To introduce our first international trade discussion in class, I usually ask students to check where their clothing and shoes have been made. Finding labels that say “Made in China, Made in Thailand, Made in Peru…,” they first see how trade touches them.
Then though, the surprises begin.
U.S. businesses benefit considerably. For a $70 pair of sneakers that was Made in China, a 2011 Federal Reserve Bank of San Francisco report tells us that transport, wholesale and retail expenses involving US businesses represented 55% of the selling price. As a result, the US truck driver, the US store owner, the US wholesaler and retailer all received some income because of those Chinese sneakers.
US consumers also enjoy benefits from the “Made in China” label. In “The Fruits of Free Trade” from the Dallas Fed is a chart that conveys the trajectory of prices for traded and non-traded goods from 1997 to 2002. For traded goods like video equipment, TV sets and toys, prices plunged while the non-traded goods had price increases. On the flip side, when jobs are protected, the consumer suffers. For apparel and textiles, when trade barriers saved 168,786 jobs, the cost to consumers was $199,241 per job.
So, when 9 Senators introduce legislation to mandate “Made in the USA” Olympic uniforms, they are making a political statement but ignoring the economic realities.
Intuitively though, it is tough to grasp why legislators suggesting home industry might be harming the US economy. Nineteenth century economist David Ricardo first explained the classic defense of world trade through the law of comparative advantage. Basically, he told us to optimize world efficiency and incomes by “Doing what we do best and then trading for the rest.” Much more recently, in “Ricardo’s Difficult Idea,” Nobel laureate economist Paul Krugman tried to explain why many people have ignored the wisdom of David Ricardo’s ideas.
To read more about the merits of free trade the Federal Reserve reports are here and here while a good bio of David Ricardo is here. You might also want to read this report from Michael Mandel that looks at how we might regain any jobs lost from trade.