4 April 2020
Originally published by Cato Institute.
Some people talk about trade as though it were an end in itself. It’s not. Trade is a means to an end.
We trade so that we can specialize. We specialize so that we can produce more. We produce more so that we can consume and save more. That is how we create wealth and raise living standards. Just like electricity or machinery or expertise, trade is a tool we use to leverage our physical, mental, and creative abilities to obtain more efficiently more of the things we need and want. When we remove barriers to trade, we create greater scope for specialization, which means we can produce more value.
Why would anyone want to throw sand into the gears of these machines? Before the Trump presidency, that would have been a rhetorical question. But this administration is hellbent on repatriating supply chains and exterminating imports and, like the Luddites before them, the Trump administration and its enablers are doing their best to destroy the machinery of trade. But before addressing some of the pressing life or death issues surrounding trade policy in the midst of this pandemic, let me borrow a passage about “why we trade” from a chapter I contributed to a cool new Cato Institute book titled Visions of Liberty, which was originated, organized, and edited by Aaron Ross Powell and Paul Matzko:
Imagine life without trade. Imagine a life of solitude. To attend to your own subsistence, you wake each morning before sunrise to make your clothes, build and repair your meager shelter, hunt and harvest your food, concoct rudimentary salves for what ails you, and toil in other difficult and tedious tasks. Forget luxuries. Forget leisure. All of your time would be consumed trying to produce basic necessities merely to subsist. Life would be nasty, brutish, and short.
Fortunately, most members of modern societies choose not to live that way. In fact, one of the defining features of modern society is that most of its members recognize—actively or tacitly—the benefits of institutions, such as cooperation. Most of us don’t attempt to make everything we wish to consume. Instead, we specialize in a few, or a couple, or just one value‐added endeavor—one profession. What makes specialization possible is our commitment to the concept of exchange, which is the ultimate expression of cooperation.
The purpose of exchange is to enable each of us to focus our productive efforts on what we do best. Rather than allocate small portions of our time to the impossible task of producing everything we need and want, we specialize in what we do best, produce more of it than we need, and exchange that surplus for other things we need or want but haven’t produced.
The law of comparative advantage explains why this arrangement enables us to produce, and thus consume, more output than would be the case in the absence of specialization and trade. If Aaron can produce $100 worth of venison in eight hours but only $50 worth of clothing in eight hours, he has a comparative advantage producing venison. By specializing in venison production, Aaron forgoes $1 worth of clothing to obtain $2 worth of meat. But to forgo production of clothing, Aaron needs some assurances that he can obtain clothing by exchanging surplus venison.
Because Paul, who lives nearby, is more efficient at producing clothing than venison—he can make $40 of clothing but only $30 of venison in an eight‐hour day—he specializes in clothing production and forgoes producing venison at all, knowing he can obtain it through exchange with Aaron. Paul has a comparative advantage producing clothing.
How do we know Aaron and Paul are better off by specializing and exchanging? By specializing, their combined output is $140 per day ($100 of venison and $40 of clothing). Had they chosen to live in solitude and not exchange, they could still produce $140 per day, but Aaron would have only venison and Paul would have only clothing. Any attempt by either man to produce a combination of these products would yield less total output. If each devoted four hours each to venison and clothing production, for example, their combined daily output would be $110. Aaron would produce $50 of venison and $25 of clothing; Paul would produce $15 of venison and $20 of clothing.
Moving from a two‐person economy illustration, in the modern economy, we specialize in an occupation and exchange the monetized form of the output we produce most efficiently [our wages and salaries] for the goods and services we produce less efficiently. It’s the same concept on a grand scale. Enlarging markets entails the reduction or elimination of barriers that inhibit the free flow of goods, services, capital, and labor. The larger the market, the greater is the scope for specialization, exchange, and economic growth. Just as consumers have a greater variety and a better quality of items to purchase with their monetized output, producers have access to a greater variety and a better quality of inputs for producing most efficiently.
We trade so that we can move from subsistence toward abundance. When we restrict trade, we limit the scope for specialization. When we limit the scope for specialization, we produce and consume (and save) less than we could. When we restrict trade, we move in the wrong direction–from abundance toward subsistence. This is true regardless of the products or services being restricted and regardless of the reasons offered by policymakers for those restrictions.
Americans are much less free to trade today than we were before the Trump presidency. Since his inauguration, President Trump has imposed new tariffs on nearly half a trillion dollars of imports (that’s roughly one‐fifth of all imports and two‐thirds of imports from China). In 2017 (before the steel and aluminum, and China tariffs went into effect), U.S. imports from the world amounted to $2.3 trillion, with Customs and Border Protection taking $33 billion in duties. That amounted to an effective tariff rate of 1.42 percent.
In 2019 (the first full year that Trump’s tariffs were in effect), U.S. imports amounted to $2.5 trillion, with Customs taking over $71 billion. That $38 billion in additional taxes doubled the effective tariff rate to 2.85 percent, and came out of the pockets of these U.S. businesses and consumers. Among those businesses are producers of medical equipment and supplies, and parts thereof. But regardless of whether they produce medical products, all of those businesses reflect the benefits of trade. They channel the benefits of specialization to the whole economy, which take the form of more value added, which means more consumption and savings, which means more progress toward abundance. The tariffs they have been incurring impede that process and reverse our progress toward abundance.
So what should a president concerned about limiting the pandemic’s economic and human costs do about these trade restrictions? Obviously, he should lift them. Despite ongoing rumors that Trump would suspend duty collection for a period of three months to free up cash flow for businesses to enable them to keep more people on their payrolls, no such actions have been taken. Instead, rumors persist that Trump will sign an executive order mandating that federal agency procurement of medical supplies and pharmaceuticals be governed by “Buy American” provisions. Yes, the administration’s answer to medical supply shortages is not to lift the tariffs contributing to the shortage, but to compound the problem by limiting domestic access to foreign supply.
The Trump administration is not taking the pandemic seriously enough. Its protectionism contributes to the rising COVID-19 contraction and fatality rates.
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