Why trade is not the problem

Mark Twain reportedly said, "There are three kinds of lies: lies, damned lies, and statistics."  It was a caution to those who rely too much on statistics and not their own eyes and ears.

Sierra Rayne (whom I greatly respect) has again posited that protectionism increases GDP while free trade reduces it, that trade does not make a country rich, and that there is “good” trade and “bad” trade.  To prove his thesis, he offers a graph showing a negative correlation in GDP growth compared to trade as a percentage of GDP covering the period of time before the regulatory avalanche:

There are a few problems.

A significant reason for the British to sign a peace treaty with the United States was to keep the trade of the former colonies while denying it to the French.  Certainly the British thought trade was beneficial to the health of their nation.

The super genius among the founders, Benjamin Franklin, had this to say about trade:

Perhaps, in general; it would be better if Government meddled no further with Trade, than to protect it, and let it take its course.  Most of the Statutes, or Acts, or Edicts, Arets and Placaarts of Parliaments, Princes, and States, for regulating, directing, or restraining of trade; have, we think, been either political Blunders, or Jobs obtained by artful Men, for private Advantage, under Pretence of public Good.

Okay, you say; those are opinions of men, but do they have any scientific basis?  Let’s look at the source material Dr. Rayne cited in his article,  “Historical Aspects of U.S. Trade Policy” by Douglas A. Irwin.

Irwin discusses what happened when President Jefferson halted trade for a period of two years.  We had, in effect, total protectionism.  This is a perfect scenario for scientists, as they always want to reduce as many variables as possible so that a thesis can be tested without extraneous noise.  Here is what the author concluded:

Monthly price data allow us to observe the dramatic impact of the embargo: the export-weighted average of the prices of raw cotton, flour, tobacco, and rice, which accounted for about two-thirds of U.S. exports in the United States, fell by one third within a month or two of the embargo. The price of imported commodities rose by about a third as the number of ships entering U.S. ports fell to a trickle and imports became increasingly scarce. According to my calculations, the static welfare cost of the embargo was about 5 percent of GDP.(4) Thus, the embargo inflicted substantial costs on the economy during the short period that it was in effect.

The embargo, along with the dramatic reduction in trade as a result of the War of 1812, is commonly believed to have spurred early U.S. industrialization by promoting the growth of nascent domestic manufacturers.  Joseph Davis and I used his newly available series on U.S. industrial production to investigate how this protection from foreign competition affected domestic manufacturing.

On balance, the trade disruptions did not decisively accelerate U.S. industrialization as trend growth in industrial production was little changed over this period.

So, according to Irwin, in an almost total protectionist system, GDP fell 5% while industrial growth stayed stagnant.

Trade is trade.  It is the same throughout the world.  After all, people carry on trade, and people are the same all over the world.

So let’s look at China and India.

In the 1960s, millions of Chinese starved to death.  They were living behind the “Bamboo Curtain,” in a system of almost perfect protectionism.  In the early 1970s, the United States opened up trade with China.  Today, according to the World Bank, the Chinese trade as a percentage of GDP is about 42%.  Did trade make China the second largest economy in the world (some say first), or was it something else?

For years, India was a net importer of food; the Indians could not feed themselves.  In the very recent past, they have become one of the largest exporters of food in the world.  Trade as a percentage of GDP is roughly 49%.  Did trade make India wealthy, or was it something else?

Dr. Rayne makes the suggestion that some trade is “good,” and some trade is “bad.”  This is indeed a slippery slope.  Who is to determine what trade is “good” and what trade is “bad”?  Would you rather trust some faceless bureaucrat in Washington with a bunch of letters after his name or Joe Doaks, who is operating a business on Main Street?  I believe that the answer is self-evident.

In closing, Dr. Rayne’s source, Douglas Irwin, has shown that Jefferson’s policy of protectionism negatively affected GDP by about 5%.  Today China and India are wealthy and have trade ratios as a percentage of GDP well over 35%.

Finally, I would suggest that we don’t want government defining what is “good” trade and what is “bad” trade.  Those who are legally engaged in trade should decide what and with whom they wish to trade.  After all, trade is a benefit to both parties.  Otherwise, why engage in it?

Mark Twain reportedly said, "There are three kinds of lies: lies, damned lies, and statistics."  It was a caution to those who rely too much on statistics and not their own eyes and ears.

Sierra Rayne (whom I greatly respect) has again posited that protectionism increases GDP while free trade reduces it, that trade does not make a country rich, and that there is “good” trade and “bad” trade.  To prove his thesis, he offers a graph showing a negative correlation in GDP growth compared to trade as a percentage of GDP covering the period of time before the regulatory avalanche:

There are a few problems.

A significant reason for the British to sign a peace treaty with the United States was to keep the trade of the former colonies while denying it to the French.  Certainly the British thought trade was beneficial to the health of their nation.

The super genius among the founders, Benjamin Franklin, had this to say about trade:

Perhaps, in general; it would be better if Government meddled no further with Trade, than to protect it, and let it take its course.  Most of the Statutes, or Acts, or Edicts, Arets and Placaarts of Parliaments, Princes, and States, for regulating, directing, or restraining of trade; have, we think, been either political Blunders, or Jobs obtained by artful Men, for private Advantage, under Pretence of public Good.

Okay, you say; those are opinions of men, but do they have any scientific basis?  Let’s look at the source material Dr. Rayne cited in his article,  “Historical Aspects of U.S. Trade Policy” by Douglas A. Irwin.

Irwin discusses what happened when President Jefferson halted trade for a period of two years.  We had, in effect, total protectionism.  This is a perfect scenario for scientists, as they always want to reduce as many variables as possible so that a thesis can be tested without extraneous noise.  Here is what the author concluded:

Monthly price data allow us to observe the dramatic impact of the embargo: the export-weighted average of the prices of raw cotton, flour, tobacco, and rice, which accounted for about two-thirds of U.S. exports in the United States, fell by one third within a month or two of the embargo. The price of imported commodities rose by about a third as the number of ships entering U.S. ports fell to a trickle and imports became increasingly scarce. According to my calculations, the static welfare cost of the embargo was about 5 percent of GDP.(4) Thus, the embargo inflicted substantial costs on the economy during the short period that it was in effect.

The embargo, along with the dramatic reduction in trade as a result of the War of 1812, is commonly believed to have spurred early U.S. industrialization by promoting the growth of nascent domestic manufacturers.  Joseph Davis and I used his newly available series on U.S. industrial production to investigate how this protection from foreign competition affected domestic manufacturing.

On balance, the trade disruptions did not decisively accelerate U.S. industrialization as trend growth in industrial production was little changed over this period.

So, according to Irwin, in an almost total protectionist system, GDP fell 5% while industrial growth stayed stagnant.

Trade is trade.  It is the same throughout the world.  After all, people carry on trade, and people are the same all over the world.

So let’s look at China and India.

In the 1960s, millions of Chinese starved to death.  They were living behind the “Bamboo Curtain,” in a system of almost perfect protectionism.  In the early 1970s, the United States opened up trade with China.  Today, according to the World Bank, the Chinese trade as a percentage of GDP is about 42%.  Did trade make China the second largest economy in the world (some say first), or was it something else?

For years, India was a net importer of food; the Indians could not feed themselves.  In the very recent past, they have become one of the largest exporters of food in the world.  Trade as a percentage of GDP is roughly 49%.  Did trade make India wealthy, or was it something else?

Dr. Rayne makes the suggestion that some trade is “good,” and some trade is “bad.”  This is indeed a slippery slope.  Who is to determine what trade is “good” and what trade is “bad”?  Would you rather trust some faceless bureaucrat in Washington with a bunch of letters after his name or Joe Doaks, who is operating a business on Main Street?  I believe that the answer is self-evident.

In closing, Dr. Rayne’s source, Douglas Irwin, has shown that Jefferson’s policy of protectionism negatively affected GDP by about 5%.  Today China and India are wealthy and have trade ratios as a percentage of GDP well over 35%.

Finally, I would suggest that we don’t want government defining what is “good” trade and what is “bad” trade.  Those who are legally engaged in trade should decide what and with whom they wish to trade.  After all, trade is a benefit to both parties.  Otherwise, why engage in it?