To be honest, it appalls me how many good-meaning people misunderstand international trade. In normal times, it wouldn’t matter because the role of peaceful trade has been a largely settled intellectual consensus for close to a century. It is a background issue to most of our lives.
Today, the consensus has vanished for all the wrong reasons. It wasn’t challenged on facts or theory. It disappeared because so many folks just don’t understand the issue and are succumbing to demagogues exploiting that lack of knowledge.
I think a good analogy to this is vaccinations for polio. Within a generation of the last trade war, the polio vaccine radically altered the lives of Americans. Prior to that, young healthy people routinely died of a disease whose appearance led to citywide panics, and the closing of schools, parks and pools. That has not occurred for more than 60 years, so today only parents in their very late 80s or older recall the visceral fear of the disease killing or maiming their children.
Today, demagogues spread lies about vaccines to a public rendered susceptible through ignorance. The number of children who avoid vaccines is becoming dangerously high.
As with polio pandemics, the deep damage of the last trade war has passed from common memory. Only a few centenarians will remember it. So, with the distance of time, we are all at risk by not schooling ourselves on the benefits and costs of trade.
Now, I don’t know how much of the ignorance on trade is willful and how much of it is casual, but I like to assume the best of folks. So, let me explain briefly and plainly what trade is and what it is not.
First, all trade deals exist to reduce the barriers to trade between people and businesses. Countries don’t trade. When you hear someone say we are trading with China, that is simply a shorthand expression for households buying and selling to one another. We Americans buy and sell things to the Chinese with minimal government involvement. As consumers we buy based on value, and as producers we sell based on value. Cost is only a part of that value proposition. It is that simple.
Second, no household, city, region or nation runs a balanced trade with other places. The reasons for this are simple. Each of us specializes in some sort of production (e.g. barbering, teaching, doctoring) but don’t specialize in consumption of just one good. We’ll buy different items from different people who make these items in different regions. It is that simple.
Third, the balance of trade doesn’t affect the level of jobs or production in the United States. The reason for this is that every dollar spent on an imported good must be offset by either an exported good or foreign investment in the United States. So, if we import a trillion dollars of goods each year, the sum of our exports and foreign investment in the US must equal a trillion dollars. It is that simple.
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Obviously, these three facts are easily to twist and confuse a public not thinking deeply about the issue. It is easy to talk about “bad trade deals” as if it was akin to buying a used car. It is easy to sound deeply sophisticated by talking about “balanced” trade, when no such thing exists anywhere.
The tariffs that everyone speaks about, are essentially taxes on the domestic consumers of goods. These act as a very blunt subsidy to domestic manufacturing firms. While the U.S. has relatively low tariffs, we tend to subsidize our exporting firms with education and training dollars, and absolutely stupendously large tax abatements. Unravelling the whole basket of industry subsidies might be worthwhile. Still, with the average tariff between the U.S. and EU nations is running at about 1.6%, the issue wouldn’t make the current top 1,000 list of problems plaguing domestic and international affairs.
Or it is simple to tell folks a half-lie by talking about imports costing jobs. After all, we see factories closing all the time, right? Well, not so much now because we are currently experiencing the longest uninterrupted manufacturingemployment growth in history. This is happening at the same time as record trade deficits. You have to lie about facts to convince folks trade is bad.
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Now, it is also good to note that trade tends to lower prices and add abundance to our choices. At the same time, it shifts the demand for labor away from certain occupations and into other ones. The occupational shift is from low-productivity jobs to high-productivity jobs.
While the lower prices benefit us all, the shift of occupations benefits only some workers and imposes a cost on others. The problem is that we only really see the costs. That makes us susceptible to lies about the overall effect of trade.
In the end, the anti-vaccine and the anti-trade crowd represent two sides of the same problem; a raw lack of understanding coupled with a lifetime of distance from the last deep negative consequences.
This brings me to a hopeful point. With the United States careening mindlessly toward a global trade war, we have the chance to relearn an important lesson. It will be costly, of course, but we are likely to be reminded of the benefits of trade in the same way an outbreak of polio will remind us of the benefits of vaccines.
Michael J. Hicks is the George and Frances Ball distinguished professor of economics and the director of the Center for Business and Economic Research at Ball State University in Muncie, Ind. This is adapted from his weekly commentary — “We Are on the Cusp of Relearning the Impacts of Trade Wars”.