free trade

Explaining Free Trade in Under Three Minutes

by Ryan Young on June 8, 2010 · 1 comment

in Economy, Trade

Sometimes, the fastest, most effective way to explain economics is to tell a story. One of the best-done examples is in Steven Landsburg’s book The Armchair Economist, where he tells David Friedman’s “Iowa Car Crop” story to get readers to think about trade (see pp. 197-99).

[T]here are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa.

Okay… how does that work?

First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

Sounds almost magical. But it happens millions of times every day. The lesson is that trade is about specialization. A farmer doesn’t know how to build a car. But he can still have one by sticking to his specialty–growing wheat. He can trade his surplus to other people who do nothing but specialize in building cars.

This cuts both ways. Most factory workers don’t know a thing about farming. But by concentrating on building cars, they eat far better than if they grew their own wheat. The nature of trade is that everyone wins when they specialize. The only limit on specialization is the size of the market.

Restrictions on trade–tariffs, quotas, antidumping duties–shrink that market. And by shrinking the market, they limit specialization, which is the source of all prosperity. It’s good to grow cars in Iowa.

The lesson doesn’t apply to just wheat and cars. It applies to everything. Tom Palmer from the Atlas Economic Research Foundation makes that clear as day in this excellent video. If you want to learn the meaning of free trade in under three minutes, this is as good as it gets.

Regulation of the Day 89: Purple Dye

by Ryan Young on December 22, 2009

in Deregulate to Stimulate, Economy, International, Personal Liberty, Regulation, Regulation of the Day, Trade

Ancient Roman consuls – equivalent to our presidents – wore togas edged in purple to mark their high status. As Republic became Empire, new emperors were said to “ascend to the purple.”

Purple clothing was a status symbol for most of human history. It was the ancient equivalent of the Mercedes-Benz. Originally discovered in the glands of shellfish (reputedly by Heracles’s dog!), it took 12,000 of the creatures to get just 1.5 grams of dye. Purple garments could be as rare and costly as gold in some places.

Modern innovations such as inexpensive synthetic dyes, the Minnesota Vikings, and purple M&Ms have taken away the color’s exotic reputation. But no worry. Federal regulators are doing what they can to bring it back.

Alpinil Industries, a dye manufacturer in India, sells its carbazole violet pigment 23 cheaply. Too cheaply, it seems. Even commoners can afford to buy products colored with their purple hues!

Irate American competitors convinced the government in 2004 to put an anti-dumping duty on Alpinil’s purple dye. That raised the price to match pricey American-made dyes. Purple would once again be reserved for the rich.

Now that the tax has been in place for five years, the Department of Commerce is wrapping up an investigation to see if it has been working as intended. A repeal would be best for consumers. Don’t expect to see it happen, though.

The benefits are concentrated to a few dye manufacturers, who have a strong incentive to lobby to keep the status quo. Meanwhile, the costs are diffused onto millions of consumers, none of whom have much incentive to spend thousands of dollars in an effort to save themselves a few pennies.

Don’t Worry about Trade Deficits

by Ryan Young on December 5, 2009

in Economy, International, Personal Liberty, Regulation, Trade

Here’s a letter I sent recently to the New York Daily News:

December 3, 2009

Editor, New York Daily News
450 W. 33rd Street
New York, NY 10001

Washington, D.C.: In his December 3 column, “On jobs front, President Obama needs to show a little audacity,” Errol Louis worries about America’s trade deficit. He shouldn’t.

I run an ongoing trade deficit with my local grocery store. I import food from them every week. They have never purchased a thing from me in return. Even so, we both benefit. I’d rather have their food than my money, and they’d rather have my money than the food on their shelves. This is true even if an international border separates us.

If Mr. Louis is as worried about trade deficits as he says he is, he would never again set foot in a grocery store, start growing his own food, and engage only in barter transactions. If he doesn’t, he is either misinformed, or else he doesn’t really believe what he writes.

Ryan Young
Warren T. Brookes Journalism Fellow
Competitive Enterprise Institute
Washington, D.C.

President Obama Wins Nobel Peace Prize

by Ryan Young on October 9, 2009

in Economy, Personal Liberty, Trade

It is ironic that the winner of the Nobel Peace Prize wants to send more troops to Afghanistan. Even so, President Obama is in a prime position to work wonders for the cause of peace. He can institute free trade in America.

Trade is the ultimate act of peace. If someone has something you covet, you are faced with a choice. You could take it from him by force. Or you could trade for it. The first option is the root of all war. The second is the root of all peace.

Trading with people instead of stealing from them is a sign of respect. It says you honor their rights as an individual. It says you reject the use of force.

If he wants to earn the prize he has been given, President Obama should scrap those tire tariffs against China. Publicly retract his blustery campaign statements about renegotiating NAFTA. Repeal every tariff, every antidumping duty, and every last restraint on trade in the books.

Nothing promotes peace and civility more than commerce. After all, killing the customer is very bad for business.

Regulation of the Day 50: Tires from China

by Ryan Young on September 14, 2009

in Economy, Mobility, Regulation, Regulation of the Day, Trade

Consumers have been buying a lot of tires made in China lately. Naturally, U.S.-based tire manufacturers are upset at their competitors’ success. Fortunately, there are two ways for the aggrieved American firms to ease their troubled minds:

1: Make better tires for less money. Give consumers a reason to buy American tires rather than Chinese. Compete, in other words.

2: Don’t compete. Too much hard work. Instead, persuade some politicians to place a 35 percent protective tariff on competitors’ tires. Price them out of the market. Then keep making the same old tires that people don’t want. If the tariff is large enough, you may even be able to raise your prices, even without raising quality.

This is a choice between raising the bar and lowering it. Unfortunately, U.S. tire firms and allied politicians have chosen to lower it. China, by putting up its own barriers to retaliate, is lowering the bar even further.

The really audacious part is that tire tariff supporters think they are really helping the economy. Raising that bar. Saving American jobs!

There is something very unsettling about the notion that an American job is intrinsically more valuable than a Chinese job. We are all human beings, are we not?

This is an ugly, ugly mindset. And it is one that politicians and tire companies have explicitly adopted. The burden is on them to explain why they think people who live in one country are more deserving of economic opportunity than people who live in another.

Blight Hits East Coast, Capitalism Saves the Day

by Kevin Hilferty on July 7, 2009 · 1 comment

in Agriculture, Trade

There are many reasons for free-market advocates to be unhappy about current affairs. With numerous pieces of legislation being proposed to put shackles on our economy, it can be quite easy to take a pessimistic outlook on the present state of free markets. But sometimes to be optimistic you just need to look for the silver lining on otherwise dark clouds. Today’s dark cloud: news sources are reporting that a widespread outbreak of blight, the mold responsible for the Irish Potato Famine, is hitting the East Coast hard right now. The silver lining: because of entrepreneurial innovations and trade made possible through the open market, what would have been a major crisis 100 years ago is now a minor inconvenience to home gardeners.

Due to cooler than average temperatures and rainy conditions, the mold known as late-blight has taken hold and spread across the Northeast. The mold spreads spores that kill infected plants, generally those of the nightshade variety like tomatoes and potatoes. In the 1840s, late-blight struck Ireland’s main source of food –potatoes- and caused millions to starve and millions more to emigrate. So why not be afraid of the same thing happening here today in the U.S.? Why aren’t major news stations running this story 24/7 and interviewing experts on how to solve this crisis?

Mainly there is little to worry about because free markets work. While food markets have been regulated, they still have been free enough to encourage innovation in food technology and trade with other nations. Due to the profit motive driving entrepreneurial activity there have been many advances in biotechnology that have helped develop crops that can withstand diseases like blight. Genetically-engineered foods that are resistant to viruses, fungi, and disease are now available on the market.hasbro-mr-potato-head-darth-tater2

Furthermore, despite some barriers, international trade still exists for food. The international food market is diverse and allows for different foods to come from many different sources. It is nothing short of amazing that – because of free trade- you can buy fresh produce like strawberries year round even if they are out of season in your hemisphere. If we were totally independent nationally for our sources of food, an outbreak of blight like this could very well be a huge crisis. If, as some environmentalists propose, we were all only able to purchase locally-grown produce then blight could be regionally devastating. Luckily, we are not restricted to only buying food from our home regions and can trade with other nations. If blight were somehow to cripple East Coast food production, while highly inconvenient and costly, food could be imported from other regions or countries.

Although many home gardeners will have problems with their tomato plants this summer, the average American will not notice any differences in everyday life. While there are many problems facing advocates of free markets, worrying about blight-induced famine should not be one of them. It can be easy to get caught up in defending open markets and to forget the unseen benefits that they constantly provide. So this summer, be sure to thank the process of free exchange as you eat non-blighted potatoes and tomatoes.

More Money For Your Mattress

by Cord Blomquist on January 3, 2009 · 9 comments

in Features, Politics as Usual, Trade

Leggett & Platt, an American innerspring manufacturer, has been busy lobbying the Department of Commerce.  The fruit of their labor: a tariff of anywhere from 164.75% to 234.51% on innersprings from China, their biggest competition.

This tariff means that you can expect to pay double for your next mattress.  Because innersprings are the most expensive part of traditional mattresses and the tariff has effectively removed affordable, low-priced mattresses from the market.

This is the result of a petition to the International Trade Commission filed in December of 2007 by Leggett & Platt—a Fortune 500 company based in Carthage, Missouri.  The petition started an investigation into alleged “dumping” by several Chinese spring makers.

For those not familiar with the doublespeak of trade policy, “dumping” refers to the act of shipping large amounts of a product into a foreign market at well below current market prices.  This seems like a good thing for mattress makers as well as consumers who buy mattresses.  Others disagree, namely Leggett & Platt.

The folks at Leggett & Platt argue that laws like these are necessary to protect American manufacturers (namely themselves)  from unfair competition from abroad.  But, rather than protecting American businesses, this policy is killing them.

Small mattress makers—think obnoxious ads on your local televisions stations—add padding, memory foams, lovely flower print coverings and other components to innersprings to make a finished mattress.  These small to medium sized businesses are paying a steep price for Leggett’s “protection.”

Leggett was already responsible for 70 to 80 percent of the domestic innersprings market.  Without foreign competition, they now have a virtual monopoly on the market.  In short, mattress makers are now forced to buy from Leggett at any price they set.

This means many mattress makers have discontinued discount mattress lines.   Almost all have had to raise their prices in order to pay for Leggett’s high-priced product.

Many small mattress makers relied on foreign sources of innersprings in order to compete with their larger competitors. This new tariff means that’s no longer an option, so  many small mattress makers maybe forced to close their doors.

Those with a dark sense of humor may chuckle at the regulatory underpinnings of this tariff.  The DOC has the authority to investigate dumping and enact such anti-dumping tariffs under Title VII of the Tariff Act of 1930, otherwise known as the Smoot-Hawley Tariff Act.  Under Smoot-Hawley, exports and imports plunged by over 50 percent, from their high in 1929 to the depressed levels of 1932.  Most economists agree that this policy was one of the major catalysts that led to the start of the Great Depression.

Smoot-Hawley has, thankfully, been reformed several times in the decades since those dark days.  But, thanks to companies like Leggett & Platt, who manipulate trade policy to avoid competition, Smott-Hawley is being put back together piece by piece.

But don’t lose any sleep over it; after all, you paid so much for that mattress.

Full disclosure: The author worked for Leggett & Platt as a shipping clerk for a summer in college .  It was a great job.

Even the liberal media support the Colombia trade deal

by Ivan Osorio on November 12, 2008 · 1 comment

in International, Trade

Today’s Washington Post and Los Angeles Times both endorse passage of the U.S- Colombia free trade agreement, which many Democratic politicians, pressured by organized labor, have refused to endorse. House Speaker Nancy Pelosi has ducked the issue by refusing to bring it to a vote. President-elect Obama got considerable help in his campaign from labor unions that oppose the deal, but no political debt is worth undertaking such a disastrous course as scuttling this trade deal.

Not only is Colombia the United States’ strongest ally in South America — a fact that would make scuppering the deal a slap in the face for Colombia and a political victory for the increasingly unhinged Hugo Chavez — but the last thing America needs in a time of economic turmoil is a Hawley-Smoot lite in the form of failed trade liberalization.

For all the bailouts and stimulus packages being batted around Washington, what the American economy really needs is greater opportunity to innovate and invest — in other words, less burdensome regulation and more open markets. As the Times‘ editorial argues:

The pact would balance and normalize a trade relationship that is now one-way. Colombia has almost unfettered access to U.S. markets — 91% of its goods enter duty free — but U.S. products face tariffs of up to 35%. Each Caterpillar truck sold in Colombia, for example, is taxed more than $200,000. This is a hindrance to prosperity for both countries. Currently, about 9,000 U.S. businesses export to Colombia, and were this deal passed, that number would skyrocket.

And, as the Post‘s editorial says:

The main economic effect of the trade agreement would be to enable U.S. producers — automakers included — to export to Colombia tariff-free. This would simply level the playing field, because 90 percent of Colombian goods already arrive in the United States tariff-free under temporary trade preferences that Congress recently renewed. With U.S. goods exports to Colombia totaling over $8 billion per year, the pact offers a nifty dose of stimulus for U.S. businesses and workers.

Stimulus, indeed! As CEI’s Wayne Crews argues, to stimulate, deregulate. The same is true of liberalizing trade.

For more on the U.S.-Colombia trade deal, see here and here.

Last-minute push for Colombia trade pact

by Fran Smith on November 12, 2008

in International, Trade

Major newspapers around the country including the Washington Post, the LA Times, and the Wall Street Journal are urging President-elect Barack Obama to pass the U.S.-Colombia Free Trade Agreement in the lame duck session. The Los Angeles Times said it bluntly, “It’s time to stop playing games with a trade pact whose economic and political benefits are good for both nations.”

Some reports of the meeting between the president-elect and President Bush said that the president had pushed for the trade agreement in exchange for support of the auto loan package, but that was denied.

CEI has strongly supported the passage of this agreement based on its own merits — it provides surety for continued liberalized trade for Colombia, it opens up Colombian markets to U.S. goods without high tariffs, and it helps cement the close relationship with a Latin American ally besieged by leftist neighboring governments.

Perspective on trade in the Obama Administration

by Fran Smith on November 6, 2008

in International, Politics as Usual, Trade

During the presidential primaries and in the campaigns, there was a lot of rhetoric about the need for “fair” trade instead of free trade. Candidates were in a populist mode, catering to critical manufacturing states that have lost jobs and serving up trade as the villain.

Now that Senator Barack Obama is the President-elect, there is renewed speculation on what path his administration will take on international trade. Will he make good on his campaign rhetoric that echoed the Democratic platform’s call for renegotiation of trade agreements to include even more stringent labor and environmental standards? Will he continue to hold up pending trade agreements with close U.S. allies? Will he embrace isolationism and protectionism or adapt to geopolitical realities?

In a new C:\Spin publication, I provide some perspective on the outlook for trade in the Obama Administration. I opine that President Obama will face enormous pressure to make good on some of his campaign promises on trade.  But, with his top-notch economic advisers, he may pull back from drastic anti-trade actions that would harm the fragile economy and alienate U.S. allies and trading partners.

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