No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 382 U.S. products, such as pharmaceuticals. When a tariff is passed on steel, they have fewer dollars to buy other U.S. goods and services. So fewer pharmaceuticals are sold to Japan and workers in that industry are hurt. As we learned early on, the mark of a good economist is to see not just the near-term effects, but the long-term as well. We need to look at not only the “seen” but the “unseen” effects of a tariff policy. The “seen” is the benefit to steel workers and producers. They do indeed benefit—far more as producers than it will cost them as consumers. Everybody can see this. Politicians will gladly stand up for American workers, and claim they have “saved or created jobs. ” But no one will see the jobs that were lost or not created due to higher steel prices. Very few will be able to see that pharmaceutical job growth was less than it otherwise would have been absent the tariff. This is the “unseen,” and because it is unseen we have continual political pressure in favor of actions that have “seen” benefits and “unseen” costs. The point of the discussion is this: our analytical model in Figure 15.11 captures only the beginning of the losses to our economy when trade is not free; we must also understand how incentives are changed and how a policy affects markets beyond where the tariff is enacted in order to understand the full impact. ARGUMENTS AGAINST FREE TRADE We’ve identified special interests as a driving force for limitations on free trade; public choice analysis accurately describes the behavior of those wanting to limit free trade. Nevertheless, opponents of free trade don’t usually appeal to the general public in terms of their narrow self-interest. Instead, there are several common theoretical arguments against free trade that we will briefly discuss. First, there are many national security concerns with free trade that have significant merit. The U.S. military superiority is largely due to technology, and the U.S. therefore restricts sales of critical technologies. This restriction is not as effective as one might hope, since potential adversaries such as China simply steal American technologies; when we don’t sell these technologies, other “friends” such as France will sell them. Further, to maintain that technological advantage, opponents of free trade call for domestic production of all critical defense capabilities. For example, the U.S. currently purchases Russian Energomesh engines for the Air Force’s Atlas V military rocket. How can we possibly depend on Russia for critical national security space launches? The standard answer and what has been applied in this case is that prior to demanding domestic production, one should consider if it is more cost effective to stockpile the critical foreign provided asset. In the case of the Russian engine, we both stockpile several years’ supply of the engine, and also have purchased the manufacturing technology to be able to produce the engine domestically, if necessary. So while national security concerns may have some applicability in trade, there are often ways to obtain the gains from trade and preserve national security. Further, a strong, competitive, dynamic economy strengthens our national security in and of itself.