03 October 2016

What I Believe, Part 1

I believe in Free Trade. I believe that the net benefits of free trade outweigh the costs. I think this has been demonstrated academically, and it makes intuitive sense. Pablo Fajgelbaum of the University of California, Los Angeles, and Amit Khandelwal, of Columbia University (from The Economist, and cited in this post from Tyler Cowen): 

...in an average country, people on high incomes would lose 28% of their purchasing power if borders were closed to trade. But the poorest 10% of consumers would lose 63% of their spending power, because they buy relatively more imported goods. The authors find a bias of trade in favour of poorer people in all 40 countries in their study, which included 13 developing countries. 
There is a negative impact on low-tech firms, but the firms that survive become more dynamic: 
An in-depth study of European industry by Nicholas Bloom, of Stanford University, Mirko Draca of Warwick University and John Van Reenen of the LSE found that import competition from China led to a decline in jobs and made life harder for low-tech firms in affected industries. But it also forced surviving firms to become more innovative: R&D spending, patent creation and the use of information technology all increased, as did total factor productivity. 
Neither major-party candidate in the presidential election is very supportive of free trade, with Trump being in favor of eliminating some existing trade deals like NAFTA. Mary Anastasia O'Grady explains how much of what Trump has said about NAFTA is incorrect:
Mr. Trump gave a quick nod to one genuine U.S. disadvantage during the debate when he talked about cutting U.S. corporate tax rates to spur investment at home. But his main message was that under NAFTA Mexico is “stealing” U.S. jobs. In fact, an interconnected North American economy has made U.S. manufacturing globally competitive. U.S. companies source components from Mexico and Canada and add value in innovation, design and marketing. The final outputs are among the most high-quality, low-price products in the world. U.S. automotive competitiveness is highly dependent on global free trade. According to the Mexico City-based consulting firm De la Calle, Madrazo, Mancera, 37% of the U.S.’s imported auto components came from Mexico and Canada in 2015. This sourcing from abroad is important to good-paying U.S. auto-assembly jobs. But parts also flow the other way. U.S. parts manufacturers sent 61% of their exports to Mexico and Canada in 2015. 
As a parent, I want my children to succeed. But I want this to happen in a way that prepares them for the real world, a competitive and dynamic world that owes them nothing. We don't help our industries by sheltering them from competition, and we may harm our own citizens in the process. Trade restrictions are almost always worse for American industry than it is for the industries from the countries we seek to deal with. One way to level the playing field is to stop playing favorites.

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