In the section above, I stated that people often think that “there’s a special problem when we buy from people in other countries.” In a sense, that’s true. If you buy a low-end toaster, chances are that it’s made in China. Buying one from China means that you’re not buying one made anywhere else, including in America. So, Americans who might have produced toasters here, admittedly at a much higher cost, don’t get those jobs.
But there are three important responses to that point. First, workers who don’t produce toasters here produce other goods or services. Our current unemployment rate, U-3, which is a measure of people who are out of work and looking for work, is a low 4.1 percent. Moreover, the ratio of the number of job openings to the number of unemployed workers is 1.1. There are more jobs vacancies than there are unemployed people.
Second, there is nothing special about the fact that the toaster is produced in another country. If I buy GAF shingles produced in Baltimore, Maryland, rather than Owens Corning shingles made in Portland, Oregon, I help to employ someone in Baltimore instead of someone in Portland. But we don’t hear a lot of upset about that.
You might say that’s because at least either way I’m employing a worker in America. So, it comes down to jobs. But then go back to my first point. American residents who don’t have jobs producing toasters do get jobs producing other things.
The third point is that most people exaggerate the number of jobs lost to imports and fail to understand the number of jobs lost to technological innovation. Our manufacturing output is only 6.4 percent below its all-time high, which was in 2007. We aren’t “deindustrializing.” Instead, our industrial sector, due to improved technology, is becoming more productive. Manufacturing employment is 33.9 percent below its peak in 1979. Moreover, manufacturing employment as a percent of all employment, which hit its peak in December 1943 at 38.7 percent and its postwar peak in September 1948 at 31.9 percent, is now 8.1 percent.
This is from David R. Henderson, “Why Trade Should Be Free,” Defining Ideas, October 30, 2024.
Read the whole thing. Be aware that it’s longer than my usual article. I had a lot to cover.
Thanks to Don Boudreaux for giving comments and suggesting data sources.
READER COMMENTS
Monte
Oct 30 2024 at 3:12pm
Not all. Jayoti Ghosh brings to light some legitimate grievances:
Try as one might, these grievances cannot simply be dismissed with a wave of the hand.
Jon Murphy
Oct 30 2024 at 3:33pm
A wave of the hand? No. But data, yes. His claims are, as a factual matter, incorrect.
David Seltzer
Oct 30 2024 at 3:55pm
Disregard the comments on protectionism. They were googled for another article. My bad.
David Henderson
Oct 30 2024 at 5:15pm
You write:
It’s worse than that. I didn’t even have space to dismiss them with a wave of my hand. I was surprised by how little I was able to say in 2,400 words.
I’ll take a look at her piece.
How does she deal with the claim–which I think of as a fact, but maybe she’ll convince me otherwise– that restricting competition from imports necessarily means less monopoly, not more?
Monte
Oct 30 2024 at 6:28pm
Gentlemen,
Firstly, Jayoti Ghosh is a woman. Secondly, I’m not against against free (and fair) trade, but stumbled across this piece and felt she made some valid observations. Mainly:
The idea that restricting imports leads to less monopoly power is a common argument, suggesting that competition from imports can stunt the growth of domestic industries. Critics of free trade (which I am not) often contend that allowing global competition can result in market concentration among large firms.
Scott Sumner
Oct 30 2024 at 7:22pm
Interesting theory, but clearly false. Trade has made markets less concentrated. The auto industry is a perfect example, but there are many others.
Trade has also reduced global inequality, so that theory is also false.
Dylan
Oct 30 2024 at 8:23pm
Does it hold for tech? The only country that has companies that challenge the American dominance in tech is China, which has a lot of barriers that make it hard for American tech companies to operate fully there.
Jon Murphy
Oct 30 2024 at 9:11pm
Your comment indicates it does hold for tech.
That said, it’s important to remember we’re talking firms, not counties.
Jon Murphy
Oct 30 2024 at 8:23pm
Critics contend trade increases concentration, but for the life of me I cannot figure out why. How would increasing the number of firms in the market reduce competition?
Dylan
Oct 30 2024 at 10:04pm
I think the idea is that opening up markets will lead to a few global winners, who can take advantage of network effects and economies of scale to dominate the global market. Honestly though, that doesn’t seem like a slam dunk argument even if it were true, I don’t see why having a Google that only dominates the U.S. market would be better for U.S. consumers? We’d still have most of the same problems of concentration, but without the benefits of being able to use the same platform with people around the world. It’s hard enough to try to work with people in China for this reason, you can never find a platform that everyone has access to.
Jon Murphy
Oct 31 2024 at 8:18am
You’re right that it’s not a slam dunk argument for two reasons.
First: economies of scale and network effects are very industry-specific, rather than a general effect.
Second: opening to trade would necessarily reduce potential monopoly power of firms in those economies of scale industries. Monopoly power from economies of scale occur because demand for the good is insufficient to force the firm(s) to operate at minimum average total cost. By increasing the size of the market, one increases demand for the good, which in turn shifts firms further down their ATC curve toward the point where more firms can be supported.
David Henderson
Oct 31 2024 at 12:18am
Yes, I noticed that she’s a woman. But I didn’t change all the pronouns after I made the mistake. Now I have.
Roger McKinney
Oct 31 2024 at 10:26am
The concentration of industries onto oligopolies has happened because corporations have bought politicians to wrote regulations that protect them from competition. Again, she employs a post hoc fallacy.
And the idea that free trade causes oligopolies is a non sequitur, a logical leap across the Grand Canyon!
Roger McKinney
Oct 31 2024 at 10:21am
That’s the post hoc fallacy. Have you noticed that inequality has increased in the EU, which no one accuses of free trade?
Jon Murphy
Oct 30 2024 at 3:36pm
To your 3rd point, I have a blog post in the hopper that goes into more detail on those points. The short version: the job numbers (layoffs, openings, wages, etc) show a manufacturing sector desperate to hire. The boundry is on inputs. Firms cannot get the workers they need to expand production. The issue is not foreign competition.
David Seltzer
Oct 30 2024 at 3:52pm
Monte: Massive inequalities and rent-seeking? Ghosh doesn’t define or provide evidence in her conjecture. Again, without evidence, Ghosh writes that firms often benefit from intellectual-property monopolies, reinforced by free-trade agreements designed to strengthen corporate power. The definition of intellectual property rights is any and all rights associated with intangible assets owned by a person or company and protected against use without consent. Where is the monopoly in this legal definition? Is Ghosh conflating ownership with monopoly? I own my home. Is ownership in my property a monopoly? If intellectual property is a monopoly? How can there be free-trade agreements? If there is some collusion, isn’t there an incentive to be the first too offer better terms in contracts? I’m sure your comment to my post will be well thought out.
Protectionism certainly saves jobs in the specific industry being protected but, for two reasons, it costs jobs in other unprotected industries. First, if consumers are paying higher prices to the protected industry, they inevitably have less money to spend on goods from other industries, and so jobs are lost in those other industries. Second, if a firm sells the protected product to other firms, so that other firms must now pay a higher price for a key input, then those firms will lose sales to foreign producers who do not need to pay the higher price. Lost sales translate into lost jobs. The hidden opportunity cost of using protectionism to save jobs in one industry is jobs sacrificed in other industries. This is why the United States International Trade Commission, in its study of barriers to trade, predicts that reducing trade barriers would not lead to an overall loss of jobs. Protectionism reshuffles jobs from industries without import protections to industries that are protected from imports, but it does not create more jobs.
Monte
Oct 30 2024 at 10:37pm
By quoting Ghosh, it appears I’ve been forced into playing devil’s advocate. But I made the wine, so I’ll drink the cup. I’ll do my best to summarize her argument.
With regard to IP and monopolies, Ghosh asserts the following:
Strong IP rights can create monopolistic conditions by granting firms exclusive control over their innovations. While IP laws are designed to protect creators and incentivize innovation, they can also limit competition by disproportionately benefitting a few large companies. This isn’t to say that all ownership is a power in a few corporations is essential to ensure that the benefits of trade are more broadly shared. Only through thoughtful regulation and reform can we hope to create a fairer global trading system.
FTAs often include provisions that enhance IP protections. While these agreements aim to facilitate trade, critics argue that they can inadvertently entrench the power of large by by making it harder for new entrants to compete. The argument is that by strengthening IP rights, FTAs can lead to fewer competitors and greater market concentration, which can contribute to inequality.
Since Ghosh failed to provide supporting evidence (at least in this article), I asked ChatGPT for some references:
Lerner, J. (2009). “The Empirical Impact of Intellectual Property Rights on Innovation: A Survey.” Innovation Policy and the Economy, 9(1), 25-65.
This survey reviews empirical studies on how IP rights affect innovation and competition.
Stiglitz, J. E. (2008). “Economic Foundations of Intellectual Property Rights.” Duke Law Journal, 57(6), 1693-1724.
Stiglitz discusses the trade-offs between protecting IP and promoting competition.
Mazzoleni, R., & Nelson, R. R. (1998). “The Role of Patents in Technological Innovation.” Research Policy, 27(3), 273-284.
This article examines how patents can both incentivize innovation and contribute to market concentration.
Diwan, I., & Rodrik, D. (1991). “Patents, Appropriate Technology, and North-South Trade.” Journal of International Economics, 30(1-2), 27-47.
This study explores the effects of patent laws on technology transfer and competition.
Scherer, L. (2013). “Patents and Market Power.” Antitrust Law Journal, 79(3), 1055-1100.
Scherer analyzes how patent rights can confer market power and lead to monopolistic behavior.
Cockburn, I. M., & Henderson, R. (2001). “Scale and Scope in Drug Development.” Journal of Health Economics, 20(6), 1037-1059.
This research highlights how IP protections in the pharmaceutical industry can limit competition and affect market dynamics.
Grabowski, H. G., & Vernon, J. A. (1990). “A New Look at the Returns and Risks to Pharmaceutical R&D.” Journal of Health Economics, 9(4), 471-490.
This paper discusses the implications of patent protection on R&D investments and market behavior.
For the record, I’m all for free (and fair) trade.
Monte
Oct 31 2024 at 12:08am
My apologies for the typos and omissions. I’m using a Kindle Fire to respond (since my IMAC is down) and the spell check is exasperating, to say the least.
David Henderson
Oct 31 2024 at 12:19am
Of course, patents lead to monopoly power. That’s the point of patents.
That’s a separate issue from international trade.
Monte
Oct 31 2024 at 2:20am
But aren’t patents somewhat connected to international trade by FTAs that include enhanced IP protections, which allows monopolies to consolidate market power and make it more difficult for smaller firms to compete?
Komori
Oct 31 2024 at 11:57am
Patents are government enforced monopolies. I don’t see how arguments against patents are arguments against free trade, because they are explicitly the opposite of it.
Monte
Oct 31 2024 at 8:14pm
Conversely, we might ask how an argument for patents can be an argument for free trade? By granting creators exclusive rights (which incentivizes R&D), standardizing technology (which reduces barriers to trade), and attracting foreign investment in markets where IP is safeguarded.
Patents may create temporary monopolies, but they can also promote innovation and trade by protecting inventors rights and encouraging the sharing of technology.
Craig
Oct 30 2024 at 4:50pm
Trump has floated the possibility of completely abolishing income taxes in favor of tariffs. Will that happen? Unlikely of course. A uniform revenue tariff should be the ONLY tax the federal govt is allowed to levy.
Jon Murphy
Oct 30 2024 at 5:26pm
A revenue tariff is a different beast. It’s designed so as to maximize revenue, not reduce imports.
Warren Platts
Nov 1 2024 at 4:17pm
I’ve heard that a 20 to 30 percent ad valorum revenue tariff is about the optimal level. You game?
Jon Murphy
Nov 2 2024 at 11:25am
Probably not at that rate, no. We have seen that rate recently since 2018 and the negative effects far, fa outweighed tax revenue.
I’m not sure what the exact revenue tariff level should be, but certainly lower than 20%, and probably lower than 5%. The big complicating factor is that America imports are mainly intermediate goods used in the manufacturing process (about 2/3rds of imports are intermediate goods, if memory serves). Tariffs conseqently reduce manufacturing output, which would reduce other tax collections. Since tariffs on intermediate products have a cascading effect through the economy (indeed, the textbook model of tariffs actually understates the net costs of tariffs), one would have to be very, very careful about what the tariff rate is.
Warren Platts
Nov 2 2024 at 1:38pm
The optimal tariff (revenue-raising as opposed to welfare maximizing) depends on the elasticities. If the elasticity = 1, then the optimal tariff is 50%. For a 25% optimal tariff, that would imply elasticities = 2. For 5% tariff, elasticities = 10. Does that seem plausible to you?
At any rate, tariffs are just one sort of tax among many others such as corporate taxes, personal income taxes, sales taxes, value-added taxes, excise taxes, property taxes, land taxes, wealth taxes, use taxes, carbon Pigouvian taxes. They all have all sorts of negative ripple effects about which hundreds of books have been written. Yet most people agree a world with some taxes is better than a world with no taxes. Therefore, since we need some taxes, to properly complain about tariffs, you’d have to show that they are especially worse than all these other sorts of taxes.
Jon Murphy
Nov 2 2024 at 1:55pm
Partially on elasticities. There are other factors as well, as I discussed.
Yes. Estimates of trade elasticities are generally in that range, at least for the US. They can be extremely broad and there is significant variation between industry.
Regardless, we already have the empirical evidence that the tariffs from Trump’s trade war, which were around that 20-30% range you estimate, were on net harmful. We know 20-30% is too high.
Fine, but that’s a totally different conversation.
Warren Platts
Nov 2 2024 at 5:17pm
Elasticities of 10 are way too high. This EU study estimated aggregate price elasticies of imports and exports for over 30 countries. Here is the summary of import elasticities.
Their estimate of an aggregate import elasticity for USA of about 2 implies an optimal tariff of 25% — exactly what I said earlier. Thus, Trump’s 20% proposed tariff is in the right ballpark. And yes, there is significant variation among industries. I saw an estimate for crude oil was that estimated the elasticity of 0.1. Cf. Kuwait’s overall elasticity above.
Not at all. One cannot say tariff revenue is worse than income tax revenue without comparing their relative economic tradeoffs. At a minimum, we know that if you tax something, you get less of it. So when we tax GDP producing citizens and corporations, we get less GDP. If we tax imports, we get less imports.
&nbst;
Meantime, we’re paying over a trillion a year on federal debt interest payments with little sign it’ll stop increasing — this represents a doubling just under Biden — not to mention we’re now in an arms race with China, thanks to free trade. Bottom line, we need more tax revenue & there’s little appetite for raising income & payroll taxes. If we could raise $600 billion from a revenue-raising tariff, we should do it just because we need it.
Warren Platts
Nov 2 2024 at 10:37am
Speaking of the Scottish Commissioner for Managing and Causing to be Levied and Collected His Majesty’s Customs, and Subsidies and other Duties in that part of Great Britain called Scotland, and also the Duties of Excise upon all Salt and Rock Salt Imported or to be Imported into that part of Great Britain called Scotland, he said you’re wrong. It’s quite possible for a tariff to function as both a revenue tariff and a protective tariff:
Smith: By removing all [import] prohibitions, and by subjecting all foreign manufactures to such moderate taxes as it was found from experience, afforded upon each article the greatest revenue to the public, our own workmen might still have a considerable advantage in the home market.
Jon Murphy
Nov 2 2024 at 11:08am
Only you could take a sentence where Smith explicitly says protectionist tariffs should be removed to be an advocacy of protectionist tariffs.
Warren Platts
Nov 2 2024 at 1:48pm
Smith was against import bans, not revenue raising tariffs. They are the two different animals. Cripes, Smith was the boss of the Scottish version of the U.S. Customs & Border Protection. The study of the number of smugglers hanged without clergy who were caught by Smith’s forces has yet to be written…
Smith merely pointed out that revenue raising tariffs also offer protection for workmen. That is true, indeed, per my post above, depending on the elasticities, the optimal tariff can be far higher than what are normally taken to be adequate protective tariffs.
Jon Murphy
Nov 2 2024 at 1:56pm
Again, the literal meaning of the quote says otherwise.
Jon Murphy
Nov 2 2024 at 2:42pm
Not quite. He was against protectionist tariffs (any kind of protection, really, except under very very rare circumstances, as he himself says), but not all revenue-raising tariffs were in his favor. Specifically, Smith advocated for dramatically reducing the British tariff schedule from a blanket tariff (with mercantilist attitudes and protectionist higher tariffs) with tariffs on just a few luxury consumer goods. He’s not thrilled with them (“Such taxes, in proportion to what they bring into the publick treasury of the state, always take out or keep out of the pockets of the people more than almost any other taxes”), but he does seem to think they can be managable. See Book V, Chapter ii, section k, in particular paragraphs 20-67
Warren Platts
Nov 2 2024 at 10:38pm
He’s talking about consumption taxes in general, and that includes exise taxes on domestic production — not just customs duties. Smith’s complaint with consumption taxes is that, although they are comparatively fair, non-arbitary, and convenient, the overhead required to collect them can be quite high. E.g., he claims that customs house officers’ salaries & perquisites eat up some 20% of the gross customs revenue, thus reducing the net (“neat”) revenue to only £2.5 millions.
But don’t the textbooks say that the main reason many developing countries like revenue-raising tariffs is because they’re easy to administer? Now, I don’t know what the overhead is for U.S. customs collection. That’s certainly a good question to ask. Moreover, you & Smith are right that simplifying tariff schedules would reduce that overhead. However, I think a “blanket” ad valorum tariff (with exceptions made for necessities) would be simpler to administrate that trying to figure out the optimal tariff for 10,000 different products. Once we know the aggregate import price elasticity within reasonable bounds, then just set the same optimal tariff on everything.
As for whether revenue-raising tariffs also “provide considerable protection for workmen,” that has to be Smith’s position because that’s necessarily true! Just look at the Econ 101 diagram: domestic workers in the import-competing industry are protected AND tariff revenue is collected. What you write at the top of the chart — whether “Revenue-Raising Tariff” or “Protective Tariff” — doesn’t matter: under either label there is both revenue-raising & protection going on. Tonight I ate baked fish served over a bed of pasta with a fork. I used the fork to spear the fish AND to noodle the noodles. So is it a spearing fork or a noodling fork? I guess that depends on your purpose, but it’s certainly possible for a fork — and a tariff — to serve dual functions.
David Henderson
Oct 30 2024 at 5:45pm
I read the Jayoti Ghosh piece that Monte referenced. I was disappointed. I had expected that she would make a case with some amount of evidence, not just assertion.
Monte quoted her statement:
But one can think that many people don’t understand the benefits of free trade without being patronizing. In their private lives, people do typically understand what is in their best interest. That’s a point I made in my article. But that doesn’t mean that they understand the economics of free trade.
I was never patronizing to my students who came in at the start of the quarter not knowing much of what I was going to teach them. Hasn’t she had that experience? Her statement is a strange one for an economics professor to make.
Harry Chernoff
Oct 30 2024 at 6:56pm
Is the economics of manufacturing and trading toasters where we are today?
Can you make the same case for free trade under conditions Smith & Ricardo would not have imagined, e.g.,
a) returns to scale so extreme that only a very few global manufacturers could conceivably be competitive, with a government industrial policy determined to make that happen regardless of cost, ultimately locking out less mercantilist competitors, e.g., Made in China 2025? Isn’t this a central component of China’s repression of household income / consumption?
b) the same scenariio as above, except with extreme positive industrial externalities and network economies, as with the US attempt to induce leading edge semiconductor manufacturers to build fabs here?
c) the same scenario as above, except where the forced deindustrialization is based on military advantage rather than economc advantage, as in making US shipyards uncompetitive?
Separately, as relates to your example of telephone operators becoming coffee shop baristas, exactly how to do you propose translating this to the left-behind industrial workers of Appalachia and the Rust Belt, e.g., Deaton’s Deaths of Despair demographic or, more lyrically, Springsteen’s Youngstown? How much economic efficiency are you willing to sacrifice for this and how exactly would you evaluate the tradeoffs?
Jon Murphy
Oct 31 2024 at 12:46pm
Those issues have been addressed at legnth (even by Adam Smith!). Would you like a reading list?
Warren Platts
Nov 2 2024 at 10:20am
Adam Smith you say? Taking Harry’s points in order:
a) Smith: There may be good policy in retaliations … when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods.
b) Smith: It will generally be advantageous to lay some burden upon foreign industry for the encouragement of domestic industry, when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former. This would not give the monopoly of the borne market to domestic industry, nor turn towards a particular employment a greater share of the stock and labour of the country, than what would naturally go to it. It would only hinder any part of what would naturally go to it from being turned away by the tax into a less natural direction, and would leave the competition between foreign and domestic industry, after the tax, as nearly as possible upon the same footing as before it.
c) Smith: The Act of Navigation very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country, in some cases, by absolute prohibitions, and in others, by heavy burdens upon the shipping of foreign countries. The Act of Navigation is, perhaps, the wisest of all the commercial regulations of England.
d) Smith: Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market, as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable.
Jon Murphy
Nov 2 2024 at 11:10am
Very good. Those are some of the quotations I was thinking of, which undermine Harry’s point that Smith never considered these situations. In fact, he did consider them and rejected them (or highly qualified them) as reasonable uses for tariffs.
Roger McKinney
Oct 31 2024 at 10:18am
Mises wrote that good economics requires the ability to think in long chains of reason. But the average person can’t link more than two. It’s another way of stating the broken window fallacy.
Monte
Oct 31 2024 at 11:24am
Beyond economies of scale (which Jon has already addressed), critics argue that free trade reduces competition by enabling larger firms to expand their reach into new markets more effectively than smaller ones, resulting in fewer firms dominating the market. Additionally, critics claim IP protections create barriers to entry and that increased trade leads to the formation of global supply chains, allowing larger firms to control significant portions of production and distribution. And finally, aren’t larger firms, with their abundance of resources, better able to navigate the regulatory environment than smaller firms?
Again, I’m just playing devil’s advocate here. I would like clarification on these issues.
Also for discussion:
Economist Dani Rodrik sees both sides to the trade issue.
Free trade and Global Inequality: Why the WTO and IMF Continue to Advocate for Free and Unfettered Trade
The Impact of Trade Liberalization on Income Equality
Jon Murphy
Oct 31 2024 at 12:20pm
I’ll need to check out those arguments. The conditional (“enabling larger firms to expand their reach into new markets more effectively than smaller ones”) prima facie seems contradictory to the conclusion (“resulting in fewer firms dominating the market.”). It seems to me that in one market (the domestic market), the number of firms would be unchanged and in the second (the foreign market), the number of firms would increase.
Warren Platts
Nov 1 2024 at 4:48pm
You free traders might have an argument if trade was actually free. But since it’s not, the free trader argument is moot. Nor is “100% unilateral free trade 100% of the time” in a world filled with mercantilists is free trade in name only. Countries employ beggar-thy-neighbor policies because they work. Granted, such policies lower the potential global gains from trade, but the countries employing such tactics achieve net strategic gains from the deficit countries they plunder: trade surpluses allow the mercantilists to acquire money-making foreign assets (foreigners own $22 trillion more American assets than American owned foreign assets last I checked), corner global supply chains in key industries, export their unemployment, and goose their GDP growth rates. Sure, these benefits are not without costs viz. mercantilism works by using various industrial policies that have the effect of forcing up the savings rate and that entails forcing down household income in order to force down domestic consumption.
Indeed, arguably, countries like China & Germany would be better off if they balanced their trade by increasing their domestic consumption. But try telling them that! (They won’t listen.) Meantime, the global economy and the big deficit countries especially are getting royally screwed by the countries employing the beggar-thy-neighbor industrial policies. Therefore, the morally and best economic path for the deficit counties is employ their own industrial policies to rebalance global trade. Granted, such a world will not be a free trade world, but rebalancing global trade will help the deficit countries more than it hurts the surplus economies, so that global GDP will improve as a result. Yes, this still wounldn’t be as nice as a truly free world that Ricardo might have imagined, but to do that requires global cooperation that just isn’t there.
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