The Technology-Trade Tension
Feb. 13, 2017, at 3:30 p.m.

“Such then is the human condition, that to wish greatness for one’s country is to wish harm to one’s neighbors,” reflected the French philosopher Voltaire. This adversarial perspective toward foreign relations is alive and well today, as evidenced in the Brexit vote and the U.S. presidential elections. And while anti-free-trade sentiment is mainstream, it’s worth reflecting upon how difficult it is to reconcile pro-protectionism with the near-universal love of technological progress.

To understand why economists generally extol free trade, note that in the beginnings of civilization, before the development of currency and formal trade, households were responsible for producing all of the goods and services that they would consume, such as food, clothing, entertainment and so on.

Household-level self-sufficiency is terribly wasteful compared to the alternative – specializing in the production of certain goods and trading the surplus for the goods produced by others. Let food production be the exclusive domain of a few farmers, allow others to focus on making clothes and designate a singer to keep everyone happy after work. The result is more goods produced in total. People differ in their skills, and so it’s more efficient to have them focus on what they’re good at doing, rather than forcing them to practice all trades. Just imagine how wasteful it would be if modern households had to produce their own clothing! Further, there are scale economies when you focus on one good with the intent of supplying many households – making 30 identical sandwiches for your child’s class is a lot less effort than making 30 different ones. The same exact principle is used to justify global free trade: Countries, like households, vary in their abilities to produce certain goods and services, and specialization allows for the exploitation of scale economies. Insisting that the United States be self-sufficient in clothing production is as wasteful as insisting that households produce their own clothes. Compared to the squalor of antiquity, much of the globe’s prosperity today can be attributed directly to international specialization and trade.

This argument does have one key flaw: The process of adjusting to a new configuration of specialization can create workers with obsolete skills, and they may permanently suffer, even if the economy as a whole benefits. This occurs because human capital takes many years to build, much of it resulting from on-the-job experience. It is the reason why the living standards of many U.S. manufacturing workers declined significantly after Chinese imports increased during the latter half of the 20th century – they were unable to find suitable alternative job opportunities. If the distress that such groups suffer from free trade is large enough, it can constitute reasonable grounds for trade protectionism, even if the economy as a whole always benefits from free trade. For observers, the conundrum is how to reconcile widespread antipathy toward free trade with the apparently universal love of new technology. When an entrepreneur develops a commercially valuable discovery, just like enhanced trade, it tends to adversely affect a small minority. The companies producing the now obsolete substitute product, or using the now obsolete technology – and their employees – will often suffer, like Kodak did with the advent of digital photography, or 19th century textile workers did with the advent of machines.

Yet for some reason, virtually all opponents of free trade embrace technological progress, fixating on the benefit of cheaper and better products to consume and brushing aside the lot of those losing out, possibly by referring to the need to “break eggs” to make an omelet. And while there has been a recent fear of advanced robotics damaging the living standards of the working classes, for the most part, those opposed to technological progress are scorned and laughed at by all of society; “luddite” is considered an insult.

How can we reconcile embracing technological progress with expressing suspicion toward free trade? Technology and free trade have entirely analogous pros and cons, but perhaps the difference lies in the visibility and tangibility of the benefits – it is easy to perceive the advantages offered by inventing mobile phones, but difficult to pinpoint the returns from outsourcing the production to China, even if the latter can be huge. It is, however, critical that people appreciate the similarity between free trade and technological progress. Consider, then, another quote often attributed to Voltaire, one that beautifully captures the spirit of free trade: “Appreciation is a wonderful thing: it makes what is excellent in others belong to us as well.”
March 2017
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