With just five minutes to go in the Steelers-Colts playoff game last Sunday, NFL Referee Pete Morelli made a terrible call against the Steelers. On Monday, the NFL made a rare statement saying that Morelli was wrong. Thankfully for Steelers fans, Big Ben’s bruisers prevailed in spite of the game-changing call. Unlike the continuing prosperity of the Steelers, two western Pennsylvania steel tube producers have laid off workers and face the prospect of plant closings in response to competition from low cost Chinese imports. Should President Bush admit a mistake for refusing to impose a quota on tube imports from China, in spite of lobbying by United Steelworkers and seven domestic steel tube makers? Let’s review the issues and be the referee.
First, it is misleading of a local paper to imply that refusing to restrict tube imports primarily benefits oil companies. While companies that use steel tube might experience a modest short run reduction in profits if tube prices were higher, those higher tube prices, artificially created by import restrictions, would ultimately be passed on to consumers. The primary beneficiaries of free trade with China are the consumers, the American public, who are able buy a whole range of products for less as a result.
Critics of trade with China accuse China of dumping these products on the market at prices that are lower than the cost of production.However, Chinese firms, just like firms everywhere else in the world, are in business to make a profit.The fact that the Chinese economy is growing rapidly and many Chinese workers are escaping poverty suggests that trade with China is very beneficial to Chinese workers as well as to U.S. consumers.
But what about the workers who face plant closings?If the workers really want to keep their plants from shutting down, they could agree to work for lower wages. This might be the best strategy for some highly paid unionized workers.Many others could earn more in the long run by taking up a new career rather than agreeing to wage reductions.
But why should workers have to accept pay cuts to remain employed? Don’t they have a right to a living wage?Not if the “living wage” is high enough to result in uncompetitive product prices. If American consumers prefer to buy lower priced products from China, is it right for the government to use its force via quotas to prevent consumers from freely buying from whoever they choose?
It is important to dispel some myths about the effect of trade with low wage countries like China.U.S. firms do not have to lower wages to anywhere near Chinese levels to compete with Chinese firms.Many U.S. firms can compete on the international market and pay high wages because they have more capital and better technology, which makes their workers much more productive than firms in developing countries like China. U.S. firms are relatively more productive at some things than others, so it makes sense to specialize in producing those things for which U.S. workers’ productivity is largest relative to that of foreign workers.In today’s global economy, changes in the relative productivity of U.S. to foreign workers in different industries means that Americans can do well if they are flexible enough to leave jobs in declining industries and train for jobs where U.S. relative productivity is rising.
Fear that trade with China results in unemployment for American workers is based on some myths about how the world economy functions. There is not some fixed number of jobs that depends on how much we import and export. In a free market economy, anyone with the ability to work can find a job.Wages, however, will depend on worker productivity at producing things that consumers want to buy.
When Americans buy imports, there is no reason why the overall level of employment should decline. Even if imports increase more than exports, there is no reason why overall employment should decrease, except temporarily, until workers laid off in declining industries can find jobs elsewhere.
Moreover, the size of the trade deficit has no necessary connection to the demand for American-made goods and services. The dollar value of the trade deficit with China is the amount of money that China is lending to American consumers to buy Chinese imports. For every dollar that Americans borrow to buy imported products, there will be no reduction in the dollars Americans have to spend on American made goods and services.While it may not be a good thing for U.S. consumers and the government to accumulate such a high level of debt, free trade is not the reason for this debt.
“After further review,” here’s the call: The bottom line is that free trade means that some goods that used to be made in America can be produced overseas for less.This frees up resources for American workers to produce and sell other goods and services for export or to other Americans who can afford bigger homes, nicer vacations and many other things as a result. President Bush made the right call. And go Steelers!