Whether it’s the economy or illegal immigration, when things go wrong, there’s always a segment of the population that figures erecting taller, stronger, sturdier barriers to outsiders is the solution.

Obviously, the Great Wall of the Rio Grande has done nothing to treat either the symptom or the cause of illegal immigration.

Likewise, economic protectionism—all those import tariffs, quotas, subsidies and taxes—never accomplish anything other than making worse the situation they’re supposed to be helping.
 

Focusing on the Pie or the Slice

If you want to know someone’s economic philosophy ask them how they feel about globalization. Each of our answers typically entrenches us firmly on either side of a line: grow wealth—increase the slice of the proverbial economic pie—by eliminating current and potential competitors; or focus on growing the pie so that even smaller slices represent more than larger slices of a smaller pie.

Though the latter remains unbelievable and anathema to some, the benefits of globalization to the overall economy are indisputable.

“The evidence is clear: international trade raises a country’s standard of living,” writes Robert Krol, professor at California State University at Northridge, in  his 2008 study, Trade, Protectionism, and the U.S. Economy: Examining the Evidence, published by the Cato Institute.

The study provides a comprehensive review of the important empirical works that quantify the impact of trade on the economy, looking at data dating back to the end of World War II.

“U.S. goods (exports plus imports) increased from 9.2% of gross domestic product in 1960 to 28.6% in 2007. This expansion of international trade has benefited the United States and its trading partners considerably. The benefits include a higher standard of living, lower prices for consumers, improved efficiency in production and a greater variety of goods,” writes Krol. In fact, international trade is so beneficial, he explains that a global elimination of trade barriers would boost the income of Americans by a total of half a trillion dollars. 

The reasons free, global trade lifts economic fortunes has everything to with a few practical principles that go back to the birth of economic science itself. Bottom line, if it costs you more to do something yourself than what you can pay for somebody else to provide the product or service, then you need to pay someone else and pocket the difference. Plus, as you focus upon providing services and products for which you have a comparative advantage, you make more than trying to be self sufficient in areas where you lack the comparative advantage.

That’s why cattle producers buy tires from someone else, pay for someone else to keep their chompers and heart in working order, and all the rest. That’s why dentists, doctors and tire manufacturers buy beef cuts at the supermarket rather than attempt to raise and harvest a beef animal on their own.

That’s all well and fine, respond protectionists, but look at the Great Recession we’re just now trying to escape.

According to a Free Trade Bulletin from the Cato Institute, contrary to political rhetoric, free trade does not cause economic downturns, but in fact it has helped ensure that recessions are mercifully shorter, shallower, and less frequent than in past decades.

“…an analysis of previous recessions and expansions shows that international trade and investment are not to blame for downturns in the economy and may in fact be moderating the business cycle,” says Daniel Griswold, director of Cato’s Center for Trade Policy Studies, in Worried about a Recession? Don’t Blame Free Trade.

Griswold explains increased foreign trade and investment has helped bring about what economists call The Great Moderation, which began in the mid-1980s.  With the Great Moderation recessions have been milder and less frequent. The Cato study finds that the U.S. economy was in recession 21% of the time from 1945 through 1982 compared to 5% in the more globalized era since then.

Plus, Griswold explains this decreased volatility has not diluted overall economic growth. Annual real GDP (Gross Domestic Product) growth has been the same over the past 25 years that have experienced the Great Moderation as it was the 25 previous. 

Combined with other factors, such as improved monetary policy, fewer external shocks and other structural changes in the economy, Griswold explains, “…expanding trade and globalization have helped to moderate swings in national output by blessing us with a more diversified and flexible economy. Exports can take up slack when domestic demand sags, and imports can satisfy demand when domestic productive capacity is reaching its short-term limits. Access to foreign capital markets can allow domestic producers and consumers alike to more easily borrow to tide themselves over during difficult times.”
 

Competition drives the World

Of course, none of the positive net effect means everyone wins or that all win equally. The problem folks have with global trade isn’t really about global trade, it’s about competition. Both industries and individuals are at risk if someone else, somewhere else develops keener comparative advantage. That’s as true for domestic typists losing the war to computers and word processors, or for auction markets losing sales to video markets, as it is for America losing competitive to other countries due to manufacturing costs.

Consequently, the chief criticism of free trade continues to be its potential to displace some workers and industries.

According to Krol’s study, international trade only directly affects 15% of the U.S. workforce: “…trade can result in the displacement of workers in industries that must compete with imports…the impact is modest relative to overall employment growth.”

Of course, there is nothing moderate about it, if you happen to be one of those displaced. By definition, though, competition means there are winners and losers and that the race is never truly run as long as you must compete or want to. Maybe that’s why some folks call time-out, trying to figure out other ways to stay in the game without having to compete. There continues to be plenty of law makers who think that way.

Consider the economic stimulus bill enacted in 2009. Though somewhat softer in its final version, the law includes Buy American provisions, including the stipulation that all of the steel, iron and manufactured goods used in construction must be made in the United States if stimulus funds are used for public works projects.

“For all practical purposes there is no difference between the Smoot-Hawley tariff bill of 1930 and the Buy American provisions in the $819 billion spending bill that passed the House,” said Daniel J. Ikenson, associate director for the Center for Trade Policy Studies at the CATO Institute. The House version contained more protectionist provisions that the final law.

Ikenson explained that Smoot-Hawley was the catalyst for a pandemic of tit-for-tat protectionism around the world, which helped deepen and prolong the global depression in the 1930s. 
 

Protectionist Myths are the same within Industries

Both the temptations and realities of free and global trade exist within the cattle and beef industries, too.

Readers with enough miles on them may recall the beef price freeze in 1973 as the most blatant example of protectionism gone awry. In this case it was the federal government trying to protect consumers from escalating beef prices. As producers withheld cattle from the market and backlogs built, the results were disastrous.

Then there was the dairy herd buyout of 1986 as government sought to help dairy producers, but also upended cattle prices as dairy cows flooded the market.

More recently, cattle producers learned how much exports are worth to the value of cattle on the hoof when the U.S. was shut out of key export markets with the discovery of BSE in the U.S. in 2003. Even more recent is the pall cast by Country of Origin Labeling upon some markets and producers.

Yet, especially when times are tough, such external help is so seductive.

You know this tired refrain: “We can’t produce enough beef for America, as evidenced by the number of cattle and amount of beef imported to this country. Keep those other folks out of the U.S. market and prices here grow for producers.”

On the surface, that’s an alluring error in reason. Within a vacuum the strategy might work, too, if you weren’t concerned about growing the economic pie or about economic sustainability.

Some of this reality is visible enough. There is the comparative advantage, for example, of cattle and beef moving North and South across the U.S./Canadian border, rather than incurring the added freight of transporting East and West within each country. There’s the fact that calves purchased from Mexico can have more value added to them in the U.S. than in Mexico and that value can be added on this side of the border. In both cases, this bilateral trade helps ensure those countries also buy beef exports from the U.S.—they’re chief export markets for U.S. beef.

Perhaps the most lucrative aspect of importing beef to the U.S. is also the most difficult to see—it has to do with ground beef. Without importing lean trim from other countries to mix with the fatter trim in the U.S.—a byproduct of grain-fed beef—the industry would be hard-pressed to churn out as much ground beef as affordably as it does for the domestic market. And, the end cuts, predominately used for ground beef, are the ones garnering the most demand through the Great Recession.

“Some cattlemen believe that U.S. lean beef imports are harmful to their industry and should be sharply restricted. The thought process is that if the volume of imports were lower, the prices of beef would be higher due to a lower total supply,” explained Tom Elam for the Hudson Institute in a paper entitled The U.S. Ground Beef Market: Why Imports Help. “This may be true, but only in the short term. In the long term, the domestic supply of lean meat for ground beef would rise by cutting into the more profitable sales of high-quality beef—or consumers would shift even further from ground beef to poultry and pork.”

As it is, Dillon Feuz, agricultural economist at Utah State University pointed out in his July market analysis that it’s true the U.S. imports more beef tonnage than it exports. On a value basis, though, it’s also true that the U.S. receives more total dollars for beef exports than it pays for beef imports.

Spun another way, through this Spring, beef exports accounted for about $120/head of all fed cattle slaughtered, according to the Iowa Beef Industry Council.

Free Trade Aint’ what it used to Be

As the world has muddles through the Great Recession, though, there are plenty of folks eager to overlook long-term gain for short-sighted hopes.

“Recent polls and political rhetoric suggest support for continued trade liberalization may be waning, and that is of concern,” Krol writes. “A movement away from the relatively open global trading system that is currently in place would impose significant economic costs on the United States and the rest of the world.”

“Opponents of economic freedom are blaming the global recession on the operation of markets and hoping to use it as an excuse for a vast expansion in government. But even in recession, the quality of life in nations with free and open markets is vastly superior to that of nations with government managed economies,” says Fred McMahon, Fraser Institute director of trade and globalization studies. “To successfully navigate the global financial crisis, nations must focus on policies that support the principles of economic freedom. By choosing this path, the current crisis will be reversed and fade into history. But if we learn the wrong lessons and choose reforms and policies inconsistent with economic freedom, our destiny will be like the generation of 1930; we will face a decade of stagnation and decline.”

On the whole, the U.S. is neither the most liberal nor the most conservative international trader.

According to the annual index, Economic Freedom of the World report, the U.S. was among the top 10, ranking sixth behind Hong Kong, Singapore, New Zealand, Switzerland and Chile.  The United States ranked ahead of Ireland, Canada, Australia and the United Kingdom.  The annual peer-reviewed Economic Freedom of the World report is produced by the Fraser Institute—Canada’s leading economic think tank—in cooperation with independent institutes in 75 nations and territories. The 2009 index ranked 141 nations.

“Economic freedom is the key building block of the most prosperous nations around the world,” McMahon says. Countries with high levels of economic freedom are those in which people enjoy high standards of living and personal freedoms. Countries at the bottom of the index face the opposite situation; their citizens are often mired in poverty, are governed by totalitarian regimes and have few if any, individual rights or freedoms.”