Finally, when Dikembe Mutombo came to Georgetown University in 1987, what was his career plan? Answer: to become a doctor and return to the Congo and help his people, who badly needed doctors. But then Georgetown Hoyas basketball coach John Thompson recruited Mutombo to play basketball. He excelled at the game and had a lucrative eighteen-year career in the NBA, playing for the Denver Nuggets, the Atlanta Hawks, and the Houston Rockets for fifteen of those years.
But Mutombo didn’t forget his original goal. He donated $3.5 million of his earnings toward building a hospital in the Congolese capital of Kinshasa. If he had stuck with his plan to become a doctor, he would have been only one doctor in the Congo. Instead, by specializing in basketball, he earned enough to pay multiple doctors in the Congo.
This is from David R. Henderson, “A Refresher Course on Free Trade,” Defining Ideas, June 17, 2021.
Another excerpt:
If free trade is such a good policy, why do so many non-economists think it’s controversial? Part of the answer lies in the asymmetry between producers and consumers. Consider the case of sugar. We in America pay approximately double the world price of sugar because the US government sets tight quotas on sugar imports. That, incidentally, is why Coca-Cola is produced with corn syrup in the United States but with sucrose (sugar) in Canada and Mexico. Over 300 million of us pay a little more annually for higher-price sugar but the few major sugar producers in the United States make tens of millions to hundreds of millions more in revenue, and their employees make a few thousand dollars more in annual income than they would make in their next best use. The overall loss to consumers calculated by Washington State University economics professor William S. Hallagan a few years ago was $2.25 billion annually. The offsetting gain to domestic sugar producers was $0.85 billion and the gain to the lucky importers who got to buy the sugar at the world price and then sell it at the higher US price was $0.30 billion. The loss to consumers outweighs the gain to producers and importers but the average consumer’s loss is only about $10 per year, while the average producer’s gain is large. This gives producers a large incentive to be involved in the setting of sugar quotas, while the average consumer pays virtually zero attention. That’s why it’s true that even though the intellectual case for free trade is largely settled, those interest groups that want to limit trade are creating most of the buzz.
That buzz occasionally misleads even some scholars who study trade and generally understand it. Zack Beauchamp of Vox recently quoted the following comment on Biden’s trade policy by Tufts University scholar Dan Drezner: “It’s totally America First.” No, it’s not. It’s American producers first; consumers don’t seem to count. Are US consumers not Americans? To ask the question is to answer it. Of course they are. If Trump truly favored or Biden favors an “America first” policy on trade, both would be strong advocates of free trade because with rare exceptions, the consumer losses from restrictions on trade exceed the gains to producers.
By the way, even my point above about the Biden/Trump trade policy being “producer first” is overstated. Trump imposed, and Biden has kept, some protectionist measures on items that are inputs into production. Those measures hurt some U.S. producers.
Read the whole thing.
READER COMMENTS
Frank
Jun 18 2021 at 5:52pm
The producer/consumer cost benefit analysis of a move to free trade is logically impeccable and politically moronic. What has not been remembered is that a move to free trade creates winners and losers. The argument for free trade is that the winners gain more than the losers lose.
In rich countries, the losers are the unskilled, or those whose skills have become less valuable. [Heard of the Trump coalition? :-)]
Best to do something for the losers, so that everyone is better off.
BC
Jun 20 2021 at 6:55am
“the losers are the unskilled”
I don’t think that’s true. There are far more unskilled workers outside the sugar industry that are consumers of sugar and Coca-Cola than there are unskilled workers in the sugar industry, for example.
Frank
Jun 20 2021 at 4:14pm
Man lives not by Coca-Cola alone. 🙂
Jon Murphy
Jun 20 2021 at 10:50am
Any shift from a status quo creates winners and losers.* If people start preferring apples to oranges, then there are winners (apple producers) and losers (orange producers). If it snows outside, there are winners (plow truck drivers) and losers (regular drivers). The point about winners and losers is not so much forgotten as irrelevant.
*I do not like the phrasing “winners” and “losers” here as it implies 1) an individual has claims on future expectations of profits and 2) only the here and now matters, not the long term.
David Henderson
Jun 20 2021 at 11:22am
Exactly. There’s nothing special about opening the country to free trade.
My favorite example: the introduction of the Ford Model T. Because Ford figured out how to bring unit costs down with an efficient assembly line, the upper middle class and, increasingly, the middle class, were able to afford cars. The demand for buggies and horses must have plummeted. I doubt that there was much push to bail out horse raisers and buggy producers.
Jon Murphy
Jun 20 2021 at 12:02pm
Concord NH, where I used to live, used to be the Detroit of horse-and-buggy manufacturing. The Wells Fargo logo is a Concord Coach. The city was devastated by the shift to automobiles.
But the city adapted and now (after a few different shifts in industry), it’s a hub for finance, business management, and education (New Hampshire being a cheaper alternative to Massachusetts)
Frank
Jun 20 2021 at 1:34pm
The winners and losers are created by policy. They vote.
Jon Murphy
Jun 20 2021 at 1:55pm
They vote (or, in the case of Illinois Transportation Trade Association v Chicago, sue) regardless of whether or not some outcome is policy-driven or not. So again: irrelevant.
To be clear: the fact that people vote is relevant for policy analysis. The dispersed costs and concentrated benefits explain why sub-optimal policy comes about and can stick around, which is part of the post. But it is irrelevant for economic analysis. There is no economic difference between trade within borders or trade without. That is a political issue.
Frank
Jun 20 2021 at 3:03pm
Try to move to free[r] trade without considering that there are losers from that move and doing something for them.
Jon Murphy
Jun 20 2021 at 3:43pm
Again, the analysts consider the losses but they are not unique to international trade. As a general policy, it is poor jurisprudence to compensate some losers and not others. Why should some shifts from a status quo be considered and not others? To have a general policy of considerations would mean stagnation.
Frank
Jun 20 2021 at 3:45pm
Then no moves to freer trade.
Jon Murphy
Jun 20 2021 at 3:47pm
And thus no moves from the status quo. Stagnation.
Frank
Jun 20 2021 at 3:51pm
But some of them said, He casteth out devils through Beelzebub the chief of the devils.
🙂
Evan Sherman
Jun 21 2021 at 9:52am
Agreed. Not only does the phrase “winners and losers” emphasize short term changes over long term value generation, it de-emphasizes the skewed playing field of the status quo ante. Often, when the free market shakes things up and “creates winners and losers”, the “losers” had previously enjoyed an anti-competetive advantage.
Dylan
Jun 22 2021 at 8:37am
I thought Pareto improvement was kind of like the Hippocratic Oath for economists? Politicians are in the business of choosing winners and losers, economists can only recommend policies where there are no losers. (Which yes, that means economists can’t recommend policy)
Frank
Jun 22 2021 at 7:34pm
Absolutely! Compensate the losers.
Jon Murphy
Jun 23 2021 at 10:59am
Free trade is Pareto improving. No one is made worse off because of it (again, the problem with the language of “losers” is that it implies a claim of ownership of future profits. From a Pareto perspective, there are no losers to free trade, strictly speaking).
Frank
Jun 23 2021 at 12:04pm
Trade with China has had no effect on unskilled workers’ wages in the US?
Thomas Lee Hutcheson
Jun 18 2021 at 8:48pm
And producer of exportable goods and non-“protected” importable are harmed as well. Restriction of imports “strengthens” the US dollar, taxing exports and subsidizing non-“protected” imports. Would we be importing Mexican Coke were it not for the sugar quotas.
“Producers” vs “consumers” is not a good way to discuss the damage to the economy from protection.
Alan Goldhammer
Jun 19 2021 at 8:42am
During Passover, Coke made with sugar is generally available in Kosher markets as corn and corn products are not allowed because of rabbinic ruling a long time ago. I don’t know whether the Kosher for Passover Coke is imported or not. Whether there is a price differential, I don’t know but it would not surprise me.
David Henderson
Jun 19 2021 at 9:58am
Good point, Alan.
There’s a huge price differential. For decades I bought U.S. Coca-Cola with corn syrup because it’s so cheap and we were on a somewhat tight budget as we paid for our daughter’s private school, improvements to our house, etc.
I’ve realized in the last few months that really we can easily afford for me to pay over $6 for a 4-pack of Mexican Coke. So it’s about 4 to 5 times as expensive.
Mark Brady
Jun 19 2021 at 1:10pm
I have a question for David, who writes, “because with rare exceptions, the consumer losses from restrictions on trade exceed the gains to producers.” What “rare exceptions” do you have in mind?
David Henderson
Jun 19 2021 at 2:24pm
Good question: The main one is when the importer has monopsony power in trade.
Mark Brady
Jun 20 2021 at 12:20am
When you write “the importer [who] has monopsony power in trade” do you mean the domestic firm who imports the good that domestic consumers are buying?
David Henderson
Jun 20 2021 at 9:51am
Sorry for not being clear. By “importer,” I mean the importing country. Various individual importers have close to zero monopsony power. But if the country’s imports in total are a large percent of world production, the country as a whole may have monopsony power and the country’s government can exploit that with a tariff.
I wrote about such a potential case about 2 years ago. Tell me if you want me to track it down and I’ll post it here.
Jon Murphy
Jun 20 2021 at 10:41am
I think this is the post you’re referring to, David
David Henderson
Jun 20 2021 at 11:20am
Jon Murphy has kindly posted the link that I was thinking of.
Mark Brady
Jun 20 2021 at 3:19pm
Thank you, gentlemen. I wondered if that’s what David meant but I wasn’t sure. Of course, even so-called optimal tariffs invite retaliation and we end up with less international trade and greater impoverishment for domestic and foreign consumers. It’s also worth pointing out that the additional revenue that a government may glean from an optimal tariff may or may not imply lower government taxation of domestic residents.
Jon Murphy
Jun 20 2021 at 3:47pm
Yeah, that’s been the main argument against optimal tariffs as a policy goal for centuries. Also, the optimal tariff model only looks optimal from the perspective of the larger nation. If the trading partner’s perspective is accounted for, then the optimal tariff model becomes a loss (just like in a regular tariff model). If the trading partner is losing, then they may do less trade with the large nation in other areas, thus harming the large nation on net.
BC
Jun 20 2021 at 7:01am
Dikembe Mutombo might also be a great example of the “brain drain” fallacy, that allowing Mutombo to migrate from Congo to the US would deprive the Congo of medical talent.
Jon Murphy
Jun 20 2021 at 9:17am
Perhaps, but as we see from the specific example, Mutombo’s actions actually brought doctors to the Congo. You traded one doctor for a hospital full of doctors.
BC
Jun 20 2021 at 12:57pm
Yes, that’s why I said “fallacy”.
Jon Murphy
Jun 20 2021 at 1:18pm
My mistake. I didn’t see “fallacy” in your comment. I’m sorry!
Evan Sherman
Jun 21 2021 at 9:55am
“Sub-optimally spending my time learning to be a doctor instead of earning enough in the NBA to fund many doctors? … Not in my house *waves the finger*.”
Comments are closed.