U.S. Trade Rep. Katherine Tai spoke at the University of Chicago yesterday. I'll do a couple posts about her comments there, but to kick things off, here's something she said in response to a question involving Milton Friedman:
Q: We're at the University of Chicago, I'm going to bring up Milton Friedman. In his essay on the case for free trade, he brings up that exports are the price we pay for imports. And you've discussed how you've advocated for steel workers and American workers in your role as trade Ambassador. But when you're talking about tariffs, and you're talking about your relationships with other countries in free trade, how do you view your role as an advocate for the American consumer that is coming under increasing pressures from price increases that many argue are coming from rising wages and worker shortages?
Tai: ... could you repeat the quote: exports are the price for imports? Are you sure it's not the other way around? I'm just thinking through the logic, is it that imports are the price for exports?
Q: Here, I actually have the answer exactly right here. "Our gain from foreign trade is what we import. Exports are the price we pay to get imports."
Tai: That's a really interesting logic. I will take that link if you give it to me, to read it in full. But the case for trade, and you know, our free trade enthusiasts will say 95% of the world's consumers live outside our borders. So all the opportunities in terms of exporting to them come from doing these free trade agreements where we can have more access to those markets. What is interesting about that is that when we do a big free trade agreement, we're also lowering barriers into our market, and we are liberalizing and facilitating more imports. If you look at the profile of the US economy, it is true that 95% of the world's consumers live outside our borders, which means that we are only 5% of the world's consumers. At the same time, we are about a third of the purchasing power and the consumer power in the global economy. And if you look at it that way, I think that our argument for free trade has been exactly flipped on its head. If we understand, and this is true for every negotiator and I am convinced that everything in life is a negotiation, you just have to understand that dynamic, the most important thing in a negotiation is to understand what your power is. As an economy, our power is in our consumption and in our desirability to others as a destination for their exports.
As something of a free trade enthusiast myself, albeit with quirky views that don't always fit neatly into a particular category, I thought I might be able to clarify things here. For people who think free trade is good, it's the imports that are the key. In the economy overall, economic well-being is improved through better access to imports. Exporting is just the price we pay to get those imports.
Now, as part of the public policy debate, there are a lot of trade agreement supporters who do make the point that "95% of the world's consumers live outside our borders." In my view, though, these are mostly business interests seeking to maximize sales rather than "free trade enthusiasts." Exports are in the financial interest of these groups, but I'm not always sure what they think about imports. So, I would characterize them more as "free trade allies" than "free trade enthusiasts." Free trade enthusiasts don't want to use U.S. market power as leverage in a trade negotiation, but rather they want to lower protectionist trade barriers in the home market because it makes us better off.
