- Lowering our trade barriers has both benefits and costs, but overall, the benefits exceed the costs.
- The benefits of trade are dispersed broadly, while the costs are concentrated among a small group of producers.
- This asymmetry creates a political problem - producers are highly motivated to organize and lobby for trade restrictions.
- Consumers need to ask why trade policy has been rigged against them for decades and how they can have more of a voice in the public debate over trade.
Earlier this month, the members of the World Trade Organization (WTO) met in Bali and reached an agreement to simplify customs procedures. While it was a small step, the agreement creates renewed hope for the Doha round of global trade talks, which began over a decade ago. President Obama commented that the deal "represents the rejuvenation of the multilateral trading system that supports millions of American jobs and offers a forum for the robust enforcement of America's trade rights."
All of the drama surrounding the Bali agreement reflects a very common view of international trade, one that is held by many policy makers, journalists, and voters. In this view, trade is a complicated power struggle that pits American producers against foreign ones. That's because the main benefit our nation gets from free trade is the ability to export to other countries; imports can only hurt our economy. And as a result, we lose out if policy makers reduce trade barriers without other countries doing the same.
But this argument is exactly backwards. The real benefit from trade comes from importing, not exporting. Indeed, consumers can benefit from lowering our trade barriers even if other countries do not reciprocate. This implies that our current approach to trade is contrary to the broad national interest. Rather, it represents the interests of small but powerful groups of domestic producers.
Trade between nations is not fundamentally different from trade between individuals. I "export" my services to my employer - the American Enterprise Institute - and I use the income this generates to "import" groceries from my local supermarket. If I banned myself from trading with the outside world, it would be a big boost for my "agricultural sector" - I'd have to start growing lettuce on my balcony - but overall, I would certainly be worse off.
Notice that in this example, trade makes me better off regardless of any benefits that it generates for "foreigners" - AEI and the supermarket. In addition, I get huge benefits from trading with the supermarket even though the supermarket does not buy anything from me. Indeed, the main benefit I get from trade is the ability to import groceries and other products that I need. Exporting merely helps me earn the income required to buy these products.
A similar analysis holds at the national level as well. Lowering our trade barriers has both benefits and costs, but overall, the benefits exceed the costs. In their textbook on international economics, Paul Krugman, Maurice Obstfeld, and Marc Melitz illustrate this idea with the case of raw sugar import restrictions. They estimate that these restrictions cost American consumers a total of $884 million in 2013. On the other side of the ledger, American sugar producers received a benefit of $272 million. That's a net cost of $612 million to the nation.
But the benefits of trade are dispersed broadly, while the costs are concentrated among a small group of producers. Because there are hundreds of millions of sugar consumers, Krugman and his co-authors estimate that the sugar import quota cost the average consumer about $3 this year. And for each of these consumers, this cost is spread over hundreds of purchases, showing up in the form of an extra couple of cents, at most, on each tub of ice cream or box of cookies. On the other hand, sugar producers benefited to the tune of around $42,000 per worker.
This asymmetry creates a political problem. Producers are highly motivated to organize and lobby for trade restrictions, while consumers pay little attention to a few extra cents hidden within each purchase. That's why trade negotiators - like the ones who represented our nation in Bali - tend to emphasize the interests of producers rather than consumers. In fact, if our elected officials truly represented the national interest, there would be no need for trade talks. Policy makers could simply reduce trade barriers without worrying about whether other countries do the same.
After the Bali deal, U.S. Trade Representative Michael Froman remarked, "Now it's time to turn to the post-Bali agenda. The time has come to ask hard questions, to determine what is next and how to get there." He's right. But the hard questions need to come from consumers this time. Consumers need to ask why trade policy has been rigged against them for decades and how they can have more of a voice in the public debate over trade. Unless that happens, policy makers and trade negotiators will continue to promote the misguided view that trade is all about producers' interests.
Sita Nataraj Slavov is a resident scholar the American Enterprise Institute. Previously she taught economics at Occidental College and served as a senior economist at the Council of Economic Advisers.