In Praise of Imports
By Aaron Steelman
Throughout U.S. history, people have argued for restricting imports. Some have claimed that, in a world of free trade, our borders would be flooded with goods and that American companies would not have a chance to get off the ground. Others have insisted that trade barriers serve national security interests, because they support certain sectors of the economy that would be crucial in wartime.
But perhaps the most common of all protectionist claims is what might be called the "perfect world" argument. It goes something like this: "I would support cutting our tariffs if other countries would do the same." There are variations on this theme. For instance, you might hear someone say that free trade would be great if our neighbors would stop subsidizing their industries - or if wages were uniform around the world. Of course, these conditions are unlikely to be met, so in practice trade protections are unlikely to be cut.
The problem with such arguments is that they misunderstand why nations trade in the first place: to consume. Imports are the real benefit of international trade.
Consider the case of 19th-century America. During that period, we frequently imported more than we exported. In other words, we ran persistent and often large trade deficits. Did this cripple the U.S. economy? Quite the opposite. The U.S. economy grew enormously - and imports played an important role. During the 1800s, "substantial resources of labor and capital were diverted out of consumer-goods production into canal and railroad construction, and a large increase in imported consumer goods partially offset this domestic decline. In the 1850s, we also imported a large amount of railroad iron for construction," writes Douglass North, winner of the 1993 Nobel Prize in economics. "Foreign capital not only financed the import surplus described above but directed resources into cotton expansion and the social overhead investment in transportation."
Likewise, poor countries around the world today could improve their lot by opening their borders to foreign goods. Russell Roberts, an economist at Washington University in St. Louis, illustrates the benefits of trade for developing countries through a hypothetical example.
Think about what would happen if residents of St. Louis were forced to buy only products made in that city. Houses would have to be destroyed so that the land they stood on could be turned into farms. And people would have to change jobs so that they could concentrate on producing goods necessary for survival. "A whole string of economic changes would occur and all of them would be impoverishing," Roberts writes. "The poorest countries are a lot like St. Louis ... in that their size makes self-sufficiency extremely expensive. Trade lets them avoid that trap. Trading with them doesn't exploit them - it allows them to escape the poverty of self-sufficiency."
A number of developing countries in Latin America followed the opposite path from the 1950s through the 1980s. They adopted "import-substitution" policies aimed at promoting industrialization. Such protectionist policies did indeed create an industrial sector in Latin America - but at a very high cost. "Exports were discouraged, the exchange rate became overvalued, employment creation lagged behind, and massive amounts of resources - including skilled human talent - were withdrawn from the protective sphere and devoted to lobbying," writes Sebastian Edwards, an economist at the University of California at Los Angeles.
Edwards hits on a counterintuitive insight. One might think that, if a country boosted its tariff barriers, it would send at least as many goods overseas - if not more. But, in practice, that rarely happens, an observation that economist Abba Lerner made in the 1930s. Lerner argued that a tax on imports is equivalent to a tax on exports.
Contrast the cases of Chile and Brazil. Chile was one of the few Latin countries to liberalize trade in the 1970s. During the next 25 years its imports and exports, as measured as a percentage of gross domestic product, both surged. Meanwhile, in Brazil, where protectionist policies remained in place, international trade figures remained relatively stagnant.
The lesson here is that trade barriers are no panacea. They make nations poorer and have little or no effect on the current account balance. As Milton and Rose Friedman have written, the United States should say to the rest of the world: "We cannot force you to be free. But we can offer full cooperation on equal terms to all. Our market is open to you without tariffs or other restrictions. Sell here what you can and wish to. Buy whatever you can and wish to. In that way cooperation among individuals can be worldwide and free."
Order single copies or subscribe to Region Focus and other publications from the Federal Reserve System.