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Business Observer Friday, Mar. 5, 2004 18 years ago

The Real Enemy in the Trade War

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U.S. and foreign companies taking advantage of lower overseas labor costs are not the real enemy. The real enemy is the American consumer. He loves low prices.

The Real Enemy in the Trade War

U.S. and foreign companies taking advantage of lower overseas labor costs are not the real enemy. The real enemy is the American consumer. He loves low prices.

There's the "Free Trade but Fair Trade" crowd and the "Level Playing Field" crowd and the "America First" crowd all calling for tariffs and other international trade restrictions.

Their supposed adversary is corporate America, seeking to boost profits by either importing goods made by cheaper foreign labor or relocating plants in foreign lands to take advantage of cheaper labor. The tariff crowd claims that this accounts for the loss of U.S. manufacturing jobs and other economic woes. Their argument has considerable emotional appeal, but they've misidentified the true villain in the piece. Let's look at it.

Suppose U-Needa Shirt Co. relocated its production facilities to India to take advantage of cheaper labor. This is America, the land of the free. There is absolutely nothing that prevents a group of Americans as investors and workers from setting up Made in America Shirt Co. to sell shirts to the American people. This same opportunity exists for just about anything once manufactured in America but now made overseas. At this juncture, let's take a thinking pause and ask: Is what Williams said in this paragraph true or false?

Let's proceed. You might ask, "How in the world can Made in America Shirt Co. compete with U-Needa Shirt Co. which has much lower labor costs?" That's a different question, but it has nothing to do with the rights of American investors and workers to set up American-based manufacturing facilities. But let's answer the question anyway. American consumers are free to purchase from whomever they choose. Made in American Shirt Co. would survive and prosper if American consumers chose to purchase shirts from it rather than U-Needa Shirt Co. Let's take another thinking break and ask: Is what Williams said in this paragraph true or false?

Here's where the crunch comes. It's probable that U-Needa Shirt Co., because of its lower costs, will be able to undercut prices charged by Made in America Shirt Co. Thus, we encounter that troubling consumer characteristic of preferring lower prices to higher prices. So what to do?

Made in America Shirt Co. might try to change American consumer preferences so that they're indifferent between high and low prices. I predict that's a strategy doomed to failure, except maybe for a few diehard customers. There're no two ways about it. The true enemy of Made in America Shirt Co. and its workers is not U-Needa Shirt Co. but the American consumer and his preference for lower prices coupled with his freedom to purchase from whomever he pleases.

What to do? One strategy for Made in America Shirt Co. and its workers is to get Washington to enact measures restricting consumer choices. But you have to be slick about it. You just can't ask President Bush and Congress to criminalize purchases from U-Needa Shirt Co. You must make a pretense of selflessness and speak of national defense concerns like "What if there were war, and we had no shirts for our soldiers?" You must talk of being for free trade but fair trade and level playing fields.

There's another strategy. Suppose Made in America Shirt Co. could cover all of its cost with a $20 shirt price while U-Needa Shirt could do so by charging $15? Made in America Shirt might ask Congress to enact an Aid to Dependent American Shirt Manufacturers law whereby it would receive a $5 per shirt handout; then it could meet U-Needa Shirt Co.'s price. That might not be politically viable because the handout is too visible. Congress might propose, "Rather than giving you a $5 per shirt handout, how about if we impose a $5 per shirt import tax on U-Needa Shirt Co.'s shirts? Then they'll have to charge $20. That way you get what you want - a level playing field, we get more tax dollars and nobody's the wiser."

Walter E. Williams is the John M. Olin Distinguished Professor of Economics at George Mason University in Fairfax, Va.

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