There's Nothing Free - or Good - About Balanced Trade
There’s one big problem with the Trump Administration’s strategy for the upcoming NAFTA talks. It’s goal is to eliminate free trade.
The U.S. objectives for the NAFTA talks, released by the U.S. Trade Representative (USTR) on July 17, states the overriding goal: “Improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.” But once you make balanced trade the objective, you actually make trade less free. Free trade is the process of individuals making individual choices, not national governments trying to impose the results. The USTR premise seems to be that the purpose of free trade is to sell more to another country than they sell to you. In fact, the purpose is to facilitate trade across borders, and encourage imports as well as exports.
The real advantage of free trade isn’t the opportunity to sell more to other markets. It is the fact that it fosters greater competition. And it does that by opening your own national borders to additional competitors and suppliers, and forcing domestic companies to meet the needs of consumers in order to maintain their loyalty. If large domestic steel companies still maintained uncontested dominance of the domestic market, would we have the mini-mills that have brought down prices? How much more expensive would steel be for consumers? How much more costly would steel be to auto makers; in turn, how much more expensive would cars be? For that matter, if the Big Three auto companies still maintained virtual uncontested dominance of the auto market, how much more would consumers be paying and how much less choice would they have? Access to foreign steel and foreign cars has made the domestic industries more responsive to American consumers. That is the ultimate goal of competition – to give people more choice of goods and services and greater opportunity to consume them.
Free trade advances that goal, and the interest of consumers, in several ways. It generates economies of scale, allowing firms to spread production costs over a wider and larger market. It allows national economies, and therefore the people who make them up, to focus on the things they do best – their comparative advantage – and outsource the production of other goods and services to people who can produce them more efficiently. (Just like we all do when we buy a loaf of bread from a baker or a side of beef from a butcher.) It spreads technologies by widening trade networks, allowing us all to learn from every other country in the world. And it expands choice and reduces the potential for monopoly power by broadening our access to far more suppliers.
The fact is, if importing were bad for us, government would not need to try to restrict it. The reason we buy imported goods is because they are cheaper or we believe they are better. Trade surpluses and deficits merely reflect the daily purchasing decisions made by hundreds of millions of Americans every day. Just think about that the next time you make a trip to WalMart.
Nonetheless, many – including the current Administration – seem stuck on the mantra ‘imports bad, exports good.’ If that was the case, the U.S. economy would have been stronger in the 1970s – when it was actually locked in stagflation – than it was during the high-growth 1980s and 1990s. The last year the U.S. economy showed an overall trade surplus was in 1975, when the country was mired in recession. Japan, on the other hand, notched trade surpluses throughout the 1990s, when it was stuck in an economic malaise. Recent economic trends bear out the same message. The U.S. actually managed to record its smallest trade deficit of the past 15 years in 2009 – a year when the country was in recession. It saw its biggest trade deficit of that period in 2006, in the midst of a robust five-year economic expansion. Any resemblance between trade balances and the health of the economy would seem to be purely coincidental.
In making balanced trade its stated goal for NAFTA talks, the USTR is trying to mandate the result of trade, rather than the practice. There’s a reason that doesn’t work: The trade balance represents the choices of consumers. The best way to obtain their allegiance is not by mandating it, but by earning it.
