A few weeks ago, NTUF highlighted some of the most pervasive myths surrounding free trade. Unfortunately, myths about free trade have so completely permeated the American political sphere that it is difficult to cover all them at once. The Cato Institute’s Daniel Ikenson recently spoke on Capitol Hill about a couple more of these misconceptions.
Myth # 1: Trade is a competition, with winners and losers.
Advocates of this claim can be found across the political spectrum, and it is the reason why even presidential candidates such as Donald Trump consistently claim that countries such as China and Mexico are “killing us on trade.” The idea is, as Ikenson terms it, “Team America” against everyone else: Team America has to find a way to trick other countries into trade deals that allow us to “win”, or else not make them at all.
As Ikenson points out, sports metaphors are not good at representing the economics of trade, as sports would not be interesting if everyone ended up winning. This mercantilist premise that some countries are worse off than before they engaged in trade is illogical on its face, as trade is a voluntary exchange. Why would anyone engage in a voluntary exchange that hurts them? Trade, like any voluntary exchange, is not a zero-sum game.
Trade creates wealth through specialization and comparative advantage. Through trade, countries are able to focus on the industries that they’re best suited to rather than trying to be self-sustaining. In the American context, this means higher-paying jobs that require a higher degree of intellectual capital.
Myth # 2: Job outsourcing is bad for the economy.
A common refrain in recent years has been that there is a “tax break for moving jobs overseas.” This is untrue; there is a tax deduction for moving expenses that applies regardless of whether the company is moving within the country or overseas, not one specific to outsourcing. In any event, attempts to artificially discourage outsourcing is bad policy and bad economics.
Outsourcing is a central element of specialization. When companies outsource jobs, they are able to produce the same good for less cost, or else they would not outsource the job in the first place. Just as higher labor costs trigger higher prices, lower labor costs result in lower prices, benefiting all Americans by increasing their purchasing power. Americans are thus left with more money to spend, creating opportunities for new industries.