experienced by advanced nations engaged in widespread trade. In the normal course, nations don’t trade, but rather businesses in one country trade with businesses in another. In voluntary trade, without fraud or coercion, both parties to the agreement believe they will be better off after the deal, otherwise they wouldn’t do it.
People tend to like trade, as long as it is exports, with the old mercantilist sentiment that exports create jobs and imports destroy jobs. That particular view ignores the fact that there are two sides to every transaction. There are sellers, who partly represent their employee base, and there are buyers, who represent everyone in society. The standard of living is related to how affordable things are. Consumers who pay less for an item have more left over to buy other things from other companies that employ other people. Jobs are certainly important, actually one of the most important factors in an economy, but expanded trade that is not coerced expands opportunity on all sides.
Part of the problem that we have in the United States, as well as most countries with a central bank, is that the gains from trade and increased productivity are inflated away for the everyday person on Main Street. The cost of living doesn’t go down, but rather increases. That issue is not, however, the effect or fault of trade. It is the result of monetary policy that doesn’t let ordinary citizens benefit from the positive effects.
Hopefully we all get back to work soon and start to be productive. That is the only source of prosperity and well being in a nation, an economy, a society. Our economy, however, is intertwined with those of other countries throughout the world. That is generally a very good thing. With unfree authoritarian regimes as the exception, gains from trade are still valid and valuable, and withdrawal from trade with the world would be a big mistake.
Originally published on Townhall Finance.
Daniel J. McLaughlin is the author of “Compassion and Truth-Why Good Intentions Don’t Equal Good Results.” Formerly a finance executive, he is now focused primarily on writing on economics, business, and politics. You can find him at daniel-mclaughlin.com.