America's Flawed, Outdated Trade Policy

February 8, 2012

In his recent State of the Union Address, President Obama charged that the United States should stop rewarding companies for moving jobs overseas, and that manufacturing jobs should be brought back to our cities.  This demonstrates a failure to grasp sound economic principles to the detriment of our global standing and international competitiveness, says Matthew Jensen, an economic researcher at the American Enterprise Institute.

  • First, by favoring domestic companies over foreign, the president will slowly degrade the benefits that many foreign companies bring to American workers when they shift their operations to our shores (such as Toyota, BMW, Hyundai, Volkswagen, and Honda in the South).
  • Second, as a result of the president's goal to punish companies for shifting portions of their operations overseas, American companies will be unable to take advantage of nation-specific specialization in certain goods, driving up prices for consumers.
  • Third, the stated objective of bringing manufacturing jobs back to the United States displays a misunderstanding about the resources necessary to do so and an overestimation of potential benefits of unlikely success.

This first point is crucial insofar as it shows that prejudice against foreign companies stands to harm as many as it would help.  While many emphasize the losses of American businesses that shift their operations overseas, they all-too-often ignore the foreign companies that have done the same by shifting their operations here.  This results in the employment of American workers -- the stated goal of the Obama administration even if it is not through its preferred means.

The second point appeals to the economic theories of the 19th century economist David Ricardo.  He emphasized that every population around the world, as a function of its idiosyncrasies and natural resources, has a unique advantage in certain types of production.  President Obama's policies seek to divert economic energy away from America's specialties toward means of production for which we, theoretically, are ill-suited.

Finally, entire industries cannot be easily moved from one location to another.  Even if they are not catering to a nation-specific production advantage, companies are enticed to locate near like-companies to benefit from spillovers between businesses.  Thus, individual companies are unlikely to be moved -- to be successful, the Obama administration would have to move entire industries.

Source: Matthew Jensen, "America's Flawed, Outdated, Trade Policy," Real Clear Markets, February 3, 2012.

For text:

http://www.realclearmarkets.com/articles/2012/02/03/americas_flawed_outdated_trade_policy_99499.html

 

Browse more articles on Economic Issues