Mercantilism Dies Hard
By David Henderson
One of the things that economists, whatever their other views, are most sure of is that free trade is a good idea.
The normal way we argue for trade, either between individuals and companies in a country or between individuals and companies across borders, is that both sides benefit. The seller benefits by selling something for a price greater than his supply price. (The supply price is the minimum price that he requires to be willing to supply the item in question.) The seller’s gain is the difference between his supply price and the price he is paid, and is called producer’s surplus. The buyer benefits by buying something for a price that is below his demand price. (The demand price is the maximum price the buyer is willing to pay for an item.) The buyer’s benefit is his demand price minus the price he pays, and is called consumer surplus. The sum of producer’s and consumer’s surplus is the gain from the exchange.
Notice that consumer surplus is a big part of the story, whether the exchange is within a country or across borders.
But many people systematically leave out the gains to consumers. There are two recent instances.
Henry Olsen, a senior fellow at the Ethics and Public Policy Center and an adjunct professor at Villanova University, in an op/ed in the Washington Post, writes:
Many of Trump voters’ priorities can be addressed in ways consistent with Republican inclinations. Immigration can be reduced but not eliminated; trade deals can proceed if they ensure that benefits flow to average Americans, not just those in finance or exporting industries.
Notice Olsen’s narrow focus. The implication of his focus on exporters seems to be that trade deals don’t generally generate benefits for average Americans except in their role as exporters or employees of exporters. But they do benefit. One of the main benefits of free trade is lower prices, and therefore consumer surplus, on the items they buy.
Take the 25% tariff on light trucks, please. That tariff makes price of trucks, whether new or used, substantially higher. Yes, it has caused most truck production for the U.S. market to move to the United States. But the producers do that to get around the tariff wall and would likely not do that if there were no tariff. So, although 25% is almost certainly an overestimate of the higher price U.S. buyers pay for new trucks, without a tariff they would certainly pay much less. So a trade deal that cuts tariffs on trucks would definitely help “average Americans.” And here’s the thing: the U.S. government could to that unilaterally without a trade deal. I choose this example on purpose. When I mentioned to my students, while teaching about free trade and protectionism, that there is a 25% tariff on light trucks coming into the United States, that caught their attention. Many of them have bought new trucks and would have loved to have paid much less. They are not literally average Americans–their and their spouses’ incomes probably put them in the top 20% of the income distribution–but next time you talk to an “average American” who owns a pickup truck, tell him about that 25% tariff and see if he is indifferent.
Or consider this recent piece in the Wall Street Journal by Harvard economist Martin Feldstein, my boss when I was at the Council of Economic Advisers. He’s trying to defend NAFTA. Good for him. But how does he defend it? He writes:
During the campaign Mr. Trump promised to tear up the North American Free Trade Agreement if he could not negotiate a substantial improvement. Revoking the agreement would put more than $600 billion of U.S. exports to Canada and Mexico in jeopardy. According to the U.S. Census Bureau, U.S. companies export more to Canada than they import from Canada. Including Mexico, total Nafta imports exceed exports by less than $40 billion, an amount equal to just one-quarter of 1% of GDP.
So Marty’s defense is that exports would be put at risk and he mentions imports only to compare their size to the size of exports. So all that seems to matter to him, when defending free trade, is gains to producers (exporters), not gains to consumers (importers).
The misunderstanding is bipartisan. But also the understanding is bipartisan. Democratic economist Alan Blinder laid out the case for free trade beautifully in “Free Trade” in The Concise Encyclopedia of Economics.