On September 19, 1947, the small town of Janesville, Wisconsin conducted an intriguing experiment. The 2,000 employees of the Parker Pen Company received 40 percent of their salary in Mexican pesos, symbolizing the importance of overseas markets to Parker’s business strategy.
Over the next several days, the pesos circulated as legal tender throughout the town’s economy. The point of the exercise was to demonstrate the importance of foreign trade to the livelihood of Janesville’s residents. As the pesos wended their way through the cashboxes of local merchants, the PR stunt had its effect. According to two observers, “Janesville realized as never before that its prosperity and livelihood depended in no small part on the existence of a going trade with countries far distant from America’s isolated Middle West.”1
When Janesville conducted this little exercise, the postwar boom in trade was just beginning. Trade flows represented less than 7 percent of the United States economy. Sixty years later, that figure is closer to 30 percent. In this era of globalization, it would be much harder to imagine how the United States economy could run without the assistance of foreign trade. It is particularly disturbing, then, to hear renewed calls for protectionism in the halls of Congress in recent years.
Part of the problem is that when politicians preach the virtues of freer trade, they naturally focus on the importance of exports, and America’s large trade deficit makes exports seem less important. To be sure, export industries generate higher-paying jobs and symbolize America’s technological leadership and capacity for innovation. Part of this focus, however, comes from the mistaken belief that exports are good and imports are bad. This kind of mercantilist thinking lost its respectability around the time of Adam Smith, but in recent years some members of the United States Senate seem bound and determined to resuscitate the idea.2
In point of fact, the primary way Americans benefit from trade liberalization is through imports. Imports allow the United States to specialize in making the goods in which it is the most productive, relative to other possible uses of resources. This leads to increased economic growth and increases in labor productivity over time. Increased competition between importers and American producers lowers prices and increases the variety of choices for American consumers.
Furthermore, imports have greatly expanded consumer choice, and are responsible for a four-fold increase in the variety of goods available to American consumers over the past three decades. Combined, trade permits the use of more expansionary monetary policies than would otherwise be possible without triggering inflation. An open market is a significant reason why the United States has recently been able to sustain robust economic growth, dramatic increases in labor productivity, low rates of unemployment, modest rates of inflation, and historically low interest rates. A construction worker, working in a sector without imports or exports, would not ordinarily think that they got their job because of trade expansion – but some of them have.
This is easy to say in the abstract, but harder to put into concrete terms. Policy analysts at the Peterson Institute for International Economics recently attempted to measure the cumulative payoff from trade liberalization since the end of World War II.3 They conservatively estimated that multilateral trade liberalization from 1945 to the present generates economic benefits ranging from $800 billion to $1.45 trillion dollars per year in added output. This translates into an added per capita benefit of between $2,800 and $5,000 – an addition of somewhere between $7,100 and $12,900 per American household. (This figure likely understates the benefits from trade, because the Peterson Institute did not factor in the effects from increased variety of goods available through imports. Economists estimate that increases in imported varieties have raised U.S. real income by about 3 percent).4 The estimated gains from future trade expansion range between an additional $450 billion and $1.3 trillion per year in national income, which would increase per capita income between $1,500 and $2,000 on an annual basis. Few other options in the U.S. government’s policy arsenal can yield rewards of this magnitude.
Even these statistics, however, seem impersonal. To understand the benefits of freer trade in the most concrete manner possible, it is necessary to conjure up a modern version of the Janesville experiment. What would it be like to live in a world with prohibitively high trade barriers? Consider the effect of economic isolationism on the following products:
- Coffee: Erecting blanket protectionism would cause most of America to experience massive caffeine withdrawal. The United States is the largest importer of coffee in the world, because our country can only produce a fraction of the 12 million kilograms of coffee Americans consume each month.5 Of course, even if the United States could somehow produce that much coffee, it would not matter that much. Both industrial and household coffeemakers are manufactured outside the United States. Forget the morning ritual of consuming coffee at home – successful trade protectionism would also successfully bankrupt every Starbucks franchise in America.
- Shoes: If trade barriers were restored to Smoot-Hawley levels, Americans would have pay a lot more for other products. In the recent book, “A Year Without ‘Made in China,’” author Sara Bongiorni discusses her family’s efforts to go twelve months without purchasing any product exported from that country.6 In an interview with Foreign Policy magazine,7 Bongiorni related her biggest surprise from the experiment:
“People know about the downside of trade with China — they think about lost U.S. manufacturing jobs, and of course that’s a painful issue for a lot of people — but one of the things I also got to understand in a personal way was the benefit of access to often good-quality, low-cost goods. Our son outgrew his tennis shoes, and they were the only pair of shoes he had. So I set out to buy new tennis shoes, and essentially all tennis shoes are made in China at this point. It took me a couple of weeks, but I finally located these tennis shoes made in Italy that cost $68. Well, you can buy tennis shoes made in China for $15 in a place like Payless shoe stores. For someone on a moderate or low income, to be able to buy your 4-year-old kid perfectly good shoes for $15 is a real economic benefit.”
The truly astounding fact is that consumers benefit from these shoes despite persistently high tariffs for cheap footwear (48 percent). According to one think tank’s calculations, existing tariffs disproportionately hurt the poorest Americans.8 These trade barriers are concentrated in areas like clothing and kitchenware, which gobble up a larger share of income from poorer families. As a percentage of their income, a single-parent household earning under $25,000 a year has to pay nearly twice as much as a middle-class two-parent family. The conclusion: “tariffs appear at least on average to be the only major tax in which effective rates rise as incomes fall.”9
- Electronics: even products that were invented in the United States would be much more expensive without relatively open borders. Take the Apple iPod, for example.10 As the lead firm, Apple contributed its intellectual property, market knowledgte, and system integration to develop the iPod. It outsourced the manufacturing of the product components to a number of East Asian firms, however. This division of labor allowed Apple to focus its energies on innovating a product that was attractive to consumers, and captured most of the profit stream. One assessment concluded:11
[T]rade statistics can mislead as much as inform. For every $300 iPod sold in the U.S., the politically volatile U.S. trade deficit with China increased by about $150 (the factory cost). Yet, the value added to the product through assembly in China is probably a few dollars at most. While Apple’s share of value capture is high for the industry, the iPod’s overall pattern of value capture is fairly representative.
The estimated gains from future trade expansion range between an additional $450 billion and $1.3 trillion per year in national income, which would increase per capita income between $1,500 and $2,00 on an annual basis.
The iPod went from abstract concept to store shelves in under a year.12 Importing intermediate products from the lower end of the supply chain allows U.S. firms to be leaders of the pack at innovating new products and getting them to consumers as quickly as possible.
For elected officials, trade expansion is a tough policy position to advance. The costs of trade liberalization – import-competing firms going out of business, lost jobs – are concentrated. The benefits of trade liberalization – lower prices, a wider variety of goods – are diffuse. When tallied up, however, the benefits don’t just exceed the costs – they exceed them by an order of magnitude.13 The best way to appreciate this fact is to imagine what life would be like with more expensive imports. This would be actually worse than a tax increase, because this kind of tax disproportionately hurts the poorest Americans.
Sixty years ago, the citizens of Janesville learned a valuable lesson about the benefits of global integration. One wonders how the denizens of Washington, DC would fare in a world without coffee, without inexpensive shoes, and without ever-improving consumer electronics. These benefits are not trivial, and they should not be sacrificed on the altar of protectionism.
Dr. Daniel W. Drezner is associate professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University. He is the author, most recently, of All Politics is Global: Explaining International Regulatory Regimes (Princeton University Press).
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1 C. Stuart Siebert Jr. and William Peters Jr., “A Public Relations Technique for Explaining Foreign Trade,” Public Opinion Quarterly 13 (Winter 1949/50), p. 605.
2 Sherrod Brown, Myths of Free Trade (New York: W.W. Norton, 2004); Byron Dorgan, Take This Job and Ship It (New York: St. Martin’s Press, 2006); Charles Schumer, Positively American (New York: Rodale, 2007).
3 Scott Bradford, Paul Grieco, and Gary C. Hufbauer, “The Payoff to America from Global Integration,” in The United States and the World Economy: Foreign Economic Policy for the Next Decade, edited by C. Fred Bergsten (Washington, DC: Peterson Institute, 2005).
4 Christian Broda and David Weinstein, “Globalization and the Gains from Variety,” Federal Reserve Bank of New York Staff Report no. 180, March 2004, p. 1. Accessed at http://www.ny.frb.org/research/staff_reports/sr180.pdf, July 2007.
5 http://www.ico.org/prices/m5.htm, accessed July 2007.
6 Sara Bongiorni, A Year Without “Made in China”: One Family’s True Life Adventure in the Global Economy (New York: Wiley, 2007).
7 http://www.foreignpolicy.com/story/cms.php?story_id=3905, accessed July 2007.
8 Edward Presser, “Toughest on the Poor: Tariffs, Taxes, and the Single Mom.” Progressive Policy Institute, September 2002. Accessed at http://www.ppionline.org/documents/Tariffs_Poor_0902.pdf, July 2007.
9 Ibid., p. 2.
10 Greg Linden et al, “Who Captures Value in a Global Innovation System? The case of Apple’s iPod.” Personal Computing Industry Center, Irvine, CA, June 2007. Accessed at http://pcic.merage.uci.edu/papers/2007/AppleiPod.pdf, July 2007.
11 Ibid., p. 10.
12 Suzanne Berger et al, How We Compete (New York: Doubleday, 2005), p. 77.
13 The Peterson Institute estimated the annual costs of trade liberalization to be $54 billion in 2003; the benefits were estimated to be well over $500 billion. See Bradford, Grieco and Hufbauer, “The Payoff to America from Global Integration.”