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Why is trade important to human progress?

Trade helps us access goods and services from around the world at low prices. That improves our living standards, allows our wages to go further, and makes life more fun. Thanks to international trade, we have year-round access to fruits and vegetables that used to be seasonal or simply not available at all.

But it’s deeper than that. Trade is part of the great prosperity machine of free markets. Individuals trade not only goods and services but also for knowledge. That boosts our society and prosperity. It allows for innovation, either via competition or by importing innovations from abroad. Trade also allows individuals to learn about other places. And in general, trade tempers the desire to go to war. You don’t want to kill your customers. And that helps make the world a little safer.

Now, let’s assume that you don’t like foreigners. You think they are nasty don’t treat us fairly and whatever else. We have 350 million people in America. Why can’t we make everything we need here?

We technically could make everything ourselves, especially in a place like the United States, but that would just make us poorer and less productive.

I’ll give you a good example. It pays about $12 an hour to work at a T-shirt manufacturing plant in South Carolina. It pays much more to go work at Amazon or Costco. So why not purchase T-shirts from a place like Guatemala, where working in a T-shirt factory is a good, high-paying job? It just makes sense for us to trade for those things and not force American workers into those low-wage jobs.

Instead of making clothes and shoes, we can outsource those things and focus instead on higher-value production. We can work in tech, services, or advanced manufacturing. That specialization is critically important for raising living standards.

Trade is also about opportunity cost. At any given time, we only have a set amount of raw materials, workers, and capital, and if you devote those resources to lower-value production, those resources can’t flow to higher-value options. This is part of the unseen aspect of protectionism. When we put tariffs on washing machines, we might get a washing machine plant in South Carolina, but what we don’t see is that all of the resources that went to making and operating that factory could have been deployed in more productive endeavors if we had just simply bought washing machines from abroad.

Resources are also wasted on the consumer side. If you and I are forced to spend an extra hundred dollars on a washing machine, that’s money we can’t spend elsewhere in the economy. Those washing machine tariffs I mentioned created about 1000 washing machine jobs, but it cost American consumers around $800,000 a year per job created. That’s simply a loss of financial resources that could have been deployed elsewhere.

What do you make of the arguments that consumption should take second place to something else, such as national cohesion or pride or security?

First we should simply note the facts.

The first thing to know is that the United States today is the world’s second largest manufacturing nation. So, we are still a large manufacturing nation; we just don’t need a lot of workers because our workers are very productive, probably the most productive in the world.

The second is that American manufacturing is very dependent on trade. All manufacturers are consumers at some level, but that’s especially true for more advanced manufacturers like we have in the United States. They need access to cheap raw materials and parts. If you jack up the price of steel and throw a bunch of tariffs on auto parts, you end up lowering production in these more advanced industries. Steel was a case study of this. We imposed a bunch of tariffs on steel during the first Trump administration, and studies have shown that we saw a modest increase in steel output and employment, but overall manufacturing output and employment fell. According to the United States International Trade Commission, we had about a $500 million yearly net loss in manufacturing output because of the steel tariffs.

I should note one of my favorite stats: about half of everything imported into the United States today is a manufacturing input. It’s stuff that our manufacturers use to make other stuff. A lot of that also comes from their own companies abroad. So, Airbus has a facility in South Carolina that imports from Airbus France. BMW, also in South Carolina, imports from BMW in Germany. If you shut down their ability to access their parts and equipment abroad, you’re going to reduce their output in the United States. If you care about national defense, kneecapping BMW, Airbus, and Boeing is a bad thing.

Our manufacturers also need access to overseas markets and overseas consumers. About 95 percent of the world’s consumers live outside the United States. And so, if you deny American companies the ability to access those markets or make them globally uncompetitive by raising their input costs, then you’re harming the manufacturing sector.

So if you remember those things, as well as access to foreign capital, you realize that openness and production are not exclusive; they’re complementary. The former boosts the latter.

I also think there is a misunderstanding here about national security and trade. The criticism is that if we don’t have steel mills in the United States, we will depend on Chinese steel to build our aircraft carriers and tanks. But that’s not really how it works.

Right. We do import a good amount of steel, but the top steel suppliers to the United States are countries like Canada, Europe, and Japan. Countries like Russia and China are not in the top 10. And when you talk about a country like China with a billion and a half people and a massive manufacturing footprint, it makes sense for us to pool our resources with our allies and enter into trade and defense agreements. That allows us to work together boost the overall productive capacity of our defense industrial base. The US Defense industrial base includes Canada right now. That’s how close of an ally Canada is. So slapping tariffs on stuff from Canada just doesn’t make much sense, and it’s even more baffling that they’re doing it on national security grounds.

This is a good place for you to tell us about what’s been happening since Donald Trump took over the presidency. Where are we currently?

It’s been a busy few weeks. Shortly after President Trump’s inauguration, he issued several executive orders invoking a national emergency with respect to fentanyl coming from China, Mexico, and Canada. By invoking that national emergency, he unlocked tariff or trade powers under the International Emergency Economic Powers Act. It’s a cautionary tale about congressional delegations of power, but that’s an issue for another podcast. The President has since then imposed 20 percent tariffs on all Chinese goods. And those are on top of the 25 percent tariffs from his first term on half of Chinese goods and 25 percent tariffs on imports from Canada and Mexico.

He has also jacked up tariff rates from 10 percent to 25 percent for aluminum, and he kept the 25 percent steel tariffs, but he closed all of the exemptions that had been there before.

This is a huge change because around half of all steel and aluminum imports were exempt from the national security tariffs that Trump imposed the first time around. There were a series of agreements with companies going to the administration and saying, “We can’t get the steel and aluminum we need here,” and getting an exclusion. Trump has now shut all of those down. Not great for our manufacturing sector.

The President has also promised reciprocal tariffs. So, if India has a 20 percent tariff on American motorcycles, we’re going to put a 20 percent tariff on Indian motorcycles.

Markets are not thrilled. Not only with the tariffs but also the uncertainty. Economic policy is not supposed to enacted via a switch in the Oval Office. The President is turning on tariffs and then turning them off, sometimes in the same day. As any investor or lawyer will tell you, the thing that companies hate more than taxes is uncertainty. Without that predictability and consistency in the market, they can’t hire or invest. They freeze up and sit on their hands. That’s probably a bigger immediate problem than the tariffs themselves.

The other thing they’re going to do is stockpile. Right now, people in the construction industry are filling warehouses with construction materials because they’re worried about tariffs on Canadian lumber and steel. Having a warehouse full of stuff is a huge cost. You have to rent the warehouse and buy all the stuff, and that’s capital that you can’t deploy by hiring more workers or boosting output. Instead of focusing on their business, people are focusing on these emergency game plan scenarios.

And by the way, they’re all also lobbying in Washington. Trade policy lobbying has skyrocketed. Trade lawyers are making fortunes. They’re building beach houses in Delaware, all because of this tariff uncertainty. That’s good for them but bad for the economy. And it contradicts so much of the rhetoric coming out of this administration about eliminating inefficiency and waste and reducing the government’s role in the economy. It seems they’ve forgotten all of that on the trade front, and they’re doing basically the opposite. That will counteract the good parts of their economic agenda.

But what about fairness, Scott Lincicome? Is it fair that the Indians are placing a 20 percent tariff on us, and we are only placing 5 percent?

I have to tell you, when I heard about the reciprocal tariff, my lizard brain said to me, “Absolutely yes. Let’s make it fair.” What’s wrong with that argument?

A lot of the global trading system is based on this notion of reciprocity, but there are a few problems.

The first is the economics: matching other countries’ tariffs will make Americans poorer. Going back to the example of food, Mexico imposes certain tariffs on food, and we get a lot of food from Mexico. Does it make economic sense to impoverish our citizens in the way that Mexico impoverishes theirs? No, it doesn’t. So that’s the first issue.

There’s also a collectivist logic to this, that the government should punish some citizens to benefit others. But most of us don’t work in an export industry. We won’t benefit personally from any sort of expanded access to a foreign market. A few businesses might, but the vast majority of individuals won’t see any gains.

The other issue is America First. If you match other countries’ tariffs, you’re effectively letting them set your trade policy. I’ll give you examples because this can get very absurd. We buy a lot of coffee from Colombia. We do not grow coffee, except for a little bit in Hawaii. Well, Colombia has a 10 percent tariff on coffee beans from America, and we don’t send them any coffee beans. Should we let the Colombian government dictate our tariff policy in applying a 10 percent tariff on Colombian coffee? That’s not America First; it’s America Second. We should set tariffs and any other policy based on what’s good for America and what’s good for us as individuals, not what another country does.

Finally, practically speaking, this is a mess. You’re talking about thousands and thousands of different products from 200 different countries. You’re talking about trying to quantify not just tariff barriers but non-tariff barriers, subsidies, value-added taxes, you name it. Trying to administer this system would be incredibly difficult and would require thousands of new customs officials and tons of new paperwork, going back to how the administration is contradicting itself.

China is looming very large in this conversation. There is a lot of talk about the millions of jobs lost in the United States because of China. But my understanding is that most manufacturing jobs have been lost to automation.

First of all, is it true? And if so, should we be against automation? Tucker Carlson famously said he would be against autonomous vehicles if they took jobs away from truck drivers.

It is true that increased trade with China, starting around 1999, caused around a million manufacturing jobs to be lost. But there are two big caveats. First, those studies only looked at the jobs lost, not the jobs gained from lower input prices in manufacturing, jobs gained in services, and jobs gained from exports to China. When you include those figures, the overall net effect is a wash.

The second point is that those million manufacturing jobs were just a fraction of the total manufacturing jobs lost over the last several decades. Most of the manufacturing job loss over the last several decades was due to improving productivity. Not just robots, but computers, improved business practices, that kind of stuff.

And look, losing a job is painful, but it is an essential part of economic progress. The reason wages improve over time is productivity growth. In general, we want those robots. We want to outsource manual labor, unsafe labor, and the rest to machines because that allows us to make more stuff and have higher wages.

You can go back to telephone operators in the 1920s. That was a huge labor market shock, particularly for young women. But we would be worse off if we still had to pick up a rotary dial phone and have some woman connecting us like you see in the old movies. She’d have a job, but we would be worse off as a society. It is better to let that disruption happen and make it easy for people to adjust and move into other industries. We have all of these different policies in place—labor policy, occupational licensing, housing policy, regulatory policy—that make it harder for American workers hit by disruption to move on. That’s what we need to be focusing on.

I want to bring up one last subject. There’s a lot of discussion about Donald Trump playing some sort of four-dimensional chess. One of the arguments I’m hearing is that the tariff system is part of a concerted effort to reduce government spending and transition away from income taxes to a more consumption-oriented model. What do you think of that?

I’m extremely skeptical. One reason is the administration’s words and actions. There really isn’t a concerted effort in Washington right now to cut spending in the long term. The nips and cuts that DOGE is making are not going to make a dent in our spending trajectory. Mainly it’s Social Security and Medicare that need reform, and those are not being touched.

The second issue is the math. Tariffs aren’t a broad-based consumption tax; they are attacks on a narrow band of our consumption. Imports make up about $4 trillion out of $25 trillion in total consumption. And if you raise tariffs too high, you don’t get any imports, and you don’t get any revenue. So, there’s only so much revenue you can get from tariffs. You’re looking at maybe $400 billion a year maybe, and that’s generous. Others have said maybe $200 billion. Any more than that and imports will start shrinking. You would need to replace $2.5 trillion a year to eliminate the income tax.

The other big issue is that tariffs tend to cause the dollar to appreciate, which will make it harder for our exporters.

I just don’t see a lot of grand strategy here. And that leaves aside all the gossipy stuff we read in Politico. If we apply Occam’s Razor, the simplest answer is that President Trump likes tariffs. He likes using them as negotiating tools. He likes how it makes CEOs and government officials run to him seeking favor. He likes that they’re raising some revenue and that he can use them to push foreign governments around. That’s a far more likely explanation than some deep grand strategy.

 

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Daniel Griswold joins the podcast today to discuss two recent essays that he authored for Cato’s Defending Globalization Project. Those essays are “The Misplaced Nostalgia for a Less Globalized Past” and “How Trade and Agreement How Trade Agreements have Enhanced the Freedom and Prosperity of Americans.”

Let’s start with nostalgia. Many critics of free trade argue that American workers and families were better off in the less globalized past, specifically the 1970s. Why do you think there is so much nostalgia, and is there any truth to it?

You know, I came of age in the ’70s. We don’t want to go back there. The only thing better back then was the music. It’s hard to top Led Zeppelin and the Eagles. But in terms of basic measures of human welfare, Americans are much better off today than they were in the 1970s. And globalization has played a significant role in that progress.

As consumers, we have a wider choice of products. Better products, lower prices. Globalization has created more job opportunities in the United States that play to our strengths in technology and services. Then there’s foreign investment. Millions of Americans get up every day and go to work for foreign-owned companies here in the United States. And these are some of the best-paying jobs, creating products for export.

One of the important measures is real wages. People on the nostalgic side say real wages have stagnated for the last 40 years. That just ain’t true.

One, we tend to overstate inflation. We do a poor job of measuring new products that are coming in and changing consumer patterns. One book I cite is The Myth of American Inequality by Phil Gramm and a couple of co-authors. They point out that if you measure inflation properly and account for the introduction of new products and changing consumer patterns, real wages have grown 74 percent since the 1970s. Median household income, again, if you measure inflation properly, is up significantly since the 1970s.

So, the key data point that the nostalgic people talk about is wrong. By these common measures, household income, total compensation, and real wages, Americans are better off today than they were 50 years ago. This is thanks to not only globalization but also domestic liberalization. Over the last 40 years, we’ve had significant deregulation in energy, trucking, and airlines that has made our economy more efficient and rewarded Americans with a higher standard of living.

Some people claim that all our economic progress has come at the expense of the poor. What do you say to this criticism? Has the rise in living standards only accumulated to a few?

Well, again, the data just don’t bear that out. And again, if you properly measure prices and account for government transfer payments, the real poverty rate in the United States has fallen.

It’s important to understand that poor people spend more of their income on necessities—things like clothing, food, basic energy, and gasoline. And if you go back to the 1950s, the typical American household spent more than a third of its income on food, clothing, gasoline, and basic energy. By the 1970s, it was still more than a quarter. By the 2000s, it was down to 13.5 percent. And again, globalization is part of the story.

One last data point is from Human Progress: Marian Tupy and Gale Pooley’s wonderful book Superabundance. The time Americans spend working to buy basic products has fallen significantly over the last 40 years or so. In the book, they looked at a basket of 35 basic items like household appliances and clothing. The amount of time an American has to work to acquire this basket has dropped by 72 percent.

So, by these measures, which are most important to people in the lower income brackets, Americans have become much better off.

There are some wonderful charts in your paper that I encourage everyone to check out showing how the prices on so many different goods have declined over time.

Tell me more about the decline of manufacturing jobs and how that relates to globalization.

Part of the nostalgia for the 1970s is that we had higher union membership back then, and manufacturing jobs were relatively more important in the economy. But the number of manufacturing jobs in the United States has been dropping as a share of the workforce pretty steadily since the 1950s, almost in a linear fashion. And by the way, this has happened in virtually every other developed country.

The reason isn’t that we don’t make things anymore. In fact, our overall manufacturing output continues to grow, but we’re doing it with fewer workers. That’s because American workers have become so much more productive. They’re more efficient; they’re better educated. We have more capital and machinery. The mix of goods we’ve made in the last 50 years has shifted from basic goods like steel, clothing, shoes, and furniture to higher-end products like computers, jet engines, and chemicals. And by the way, those workers are better compensated than ever before. So, we remain a manufacturing powerhouse. We’re just doing it with fewer, better-paid workers.

Now, if Americans want to expand on the progress we have enjoyed since the 1970s, what sorts of policies should our leaders be pursuing?

Well, the best thing our government can do is to liberalize unilaterally. Get rid of those trade barriers that drive up basic costs for their citizens and industry. Unilateral liberalization is always the first best policy.

However, trade agreements have historically played an important role in trade liberalization. After the Great Depression and World War II, the US started to liberalize trade broadly with other countries. We negotiated with other countries to lower trade barriers on a reciprocal basis. And despite being the second-best option, these trade agreements have benefited the United States greatly. We gained more affordable products, more export opportunities for US companies, more foreign investment here in the United States, and broader foreign policy benefits. The General Agreement on Tariffs and Trade, for example, helped revive Europe and Japan after the war and knit us together as allies against communism and other threats to the civilized world. So, trade agreements served America’s interests in the post-war era and can continue to serve our interests in the future.

Tell me a little bit about the current state of free trade agreements.

America has signed free trade agreements with twenty other countries. Virtually the whole Pacific coast of the Western hemisphere is tied to the United States with free trade agreements. Thanks to these agreements, almost half of US exports now go to countries with which we have free trade agreements. Our exports enter those countries virtually tariff-free. 38 percent of US imports come from countries where we’ve committed to accept their exports at 0 percent duty. I think that’s a good thing, and most economists would agree.

The catch is that we haven’t signed a free trade agreement for more than 10 years. We have stood still while the rest of the world has continued to move ahead.

The WTO database shows there are 370 bilateral and regional trade agreements in force. One hundred of them were negotiated in the last decade. When we dropped out of the Trans-Pacific Partnership, the other 11 members signed it anyway because they knew it was a good agreement. 47 African countries have signed an agreement to engage in freer trade. Even China has signed an agreement with other countries in East Asia.

There are foreign policy implications of being on the sidelines. The rest of the world is increasing their ties with each other while we deal ourselves out of that game. We’re losing influence in Africa and East Asia, and we’re promoting trade frictions not only with strategic rivals like China but also with our friends in Canada, Mexico, and Europe. This is a losing policy that’s starting to undo all the progress we’ve made in the post-war era.

Now, you also say that both the critics and proponents of free trade agreements can sometimes overstate their effect.

Proponents of trade agreements tend to oversell them by promising things that trade agreements aren’t intended to address, one being the overall number of jobs. Trade is not primarily about creating more jobs; it’s about creating better jobs. So, I don’t think we should promise that a specific trade agreement is going to create millions of jobs and lower the unemployment rate. What it’s going to do is allow Americans to shift into what they’re better at, create better jobs, earn higher incomes, and grow the economy.

If America gets involved in trade wars, how can we expect that to affect living standards for the average American?

Sweeping tariffs on imports will raise the cost of living for Americans. If we raise tariffs on steel, lumber, and other products like that, costs for American manufacturers go up. They become less competitive in global markets and pass these costs on to consumers.

Also, it takes two to wage a trade war. Early in the first Trump administration, we were told that other countries wouldn’t dare retaliate. But they did, pretty massively. We lost a lot of exports to China, Europe, and other places because of retaliatory tariffs. So our exporters lose. Trade wars don’t have any winners besides a select few industries.

You also write that one of the most important advantages of free trade agreements is that they lock in trade liberalization and prevent backsliding during times of economic stress.

Free trade agreements mean that governments commit themselves not only to liberalize but also to maintain that liberalization. When you run into economic trouble, there’s always a temptation to reach for that snake oil of protectionism. In the 1930s, for example, there was a disastrous global trade war that deepened and prolonged the Great Depression. The 2008/2009 recession could have resulted in a similar mistake, but our network of trade agreements helped the United States and our major trading partners avoid compounding the downturn with a destructive trade war.

What would you say to someone who lives in an area where the major industry has gone away? These tend to be the areas that have the most nostalgia for that pre-free trade past.

That’s an important question. There’s a lot of discontent in certain areas of the United States, a feeling that the modern economy might be doing well for a majority of Americans, but it has left some people behind. We can’t ignore that, but turning back the clock on trade policy isn’t the answer. Y­­ou know, Youngstown, Ohio, is a good example. It was a big steel producer in the first half of the last century. People there still remember a day they call “Black Monday” when a big steel maker there announced massive layoffs. That was 50 years ago, well before NAFTA and China’s entry into the World Trade Organization. So, it was not primarily a globalization-related phenomenon; it had to do with changing technology. We’re just consuming less steel per capita as we modernize.

So, raising trade barriers is not going to help those places in Appalachia and the Midwest that are depopulating. It may help certain companies in certain places, but it’s not going to help the overall economy in those places. Jobs in today’s economy require skills and education. We need to equip the younger generation with the skills they need to be valuable in the high-tech, modernizing, globalized economy. Sadly, our public school system is not succeeding at this. But that’s the answer, not trying to recreate a past that wasn’t that great to begin with.

We’ve talked quite a bit now about the effects of free trade on the poor in the United States, but what have been the effects of free trade on global poverty?

Globalization has been one of the best things to ever happen to the global poor. It has created some of the best jobs in those societies. The low-tech factories in Asia and Africa that we call “sweatshops” have some of the best-paying jobs in those societies, sometimes paying two to three times what people would earn in their village. It’s especially important for women in those societies. Women are able to get jobs in those factories and gain economic independence. They can get off the farm and start earning their own income.

Take absolute poverty, which is defined as living on less than $2.15 a day, adjusted for inflation. The number of people living in absolute poverty around the world has dropped by a billion or more in the last 30 years. A lot of that progress happened in China, which moved towards a market economy during that time, but also in other parts of the world like India and Africa. This is one of the great stories of our time. Globalization has helped lift hundreds of millions of people out of the worst kind of poverty. The worst pockets of poverty remaining are in the countries that participate least in the global economy.