Americans have gotten addicted to buying cheap foreign goods. As a result, our trade deficit has grown substantially where we are buying a lot more goods from countries like China than they are from us. In fact, a lot of our manufacturing has disappeared as companies have placed all of their manufacturing overseas. This has left America’s inner cities as vast wastelands where former workers and their children are left with no opportunities next to the shells of former factories.
It might seem like a great thing to pay a lot less for things by buying from other countries with low manufacturing costs (and often non-existing environmental and worker safety standards) even if they don’t last very long. There is an economic (and environmental) cost to doing this, however. You may not even realize what is happening until it is too late to change things. Let’s look at the effects of moving manufacturing overseas and why it is often better to buy things made in your own country, especially if they are of higher quality, than it is to pay the lowest cost by buying from another country.
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How Free Trade Works
Free trade and free enterprise is probably the best thing to happen to societies since the beginning of economics. Before that people were largely self-sustaining, building and maintaining their homes (from local materials), hunting for meat, raising the farm animals, growing crops, gathering berries and fruits, making clothing, making pots and storage vessels, and so on. Having individuals doing everything for themselves is inefficient. There are so many things you need to do and so many tools you need to do them well. A family who had to hunt, make clothing, grow a garden, cook food, keep a clean house, preserve foods, maintain structures and so on would be busy from morning until night. Groups would often form tribes (a family is actually a small tribe) and then divide up the work. This allows people with better skills at certain tasks like hunting or basketmaking spend more time doing their crafts and let’s people specialize and develop specialized tools.
When you trade through free enterprise, it makes the system even better. People can focus all of their time exclusively on the trades that they are best at and enjoy. They are able to buy expensive tools to do specific tasks like farming or well digging that individual families could not afford. Rather than digging a trench with a shovel over a course of months, a specialist can buy a backhoe and complete the job in a day. Because people can trade for whatever they need rather than needing to create everything, they can spend all of their time doing what they do best. People skilled in management or with resources to buy expensive tools can also hire others to work for them in a mutually beneficial arrangement.
In free and fair trade, everybody comes out feeling better for being able to trade than they would feel working on their own. They feel that they are getting more in trade than they are providing, or at least feel that they are breaking even, so they are happy with the system. A farmer is happy to trade his wheat for natural gas to heat his home. A worker is happy to trade his labor for money to house his family and put food on his table. Because they are free to trade or not trade, people who feel they are not getting a fair deal will look elsewhere or do things themselves. (Someone who feels he is being overcharged for beer will find other suppliers or start making beer himself. A worker who feels underpaid will look for other employers or start to work for themselves and sell directly to consumers.) As people do this, the system adjusts until the optimal arrangement of activities and prices results.
And in free and fair trade, people will be able to find something to do where they can earn enough to take care of their basic needs and often more. This is a natural consequence of the free trade system where the buyers and the sellers jointly set the price. If a seller cannot survive on the amount he is being paid, he will become more productive and/or raise the price until he can. This is the only thing that can happen because people can’t physically can’t spend all day doing a trade that doesn’t pay their bills – they would starve. If people won’t pay the higher prices for the good or service, the sellers will stop selling the item or service and find something else that pays better. This will mean that the availability of the service or item will decrease. If the item they were producing is not critical, it simply won’t be produced as a commercial item. If it is critical, the buyers will eventually agree to pay the price needed by the seller because they cannot go without it.
For example, if people picking blueberries need to be paid $10 per quart to make enough to meet their needs, the price would be set at this price since people who pick blueberries would start to do so when people started to pay this price or more. If the price were higher, more people would start to pick blueberries and drive the price down. If people were not willing to pay $10 per quart for blueberries, people would stop picking them and people would need to go without them unless they did something like pick them themselves. If people decided they really needed blueberries and were not willing to pick them themselves, they would go ahead and pay the $10 even though it might be more than they really wanted to pay. If someone figured out a way to pick blueberries faster and could do so and sell more, the price would decline since now they could make enough money to make it worth it for them to spend their day picking by selling more quarts even though they could only get $8 per quart, say, rather than $10.
This causes all trades for critical items and services to pay enough for people to at least survive. Those trades that pay better attract more people, at least those who are able to perform the better paying crafts, until the price falls to a minimum level. The system truly works beautifully. People naturally do the tasks that are the most needed and charge the minimum required to do those tasks. The compensation for doing tasks, however, also rises to the level where it is worth it for people to do those tasks. This means that their basic needs at least are met, if they are full-time doing the task. Some tasks may not pay enough to sustain people, but they are done by people who have someone else covering some or most of their bills, so they just need to make enough for them to be happy with the pay. These are normally non-critical tasks that people will pay for if they are cheap enough, but will go without if the price is too high (for example, servers in restaurants).
Certainly, being able to trade outside of your community has great advantages as well. Other areas of the region and the world may have resources you don’t have and workers there may be more skillful at certain crafts than people in your region. In this case, trade can be a good thing. Having proper trade where you exchange goods and services equally can make both communities more wealthy.
The SmallIvy Book of Investing: Book1: Investing to Grow Wealthy
SmallIvy Book of Investing: Book1: Investing to Grow Wealthy
When Foreign Trade is Bad
Trade can be detrimental when it is done to simply reduce costs and especially when it is imbalanced where your society is buying more in trade than they are selling. Think of what you are doing:
When you’re trading with people in your economy, they are trading skills that they have to gain money, then giving you the money that they have earned for the things you produce. While there are many people involved, essentially they are trading something they do to you for the things that you do for them. You both put in effort, create something, then exchange what you made.
Really, the numerical price is irrelevant. If you each exchange goods costing $1 each or $1000 each, what is important is the exchange of effort, the exchange rate of their time to your time. If what you are each doing is of equal time value, you each will need to spend about one hour creating the goods for each hour the person you’re trading with spends. Then, it doesn’t matter if the goods cost $1 or $100. You each spend equal amount of time. If he washes your car for $100 and you do his taxes for $300 it is the same as if he washes your car for $1 and you do his taxes for $3.
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Now let’s say that instead of buying goods from people in your economy, you find someone in a foreign country that will make the same good. Maybe you pay someone in your economy $100 each for the good, but this other, foreign person will take $50. Because prices are lower where they are, $50 will buy a lot more than it will in your economy. Plus, they don’t have to comply with the environmental and safety regulations those in your economy do, so they can make the item faster and cheaper. Plus, maybe their living arrangements are cheaper because they live in a small hut with many others instead of a standard home like those in your economy do. Because of all of these things, they are able to make your goods for half of what people in your economy will make them for.
So, you buy the good from the foreign person. Your $50 goes to them and into their economy instead of the $100 going to someone in your economy. Because your costs are lower, maybe you lower your price to $70 for the goods that you sell. You’re still making $20 more per item than you were before, so you’re happy. In fact. you find that others start doing the same thing and dropping their prices, so you need to lower your prices or you would lose the sale.
But the person you were trading with now does not have a market to sell their goods in. So they stop selling goods. Your economy no longer has their output, so there is less wealth being produced. But this other person still has needs, and because your society is not just going to let him starve, you end up needing to pay out welfare to keep him alive. Before he was covering his home and food, now you’re paying for it. His lifestyle quality drops dramatically. His dignity and self-worth is eroded and he loses hope, so he turns to drugs and alcohol. His kids get involved in gangs and crime, and your society decays. Now you need to pay for security and have crime and vandalism to deal with to do your business.
Also, you find that there are fewer people who are able to buy your goods. Before people were doing useful things with their time and creating wealth. They would then trade this wealth that they created with you, buying your goods. Now they are sitting idle, so they are no longer your customers. Instead, they’re your burden to take care of. Yes, you reduced your costs by buying from foreign sources, but you have also damaged your customer base. They no longer have anything to trade for the goods that you are providing.
If trade is equal, where the foreign economy is buying the same value of goods from your economy, you won’t see this issue. Others in your economy who buy from you are able to make things and supply them to the foreign economy, so they then have money to buy your goods. They are able to sustain themselves, so they don’t need welfare or charity from you. It is just when you replace them and they are no longer able to do anything useful and trade that it becomes an issue.
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What’s the answer?
So, how do you keep your economy vibrant? You make sure that everyone who is willing and able within your economy has a useful function before you start hiring people overseas to do things they can do and want to do. Certainly if everyone in your economy is working and you need additional labor, or if people in other countries have skills that you can’t find locally, trading is a good thing. But you need to avoid replacing the labor from people in your economy with the labor from people in foreign countries unless those in your economy have something else useful to do that pays enough to sustain them at a reasonable level. You also need to be sure that those in other countries are buying at least as much from your economy as yours is buying from them.
Unlike many things, government is needed to make this happen. Because free enterprise will seek the lowest cost, left on its own, work will go to the places that have the lowest costs for the needed quality. The issue here isn’t free enterprise, but that you have free enterprise happening between two otherwise disconnected economies. You might also have the government in the foreign countries restricting trade such that few goods from your economy are purchased by those in their economy. In this way, it isn’t really free trade.
Your government must also not place unfair restrictions on those in your economy that are not present in foreign economies. You can’t require that everyone in your economy fill out extensive paperwork to make something and pay all sorts of high costs when those in other economies have none of these requirements. Your government is placing those in your economy at an unfair advantage. Plus, if the goal is to keep people safe, why is it acceptable that those in other countries are put at risk when those in your country are not. If your government has a requirement for safety or the environment, it should outlaw goods made in other countries if they do not have the same requirement. If the requirement is not needed, it should be removed.
As a seller, think about your economy and those in your homeland when making decisions. Yes, you might be bale to buy things cheaper overseas, but why its that the case? Are you taking advantage of those in poor countries and paying them less than you really should? Are you making it so that people in your country will not have a job? You may think that you’re saving money, but the cost may actually be far greater than you realize.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
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