The Mercantilist Fallacy

The Central American Free Trade Agreement (CAFTA) is in trouble. It is so because Congress and the public have forgotten that imports are a benefit of trade, not a cost.Economists have long recognized the gains realized from imports as well as exports. Nobel laureate Milton Friedman maintains that “our gain from foreign trade is what we import. Exports are the price we pay to get imports.” Similarly, the 19th century economist David Ricardo’s theory of comparative advantage showed that trade benefits nations by allowing each one to focus on producing those goods and services for which it can create the most value. Without imports such a benefit would be impossible, as we would have to produce every good or service our nation consumes no matter how inefficient it is to produce domestically.So why do policy makers denounce imports as a burden and tout exports as the ultimate prize? The answer begins with a misperception that dates back to colonial times.Mercantilism was the economic system of the major trading nations during the colonial era, based on the fallacy that exports increase national wealth while imports represent a decrease. The mercantilist fallacy has proven an extremely useful tool for domestic producers unable to compete with foreign firms, and for the politicians who seek to protect them at the expense of consumers and the broader economy.On CAFTA, Senator Kent Conrad (D-ND) says that our message to Congress should be, “Don't trade away our farms, don't trade away our jobs, don't trade away our economy”. According to Senator Byron Dorgan (D-ND), “Senators are going to ask why we should ratify another trade agreement…when the old agreements are producing nothing but record trade deficits.”They have invoked the mercantilist fallacy in this case in order to protect the sugar producers in their state. In Senator Dorgan’s own words “Any additional sugar imports can only hurt <?xml:namespace prefix = st1 ns = “urn:schemas-microsoft-com:office:smarttags” />North Dakota sugar producers.” The only way they can continue to force U.S. consumers and businesses to pay multiples of the international market price for sugar is by convincing people that cheap sugar imports would damage our economy, and of course, cost jobs.In fact, artificially high sugar prices have forced confectionary producers to move abroad or shut down, costing thousands of jobs. The number of jobs lost due to sugar protectionism far exceeds the total number of sugar farmers in the United States, yet Senator Dorgan and Senator Conrad maintain that they are protecting jobs.Members of Congress in situations like these have found mercantilist thinking so convenient that they are blinded to the basic economics of trade. In turn they have been quite successful in blinding the voters as well. Public support for free trade has collapsed over the past 5 years due to increased attention to trade deficits. In this climate, it is widely deemed that CAFTA does not have enough votes to pass either house of Congress.It’s a shame for which supporters of free trade bear some responsibility. Arguments in favor of free trade agreements from both the Clinton and Bush administrations have been framed within the mercantilist paradigm, focusing on the benefits of increased exports and downplaying the effects of the corresponding imports. Such arguments will no longer work in an era of trade deficits, and they make matters worse by legitimizing mercantilist rhetoric. If you accept that imports are bad for our economy, you will have to accept that almost any free trade agreement is a bad idea. A mercantilist argument for free trade is doomed from the start.For trade agreements such as CAFTA to gain public and congressional support, champions of free trade must make the case that opening our markets to imports will be good for the U.S. economy. Only through this economically correct prism can free trade regain acceptance.<?xml:namespace prefix = o ns = “urn:schemas-microsoft-com:office:office” />