Page 781 - Economics

CONFIRMING PAGES

PART TEN
690
International Economics
2000s in the United States). In an economy that engages Cheap Foreign Labor Argument
in international trade, exports involve spending on do- The cheap foreign labor argument says that domestic firms
mestic output and imports reflect spending to obtain part and workers must be shielded from the ruinous competition
of another nation’s output. So, in this argument, reducing of countries where wages are low. If protection is not pro-
imports will divert spending on another nation’s output to vided, cheap imports will flood U.S. markets and the prices
spending on domestic output. Thus domestic output and of U.S. goods—along with the wages of U.S. workers—will
employment will rise. But this argument has several be pulled down. That is, the domestic living standards in
shortcomings. the United States will be reduced.
While imports may eliminate some U.S. jobs, they This argument can be rebutted at several levels. The
create others. Imports may have eliminated the jobs of logic of the argument suggests that it is not mutually ben-
some U.S. steel and textile workers in recent years, but eficial for rich and poor persons to trade with one another.
other workers have gained jobs unloading ships, flying However, that is not the case. A low- income farmworker
imported aircraft, and selling imported electronic equip- may pick lettuce or tomatoes for a rich landowner, and
ment. Import restrictions alter the composition of em- both may benefit from the transaction. And both U.S.
ployment, but they may have little or no effect on the consumers and Chinese workers gain when they “trade” a
volume of employment. pair of athletic shoes priced at $30 as opposed to a similar
The fallacy of composition —the false idea that what is shoe made in the United States for $60.
true for the part is necessarily true for the whole—is also Also, recall that gains from trade are based on com-
present in this rationale for tariffs. All nations cannot parative advantage, not on absolute advantage. Look back
simultaneously succeed in restricting imports while main- at Figure 35.1 , where we supposed that the United States
taining their exports; what is true for one nation is not and Brazil had labor forces of exactly the same size. Not-
true for all nations. The exports of one nation must be the ing the positions of the production possibilities curves,
imports of another nation. To the extent that one country observe that U.S. labor can produce more of either good.
is able to expand its economy through an excess of exports Thus, it is more productive. Because of this greater pro-
over imports, the resulting excess of imports over exports ductivity, we can expect wages and living standards to be
worsens another economy’s unemployment problem. It higher for U.S. labor. Brazil’s less productive labor will re-
is no wonder that tariffs and import quotas meant to ceive lower wages.
achieve domestic full employment are called “beggar my The cheap foreign labor argument suggests that, to
neighbor” policies: They achieve short-run domestic goals maintain its standard of living, the United States should
by making trading partners poorer. not trade with low-wage Brazil. What if it does not trade
Moreover, nations adversely affected by tariffs and with Brazil. Will wages and living standards rise in the
quotas are likely to retaliate, causing a “trade-barrier war” United States as a result? No. To obtain coffee, the
that will choke off trade and make all nations worse off. United States will have to reallocate a portion of its
The Smoot-Hawley Tariff Act of 1930 is a classic exam- labor from its efficient wheat industry to its inefficient
ple. Although that act was meant to reduce imports and coffee industry. As a result, the average productivity of
stimulate U.S. production, the high tariffs it authorized U.S. labor will fall, as will real wages and living stan-
prompted adversely affected nations to retaliate with tar- dards. The labor forces of both countries will have
iffs equally high. International trade fell, lowering the out- diminished standards of living because without special-
put and income of all nations. Economic historians ization and trade they will have less output available to
generally agree that the Smoot-Hawley Tariff Act was a them. Compare column 4 with column 1 in Table 35.1
contributing cause of the Great Depression. or points A and B with A and B in Figure 35.2 to con-
Finally, forcing an excess of exports over imports can- firm this point.
not succeed in raising domestic employment over the long
run. It is through U.S. imports that foreign nations earn
dollars for buying U.S. exports. In the long run a nation Trade Adjustment Assistance
must import in order to export. The long-run impact of A nation’s comparative advantage in the production of a
tariffs is not an increase in domestic employment but, at certain product is not forever fixed. As national economies
best, a reallocation of workers away from export industries evolve, the size and quality of their labor forces may change,
and to protected domestic industries. This shift implies a the volume and composition of their capital stocks may
less efficient allocation of resources. shift, new technologies may develop, and even the quality of

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