Free trade vs Protectionism

There is a lot of criticism of how we are sending US jobs abroad. As someone who believes in the free market, it is often hard for me to defend against this. Free trade vs protectionism is an old debate. Even I have doubts, then my doubts have doubts. So if you are someone who is arguing for the protection of US jobs, you are preaching to the choir.  I agree. However, to achieve this protection of jobs is exactly where the free-trade camp differs from the protectionists.  Free traders believe high-level jobs replace the low paying jobs lost. Protectionist do not buy it. Once I let my emotions calm and I yield to the logic of the argument of Adam Smith,  I once again find myself in the free-trade camp. Let me explain how it works. If you disagree please comment.

Free trade is like two women taking a bath

After this metaphor, free trade will never look so good to you. Imagine there are two bathtubs of water. One hot and one cold. The hot one represents a rich country like the USA or Germany. The cold bathtub represents a relatively poor country like India or Poland. Imagine anyone you want in these tubs. For this example, I use two women.

The USA exports jobs like customer service call centers to India and Germany exports jobs like manufacturing cars to Poland or accounting services as does the USA.

When two economies are linked hot water warms the cold tub. Both tubs eventually gravitate towards the same temperature. The rich countries seem to lose jobs and income while the poor gain and become richer.

This is the argument against free trade. This is why there is fear. People fear that they will lose their nice bath and be sitting in a cool tub. Then some of the bubbles may disappear also. And we would not want that now, would we?

Free trade benefits outsourcing
One bath gets warmer while the other bath gets cooler until you add more hot water. That would not be added unless free trade existed. This is why it makes the world rich so we all can take hot baths.

However, one country losing warm water at the expense of another is only true when you have a static model. What happens is the exchange of water temperature generates tremendous synergy and thermodynamic energy if you will. There is a third valve which is rewarding the people in the hot tub. It is new hot water pouring in. It is like some invisible hand reaches from behind one of these girls and pours a vase of refreshing warm water down their back (imagine who you like here). This is the reward of free trade.

Hot water is coming into the USA in the form of lower prices for consumers, more innovation, more competition and the rewards of ownership capital. Further, the developing markets will start to have the power to consume our products. It is not as tangible at first glance as the outsourcing, but it is real and more powerful.

My experience with American wealth – I left the USA 7 years ago and moved to Poland. From time to time I return home and am even thinking of moving back. When I am in the USA I do not remember so many Americans with so many gadgets and big cars and so many people selective about organic vegetables.  Despite the impression Americans have of themselves, I see the USA as a rich country. This is because Americans are the great free traders of the world. I have lived in controlled economies and it is no fun.

Do not confuse a business cycle caused by reckless credit expansion by the Federal Reserve bank or government out of control with Free trade. Free trade has made the world rich from the beginning of time.

If free trade was so bad why …?

If free trade was so bad how would you explain 250 years of American prosperity? How would you explain a city like Hong Kong? Trade routes from ancient times. Adam Smith pointed out that everyone wins. No matter who you look at it, they do. Just compare the free economies of the world (like South Korea) and the controlled economies of the world (like North Korea).

The mercantilism approach (modern-day protectionism) of hoarding ye gold bullion might inspire the rabble and populous parties but they will lose their power if implemented.

Economic meltdown if free trade stopped – Think about it if one morning you woke up and free trade stopped. If your wife could not drive her car with foreign oil to get some Italian olive oil at Whole Foods and buy a Turkish made blouse on sale at the strip mall, and you could not use your laptop or mobile device made in China to check either the Drudge report or the Huffington Post, a lot of people would be pretty cranky. And that would only be the beginning.

Economist Greg Mankiw got into some hot water when he tried to explain this argument related to free trade and outsourcing. I recommend you check out this argument which is really the argument of Adam Smith.

State protectionism example

Here is another analogy that might further clarify the benefits of free trade. What if Connecticut banned intrastate free movement of labor and capital with Massachusetts. What would happen? Or if one town would not trade with another. Boston would not trade or do business with that wild frontier town west of the Charles river Cambridge, MA.  Or one household would not trade with another? Sure we all could be producing everything ourselves in our own homes A to Z from gardening to doctoring, but civilization would not progress as far. Even the Amish trade between communities and households.

So next time someone questions if the USA should follow a free trade or protectionist policy for economics think of my two women in the bath. Let me know your thoughts. Just do not vote, but leave a comment.

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3 responses to “Free trade vs Protectionism”

  1. Suzanne Martell

    If Free Trade is so good, why are the rich getting richer and the middle class disappearing into the poor? When manufacturing jobs leave, many workers can’t just get another job. Why are we importing so many foodstuffs that can be grown/raised here in the US? It drives the family farmer out of business and makes the huge farm/factories in other countries rich. Not the America I want to live in.

    1. Mark Biernat

      My question is why do you rely on large US agriculture business? The food is spayed with pesticides and it is large business and profit for the owners not the workers anyway. We for example grow out own food in out little back yard.

      Read the book the Urban Farmer for example or Mortgage Free by Rob Roy.

      There was a bubble of prosperity in the US because the whole world was destroyed by the Second World War and we were left untouched and unified relative to the rest of the world. However, once the world rebuilt and technology changed there was nothing we could do about the competition.

      Even in the US the influx of skilled workers drives wages down.

      The politics are not as important as the large macro economic trends in the world.

      My solution is do it yourself at home. I am a consultant and yet I still grow my own food. We have a few hundred heads of lettuce in our backyard, olive trees and a potato and onion field. We grow a dozen other herbs and vegetables. We do not have a large yard but we do it. I buy basically flour and milk and make everything else.

      Is this not what real America is about? Is it not about fending for yourself rather than waiting for some corporate middle class job? Or waiting for government to fix things to make those greedy companies make that job for you. A job where the boss will ride your productive and creative efforts, and your colleagues will stab you in the back.

      Is if not better to use your own talent and creativity to develop something on your own and own a business. The world has changed. Like the auto workers of the 1970s in Detroit, so are the cushy professional jobs with Martini lunches a thing of the past. It is now America like it always was, that is you have the freedom to use your talents in an entrepreneurial way.

      Besides, if you are going to be against free trade, why stop at counties? Why not say states should not trade with each other to protect the commerce in your own state? Why not stick up for your own town and impose trade barriers on town to town commerce, then you personally will prosper right?

      Better is to focus on doing things yourself, create value and not hoping the government or a company will provide you a lifestyle. If you do embrace this entrepreneurial spirit in this America you will have a nice life.

  2. Countries like Russia China and India are doing well despite being once cut-off from free trade. Also there is the point that when manufacturing is exported and we keep the design base it often does not work because as every engineer knows its difficult to design anything without being close to the factory.
    True free trade reduces the cost of living but you have to think how those cheap manufacturing countries became so efficient, by protectionism.
    Give Trump a chance he wants “fair trade”.

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