A country can only benefit from free trade if the country allows businesses economic freedom within their own lands. Free trade isn’t making American businesses non-competitive in the global market — government interventionism is.
By: John Sulzer
This article first appeared at Mises.org
The case for free trade is simple. Businesses should be able to locate where they want and import what they want. International free market activity is fundamentally parallel to that which occurs within US borders. Thus, when everyone is doing what they are most efficient at, all benefit.
For example, Floridians may be efficient at producing produce while Missourians may be most efficient raising livestock. Kansans may be best at growing crops while Pennsylvanians may be best at making steel.
The same holds true internationally. The US may be the best at developing technology while Korea may be the best at producing said technology. Canada may be a great exporter of maple syrup while Mexico may be great at producing boats.
Each country across the globe has a unique culture and demographic as well as access to different natural resources. Clearly, a combination of these factors gives some countries a comparative advantage in production of some things.
The division of labor allows each of us to specialize and become proficient at producing one or several things and buy everything else we need. The same is true for international trade. By importing some things and exporting others, we can better obtain the best products for the best price.
However, a trend toward outsourcing has sprung up among American companies in recent times. More and more companies are choosing to move overseas.
The Benefits of Outsourcing
Outsourcing can provide many benefits for American businesses and consumers. By lowering prices for customers, everyone has more money to spend elsewhere. The increase in competition also provides better products for consumers at better prices. For business, free trade allows importation of parts, components, and raw materials which free up capital to hire more Americans at higher wages. Although outsourcing isn’t always negative, such a dramatic departure from US shores warrants a close examination.
Free trade serves to let all benefit from consensual exchange, but the benefits are far greater if firms are also given adequate economic freedom within their own country.
President Trump has indicated that the solution to the outsourcing epidemic is to levy tariffs or “big border taxes” to keep companies in the US.
Such a resolution would perhaps affect the symptoms of this mass outsourcing phenomenon, but not the cause.
So, why are companies leaving our shores and fleeing abroad in the first place?
Why Companies Leave
Well, for eight years, we had an administration which increasingly crushed businesses with regulations and taxes. In America, the corporate tax rate is among the highest in the world. Regulations, which have become a cost of doing business, have been strangling companies large and small. This is not allowing US companies to be competitive. As President Trump often rightly points out, when building a factory in the US takes years of EPA reviews, inspections, and surveys.
Contrast Trump’s trade policies with Reagan’s policies. Like many Americans, Reagan felt the weight of taxes as an actor and president of the screen actors guild. At times, his income was subject to a tax rate of 90 percent. Reagan realized, however, that the proper response was not to ask for the government for even more special protections. The answer was to allow the private sector more freedom.
Reagan’s response was not to impose a “big border tax” on companies that left the US. Instead, cuts in taxes and government regulations by the Reagan administration left companies with more cash to invest at home and abroad. The power of the administration’s deregulation was best illustrated when he signed an executive order in 1981 ending price controls on oil. Within months, gas prices fell by nearly 50 percent.
The solution which will bring jobs back to the US isn’t protectionism, which will only combat the symptoms of economic stagnation. The answer is tax cuts and deregulation, which will make American businesses competitive again.
This article first appeared at Mises.org