Trade and Protectionism

Tonight I saw a bit of a news report on CNN regarding the "Buy American" provisions in the stimulus package before the Senate. The reporter stated that the Senate has betrayed American labor by caving in to special interest groups and foreign governments, softening the requirement for new infrastructure projects to rely on American steel.

This isn't central to my argument, but I would just like to point out, exactly why are those who promote free trade "special interest groups" while labor is not?

Also, apparently living up to the treaties we have made with other countries is not important when it comes to steel. Bush is lambasted by the media for hurting America's standing in the eyes of the international community by placing American needs first, but then the Senate is lambasted for "giving into foreign governments" by trying to abide by treaties. So which is it? Respect in the international community or placing America first? Thankfully in this case, we can have both. We can live up to our agreements and grow our economy.

There is a fairly simple mathematical argument regarding trade. This argument is called comparative advantage. It states that when two countries specialize and trade with one another, they will both end up with more than if they tried to produce it all themselves. This is not something anyone can argue. It is a logical proof. Trying to prove it wrong is like trying to disprove 2+2=4. It is always true in our world.

Adam Smith stated, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage." The fact is, we can get cheaper, better steel from foreign countries. With the money saved, we will be able to build up other industries. If we really want to create jobs, we need to pour our resources into industries in which we have a relative advantage. Steel may not benefit, but overall, the economy will create more jobs. We will use our resources more efficiently.

In addition, by buying foreign steel, we inject money into foreign economies. More specifically, we inject American dollars. What can they do with American dollars? Not much in their own country. They have to eventually spend that money to buy American goods.

We buy their steel. We don't waste our resources on a product we aren't very good at producing. The money that is not wasted is invested in things we are good at building, such as computers and airplanes. Foreign countries are helped by the money pouring into their steel industry. They expand and their economies recover as well. With a more stable economy and American dollars, they buy our goods. Everyone benefits.

Granted, it's not this rosy and it wouldn't happen quick. But to cut this off would result in losses we simply cannot afford. To put it bluntly, protectionism is economically stupid. It is one of the major factors in the severity of the Great Depression. We cannot recover from this quickly if we do not allow people to trade. If economic recovery comes from people buying products, why make it harder and more expensive for them to do so. Where is the sense in that?

Thankfully, the Senate has softened these restrictions. There is some sense out there.