Imagine two individuals, A and B, each of whom makes something different. Let’s say that A makes bread and B makes butter. If A wants butter for his bread, he buys some butter from B; if B wants bread to go with his butter, he buys some bread from A. This kind of exchange for mutual benefit, stripped of monetary measures, is the essence of economic activity.

What is special about trade if it happens to take place across international borders? Nothing. If I’m B (in Boston), and I have a choice between bread produced by A (in Alberta) and bread produced by C (in Chicago), I’ll choose A’s bread if I consider it a better value than C’s (e.g., same quality, lower price or higher quality, same price). Do I owe C a living? No. If C can’t compete with A in bread-making, he ought to try his hand at something else, but he shouldn’t use superior force (i.e., government) to force me to buy his product.

If B spends more on A’s bread than A spends on B’s butter, B is running a deficit. Isn’t that awful? No, it isn’t. B, to finance his deficit, can draw on his savings, borrow from A, or sell stock in his butter-making business to A. All of these are voluntary choices; none should be cause for alarm. If B draws on his savings, he’s getting something in return that he values: bread. No problem there. If B borrows from A, A is taking a risk and B is getting bread. No problem there. If A buys stock in B’s butter-making operation, A is taking a risk and B is getting bread. No problem there. (None of these actions is different, in principle, than allocating a portion of one’s savings to a down payment on a house, and financing the balance with a loan — which isn’t much different than selling the lender stock in one’s future earnings prospects.)

In each case, A and B are making informed decisions based on direct knowledge of their wants and the risks involved in satisfying them. The aggregation of such decisions into national accounts (e.g, the trade account) gives the impression that the transactions are collective, that “we” Americans in the aggregate are suffering at the hands of shifty foreigners, and that government ought to “do something” about it. Well, they aren’t collective decisions, the Americans involved aren’t being fleeced, and government efforts to “do something”  (e.g., raise tariffs on imported goods) invite the kind of disaster that followed enactment of the Smoot-Hawley Tariff Act.

What about unemployment that might result from trade? Well, yes, trade can cause transitional unemployment, but that’s true of domestic trade as well as international trade. If the U.S. government, as a matter of long-standing policy, had banned domestic and international trade because it might cause transitional unemployment, we wouldn’t have progressed from buggies to Model Ts to reliable Japanese cars, from parchment and quill pens to PCs, from face-to-face conversation to cell phones, and so on. In growing economies — as more-or-less laissez-faire economies are most of the time — temporary unemployment is soaked up by growth, that is, by the expansion of existing industries and the addition of new ones. It’s Schumpeter’s “creative destruction” at work.

The alternative to “creative destruction” (of which international trade is a necessary part) is the kind of insular, centrally directed economy that prevailed in Soviet Russia, where nominal “full employment” masked the wholesale misuse and real underemployment of land, labor, and capital. The same thing has happened by “democratic” means in most of Europe, and is happening by similarly “democratic” means in the United States. Witness, for example, the Environmental Protection Agency’s recent decree about “greenhouse gas” emissions.

In summary, trade is trade, whether domestic or foreign. When government acts in ways that stifle trade, the result is underemployment of land, labor, and capital. There are but two valid reason to stifle trade. One is to prevent, deter, or punish truly harmful acts. The other is to prevent, deter, or punish the easy acquisition of U.S. military secrets and technology by enemies and potential enemies.

For related posts, see these categories:

Economics – Fundamentals
Economics – Growth & Decline
Political Economy & Civil Society