Debates rage over the wisdom of steeper tariffs on U.S. imports and/or withdrawing from global trade pacts in hopes of protecting domestic industry and jobs. History teaches such actions pose economic and national security risks.
Consider the 1930 Smoot-Hawley Tariff imposing steep imposts on some 20,000 imported goods. Consensus among economists and historians is that a resulting global trade war deepened and lengthened our Great Depression (retaliatory tariffs reduced American exports by 61%) and contributed to the rise of Nazi Germany by intensifying nationalist animosities.
Here are how the benefits of global trade might be explained in an introductory economics course.
Imagine you purchase quality paper stock and coloring pencils to draw-up a fistful of Benjamins to exchange for cool stuff, like a cell phone, laptop and flat-screen television. Uh-oh, the Secret Service soon comes a knockin’.
But aren’t U.S. government-minted Benjamins equally worthless pieces of paper? The difference, aside from the law, is faith that the government issue is what your fake Benjamins aren’t—a globally accepted storehouse of value.
Such faith allows the dollar—as well as the euro, yen and yuan—to lubricate world trade, giving humankind access to resources unevenly dispersed about the planet, plus goods where they can be produced more efficiently and cheaply.
It is myth that an imbalance in trade with any nation is a swamp to avoid. Consider your grocery store, with which you have a 100% imbalance in trade—but it rights itself through innumerable other exchanges of money for goods, labor and services.
So it is with global trade. While dollars flowing to other nations may not immediately return through reverse trade, they are eventually repatriated—perhaps first passing through two or three other nations—in exchange for Boeing airplanes, Harley Davidson motorcycles, Kentucky Bourbon, John Deere tractors and financial and other services. U.S. agricultural exports—grain, for example—alone total almost $140 billion annually.
As consumers pay all costs of production, tariffs boost retail prices. As higher tariffs raise the cost of imported raw materials, American exporters of finished goods become less competitive globally. Plus, a tit-for-tat response by other nations to higher U.S. tariffs further reduces American global competitiveness. Such was the Smoot-Hawley Tariff trap.
If a steep tariff on imports raises domestic retail prices by 5%, it is equivalent to cutting paychecks the same amount. And it cascades, as less paycheck purchasing power reduces consumption, which adversely affects domestic manufacturing, demand for transportation and employment.
Higher domestic production costs have a similar negative impact on consumption, which is why investors don’t duplicate, at higher cost in America, that which can be produced more efficiently and cheaply in other countries.
When lower tariffs and less expensive imports combine to reduce retail prices, families have more to spend or save, improving our standard of living. Assertions that cheaper foreign labor causes American job losses is more myth than fact.
Yes, jobs are lost when domestic production shifts to other nations, but the real culprit of job upheaval is automation, robotics and other productivity improving technologies.
In the railroad industry, innovations—unit trains, containerization, remote-control beltpacks, Positive Train Control and even word processors—cut rail employment by nearly half since 1980. Amazon’s “store of the future” in Seattle has no cashiers, with all sales recorded and charged through a smartphone application. Warehouses now use robots to restock shelves. Yet technology also creates new job opportunities, albeit requiring retraining and higher skills.
As global trade helps reduce retail prices and boost consumption, it also stimulates demand for more transportation, making rail jobs more secure. Since the North American Free Trade Agreement (NAFTA) was negotiated in 1994, trade volume between Canada, Mexico and the U.S. has soared 450%, with much of it moving by rail. Global trade is associated with one-third of U.S. rail revenue.
When American railroads were first constructed, communities ignorant of trade benefits and regional specialization discouraged standardized track gauge and interconnectivity. Such economic foolishness, replicated by the Smoot-Hawley Tariff, should be relegated to the dust bin of history.
Clearly, the benefits of freer global trade well exceed the costs.