Happy New Year!
That’s what most of us texted our loved ones as we celebrated 2019. I did it from my iPhone.
But did you ever consider what’s inside your phone? Where it was produced?
CNBC recently posted a video of the supply chain for an iPhone. I was amazed to learn that the phone is built with dozens of minerals and by thousands of people in 43 countries across six continents.
I was reminded of Leonard Read’s essay “I, Pencil” in which he quotes the pencil to say “not a single person on the face of this earth knows how to make me.” Similarly, I think it’s safe to say that no single person knows how to make an iPhone.
So how do we get such fascinating products as simple as a pencil and as complex as a smart phone? Trade.
Without trade, you wouldn’t have been able to text your loved ones.
Unfortunately, the beauty of trade and the satisfaction that billions of people get from it every day are often lost in popular conversation.
For instance, there’s been much media hype about international trade recently regarding NAFTA, and more particularly trade between the U.S. and Mexico, after President Trump‘s recent tweet-storm against this “bad deal.”
But let’s cut to the chase: People prosper from trade.
Sure, President Trump is correct that the U.S. is running a trade deficit with Mexico, whereby imports exceed exports. This year, that deficit could surpass last year’s deficit of $71 billion; but this net trade balance is a meaningless factoid.
True prosperity should be measured by the total trade value of voluntary exchange — people importing and exporting products.
This trade value between Americans and Mexicans was $557.6 billion in 2017 and was already $512.3 billion through just October 2018, meaning this year is likely to be even higher.
As another example, my home state of Texas has a trade surplus with Mexico, meaning Mexicans purchase more from Texans than Texans do from Mexicans.
Consider that in 2017 Texas exports to Mexico of $97.7 billion were greater than its exports to the next 10 countries combined. And Texas imports from Mexico of $89.8 billion were greater than its imports from the next five countries combined. Again, the true measure of prosperity is $187.5 billion of trade between Texans and Mexicans that year.
In other words, through voluntary exchange people satisfy their desires — or else they wouldn’t trade. This provides a win-win situation — not a zero-sum game.
The idea of comparative advantage, discussed by economist David Ricardo in the early 19th Century, explains that an individual (or country) will produce whatever he is relatively more productive at, at a lower cost, compared to someone else (another country) and some other thing.
These concepts work in the real world to provide abundant human flourishing. Those people and countries that practice protectionist measures to limit trade were made poor or poorer over time — even helping instigate the Great Depression with the Smoot-Hawley Tariff of 1930.
What’s important here is for Texas and the U.S. to be as competitive as possible so that Texans and all Americans can continue to benefit from trade. Increasing productivity and finding other ways to lower production costs helps us be more competitive.
This can be done through pro-growth policies such as reducing excessive government spending to lower taxes and cut onerous regulations so that civil society flourishes.
The Texas Model of limited government has long been a success story on these fronts. And the Trump administration’s efforts to take a page out of the Texas Model with both tax and regulatory relief has been successful. These efforts have contributed to faster economic growth than many thought possible and a robust labor market not seen in decades.
However, tariffs and other trade barriers by the Trump administration and the excessive government spending by Congress continue to raise the cost of production and ultimately hurt all Americans, as these policy actions reduce their purchasing power.
For example, the Tax Foundation notes that the Trump administration’s imposed tariffs have cost Americans $42 billion in higher taxes levied on thousands of products, and additional threatened tariffs could cost them another $129 billion. Given the Trump tax cuts provided Americans with average annual tax relief nationally of about $150 billion (on a static basis), the imposed tariffs weaken the results we could have seen and the additional threatened tariffs could push us into a recession.
These aren’t just macro issues. Back to that text on my iPhone.
Apple recently downgraded their first quarter revenue estimate by about $5 billion primarily because of trade issues with China. Apple CEO Tim Cook told a CNBC reporter that “the trade tensions between the United States and China put additional pressure on their [China’s] economy.”
But there’s more to the trade story.
Adam Smith taught us in the late 18th Century that the extent of the market determines the division of labor and specialization. So, expanding the extent of the market through trade with people in other countries improves both of these measures of worker productivity while holding down production costs — and therefore consumer prices — so that the least among us and everyone else prospers over time.
Unfortunately, some sectors, and the workers in them, which don’t change course to compete in the expanded markets may be hurt. But the vast majority of people are better off from more opportunities to work in expanded sectors, along with the advantages of a higher standard of living because of more quality, affordable products and services.
We need freer trade to let people prosper. That can be achieved by assuring that NAFTA 2.0, or USMCA, provides freer trade, which is questionable with the current deal. And reentering trade talks for the Trans-Pacific Partnership with 11 other countries, including Mexico and Canada, could support freer trade with 40 percent of global economic output while also pressuring China to liberalize trade practices — rather than resort to higher taxes.
So, when the next holiday rolls around and you pick up your cell phone to text a loved one, thank the benefits of free trade among many strangers across the globe that enabled you to send that text.
Vance Ginn, Ph.D., is director of the Center for Economic Prosperity and senior economist at the Texas Public Policy Foundation. He is the author of a recent report: “People Prosper from Trade: NAFTA and Texas.”