There has been a lot of discussion lately amongst presidential candidates and in the media regarding the subject title. Does it create American jobs or destroy them? Does it reduce costs to the consumers by the importation of lower cost products but at the same time eliminate some of our own domestic industries? Would any attempt to renegotiate our trade policies trigger a trade war and if so what would be the result? In brief, what are the cost and benefits of our current and proposed trade agreement? Answering these questions is the objective of this article.
It probably is the best to begin with the theory of comparative advantage first developed in the early 1800’s by the English economist, David Ricardo. It is an explanation of the basis for international trade. As an example England has a comparative advantage in terms of climate, ecological conditions and labor productivity for raising sheep and producing wool; France has a comparative advantage in producing wine. The best solution is trade in these commodities between the two nations to maximize production at the optimum cost.
Move the clock ahead one century and to the theorem developed by two Swedish Economists Eli Hecksher and Bertil Ohlin. Again it is the theory of comparative advantage but instead of the Ricardian example of international trade in agricultural commodities the focus now is on manufacturing products of the industrial era. A country that has a lot of capital in term of factories, machinery, has a comparative advantage in producing cars, phones, appliances, etc. A country that has a very large labor force has a comparative advantage in the production of labor intensive goods like textiles. Again the win-win strategy is an exchange of these products between the two countries rather that each trying to produce both textiles and machines within their own borders.
Or so it would seem.
But suppose comparative advantage in one country is the result of a calculated plan to:
1) Have no or very small minimum wage regulation
2) Exploit child labor
3) Reduce manufacturing costs by eliminating safety regulation in factories and mines
4) Hack into the computers of foreign enterprise and steal proprietary technology
5) Ignore foreign copy rights, patents, produce and counterfeit products
6) Ignore product safety regulations e.g. manufacture wallboard, flooring with poisonous chemicals.
7) Manipulate currency
8) Block imports from foreign countries thru an assortment of protectionist barriers
The result may be an enormous trade imbalance with this country’s trading partners that eliminates a significant number of their jobs and industries.
This is not a comparative advantage based on climate, ecological conditions or differing proportions of capital and labor. It is an artificial comparative advantage based on economic piracy.
Some may argue that any attempt to rectify this would precipitate a trade war. However, the current administration has already imposed tariffs on certain imported steel products to protect the American steel industry from extinction by predatory practices – and no trade war ensued.
What is needed is a general recognition of the gravity of this problem and a comprehensive plan to deal with it. The current situation threatens to undermine our economic growth, prosperity and the opportunity for this and future generations.
One presidential candidate understands this, has a solution, and knows the way to execute the solution.
His name is Donald Trump.