- Protectionists claim we should build everything in the U.S. This will create jobs and grow the economy, they profess
- But you wouldn’t cut yourself off from others, why should a country?
- Economic isolationism wastes resources and destroys jobs
Imagine yourself cut off from the rest of society. Not from all social interactions, however, just from all economic exchanges. No more going to the grocery store for food, or trips to Home Depot for home repair supplies, or –gasp!—no cell phones available for purchase.
Total self-sufficiency. You grow your own food, build your own shelter, make your own clothes and create your own cell phone, laptop and flat screen TV. And remember, you can’t buy or otherwise trade for any of the inputs to make these items. You have to create them all yourself, using only the inputs you can find and figure out how to transform into something useful.
Pretty miserable existence, right? But the notion of self-sufficiency is one of the foremost arguments used by proponents of crony protectionist policies to limit free international trade.
“If we limited trade and made everything we need here in the U.S, think of all the jobs that would create!” goes the mantra.
They believe economic isolationism is the pathway to jobs and economic growth.
But is it?
As Adam Smith wrote nearly 250 years ago in his treatise “The Wealth of Nations”:
“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”
Smith was pointing out the folly of self-sufficiency, whether discussing an individual, family or a country.
Prosperity grows when the amount of goods and services being produced by a given set of resources increases. The division of labor is one significant way to increase productivity.
The division of labor enables individuals, communities and nations to specialize in doing the work in which they have a comparative advantage.
Comparative advantage is not, however, just something in which you are more productive than another. Opportunity costs must also be taken into consideration when discussing comparative advantage.
Take the example of a heart surgeon and his secretary. The heart surgeon can earn, say, $200 an hour performing surgery. Meanwhile, the secretary is paid $15 an hour to file the necessary paperwork for the office. But if the doctor can more efficiently file paperwork than the secretary, should he fire the secretary, save $15 an hour and do the paperwork himself?
Of course not, because every hour he spends filing paperwork he foregoes the opportunity to make $200 an hour performing surgery (not to mention saving lives). That $200 in foregone revenue would be his opportunity cost of filing paperwork, a cost far higher than the $15 an hour he pays his secretary. Even though the doctor has an absolute advantage over the secretary in both heart surgery and paperwork filing, he is far better off focusing his scarce time engaging in the work in which he has a comparative advantage, and purchase the paperwork services for only $15 an hour.
This concept can be applied beyond individuals. Because all economic resources – like tools, raw materials, labor, etc. – are scarce, it makes little sense to employ resources that could earn $100 to instead build something that could be bought from another community for $20.
As Smith wrote: “In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.”
So when protectionists call for self-sufficiency in manufacturing and production, what they are really calling for is for the U.S. to sacrifice more valuable production to create goods that we could otherwise purchase elsewhere for less. We are made worse off as a result.
But if the U.S. produced everything domestically, wouldn’t everyone have jobs?
The key to understanding the benefits of international trade is not to just look at jobs, but the quality of jobs. Poverty-stricken nations can have full employment, but what good is that if the work is back-breaking toil that barely allows people to feed themselves?
By freeing international trade, U.S. consumers can purchase basics like clothing and children’s toys at a low price from overseas countries who have a comparative advantage in those industries, thus freeing up domestic resources like labor to engage in more highly productive, and lucrative, jobs.
As author Daniel Griswold wrote in his 2009 book “Mad About Trade”:
“Trade raises the general wage level by expanding the opportunity for Americans to work in sectors where productivity and pay exceed the average. Because of comparative advantage, American workers tend to be most productive in those sectors that are the most capital intensive – those that require large investments in physical and human capital and intellectual property. Examples of such industries are pharmaceuticals, chemicals, civilian aircraft, sophisticated machinery, microprocessors, and professional services in finance, insurance, accounting and other sectors.”
Conversely, overseas countries have a comparative advantage in more labor-intensive jobs like toys, sporting goods or clothing manufacturing. Because of their lower levels of education and job skills, along with less investment in capital goods, workers in such countries have lower opportunity costs and as such accept lower wages.
Allowing for free trade to enable greater division of labor enhances the American worker’s outlook for better jobs. As Griswold noted, “As the American economy opens itself to global competition, we tend to import more of the labor-intensive goods, reducing relative employment in lower-paying sectors, while we export more of the capital-intensive goods, promoting greater employment in higher-paying sectors.”
It is also important to note the importance trade plays in supplying U.S. manufacturers with needed inputs at a low price. Taking away this option due to tariffs and other protectionist measures destroys profits and business’ ability to hire and pay workers.
Economic self-sufficiency is not a path to more jobs. Rather it is a path to economic decline. It makes no sense to tie up scarce resources in low-wage, labor intensive jobs making goods that can be purchased at a far lower cost from other countries. To do so wastes resources and destroys jobs ― not create them. Making matters worse, such calls for self-sufficiency deny U.S. workers better, higher paying opportunities. While a select few companies may benefit from crony protectionist measures, far more American workers are harmed.