Obama and Protectionism

Tuesday night was the first time I've felt proud to be American since the 2000 election travesty. I am so thrilled that we have Obama as president and that the American people agreed so overwhelmingly that he would take the country in a new direction. I was even able to get to sleep at a decent hour on Tuesday since once New Mexico was called I was comfortable that there was no chance McCain could win.

There is something I am concerned about. A traditional democratic issue is protectionism and opposition to free trade. This is very troublesome to me because globalization is here to stay, free trade makes the world economy more efficient, and I will be very upset if we trade that off to save a few American jobs.

This is based on an economic principle called "comparative advantage." What this means is that some countries can do things better than other countries can. Take two fictional countries, A and B. Country A can make cars efficiently, country B can make coffee efficiently. The most efficient way to allocate the resources is to have A make all the cars and B make all the coffee. If we have some resources in A making coffee we are sacrificing the cars they could be making more efficiently.

The key to this concept is opportunity cost. Even if we can make coffee in A cheaper than we can in B the opportunity cost of making coffee in A is the ability to make more cars. Wikipedia describes this better than I can.

Anyway free trade makes this possible. If we restrict free trade we are artificially raising prices and reducing efficiencies for foreign countries. Let's take a real world example. Data entry and call centers are cheap in India. If we force companies to not use India and instead hire Americans to do that job, they spend extra money on that. That money could be used to hire Americans to do what Americans are good at which is the creative part of the process. So India suffers because they are losing out on the money that they could be making, and the American company suffers because it has to pay higher prices for the same quality, and this makes the consumer suffer because the high prices get passed on to them, and the people suffer because they can't get high-paying jobs for things that we do better here than foreigners can do.

I am very worried about the Democrats restricting free trade. For some strange reason that has been a plank in their platform for quite a while. Its probably because of the support of the labor unions who don't care about comparative advantage or opportunity cost, they just want their people to have jobs and make as much money as possible. I find it ridiculous that a so-called "liberal" party would take such a conservative approach to foreign relations and restrict free trade.

Here's another example. In the US there are high import tariffs on sugar. So the countries that produce sugar cheaply can't sell it cheaply in the US, thanks to a Reagan policy. This makes it cheaper for US companies to buy high fructose corn syrup than real sugar. This provides the farmers and incentive to grow corn instead of other crops. (Also because they get paid by the government to grow corn even if no one wants it.) If we just allowed sugar to be imported the farmers would be free to grow crops that are more useful (and won't be bought by the government and thrown out) and I wouldn't be finding that every single thing I eat all day has high fructose corn syrup as the first or second ingredient. That's not really related to this topic but I hate that everything has high fructose corn syrup in it.

If the government cracks down on free trade the US is going to fall behind the rest of the world. Most of the rest of the world has embraced free trade and they will thrive because of the ability to maximize their efficiencies. The US will stagnate as we force companies to spend money on things that would be cheaper to offshore and less money on things that will drive the economy going into the future.