“What about when Jesse Ventura went on all these trade missions? I thought trade was supposed to be good for Minnesota?”
A friend posed that question after Minnesota Technology Inc. last month published a report on how imports of Chinese manufactured goods impose competitive pressures on some firms in Minnesota. It was a fair question, and one with a simple answer.
Trade is broadly beneficial to Minnesota as it is to almost any national economy. But economists have always argued that consumers are the primary beneficiaries of trade because it lowers the prices of many goods. But no economist — as opposed to politician — ever claimed that trade with China was going to be a bonanza for Minnesota manufacturers.
Ever since British economists Adam Smith and David Ricardo made the case for trading two centuries ago, virtually all economists have consistently played off the same sheet of music. Trade allows societies to use resources more efficiently. Thus, households in nations that trade can get more goods and services to satisfy their needs than if their nations did not allow trade.
More efficient use of resources and more goods at lower prices for consumers — that is the score. It is hard to think of another economic prescription that has changed so little in 200 years.
Right at the outset, however, these same economists recognized that, while society as a whole would benefit from trade, some sectors within any society might be worse off as trade increased. Producers who formerly did not face competition would face it as trade expanded. And these firms inevitably employ people.
Followers of Thomas Jefferson and Andrew Jackson made the same argument for low tariffs in the 1800s. High U.S. tariffs on manufactured goods hurt farmers and households because they raised the price of manufactured goods. They benefited factory owners in New England who favored the mercantilist policies that Alexander Hamilton had advocated.
After the Civil War, the Democratic Party continued to call for low tariffs and the Republicans became the party of tariff protection. That reversed in the mid-20th century when the political debate about trade shifted from low-cost goods for farmers and consumers to preservation of jobs.
No important economist ever argued that trade had much influence on jobs or on average earnings from jobs. The standard argument in the discipline is that trade influences what kind of jobs there are and the relative earnings of people with different skills. But it has virtually no impact on the total number of jobs or on average household earnings.
Unfortunately, even those politicians who strongly support fewer trade restrictions seldom make this argument to the public. It is better politics to make the false, though attractive, claim that trade will increase employment.
Imports from China are not increasing because the U.S. dropped its trade barriers. Decades have passed since the U.S. significantly lowered its import tariffs on most of the things we buy from China. They are low now, but they also were low 30 years ago.
Yes, China is entering the WTO. But we agreed to treat China as if it were a member of the WTO or its predecessor organization, the GATT, back in the 1980s. That is what the repeated Congressional battles over “most-favored-nation” status were about in the 1980s and 1990s.
Rather, imports from China are growing because the export-oriented manufacturing sector in China is growing and because the U.S. dollar has been quite strong against the Chinese and other Asian currencies.
These imports are putting pressure on Minnesota firms that produce similar products. Some have laid off workers and a few have closed down. Increasing trade always forces harsh adjustments on some sectors.
The question is whether we should do anything in response. Imposing tariffs or other trade barriers would be a knee-jerk, and self-destructive, reaction. It would hurt virtually all consumers who would have to pay more for apparel, housewares and myriad other goods. Moreover, we have made treaty commitments that prevent us from raising tariffs on Chinese goods without also increasing them on goods from third-party countries.
U.S. tariff increases would have repercussions around the globe and would inevitably hurt Minnesota exporters including farmers, high-tech manufacturers such as Medtronic Inc. and the host of other firms that sell goods or services abroad.
Simply letting firms sink or swim is the second possibility and the classic one favored by conservative economists. Competition is harsh, but it motivates efficiency. If firms cannot compete with imports, the resources such firms use need to shift to other purposes.
That response assumes resources are perfectly mobile, that workers laid off by a failing manufacturing plant one day can start a new job somewhere else the next. This is seldom true. Thus, a third response is for public assistance to hard-pressed firms to help them develop better processes or higher-value products for which there is less competition.
As a country, we provide similar technical assistance to farmers through the extension service. As a state, we have done something similar for small manufacturers via Minnesota Technology Inc., which Gov. Perpich started in the 1980s.
Society as a whole benefits substantially from trade with China. This provides a basis for arguing that society as a whole should aid the Minnesotans who are hurt by this trade. Unfortunately, this involves taxes and spending, terms that seem anathema to the governor and the lower house of the Legislature.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.