Trade Fallacies

As with everything else in economics, international trade comes with its misconceptions. There are certain common fallacies that are associated with international trade. These often lead to failures, and the reason why is due to the mistake of not considering secondary side effects of some actions. It is most particularly important to remember that the key elements of international trade are closely linked. One cannot change without affecting the other. For instance, if a nation’s government develops legislation that reduces the amount of imports it receives, it will, consequently, reduce its amount of exports. With that stated, it is also important to remember that business, labor, and political leaders who seek to gain from trade restrictions will tell half-truths and plant wrong ideas in the people’s minds to achieve their own personal gain. The two most popular trade fallacies involve the effects of imports on employment and the impact of trade with low-wage countries.

* Trade restrictions that limit imports save jobs and expand employment. This is a trade fallacy that has just enough truth to give it some credit. It is probable that when trade barriers limit imports, they will result in more employment in the industries that are being shielded from the foreign competition. However, this is only half of the effect of trade restrictions. Other domestic industries will be harmed. Imports provide foreigner with the money they need to buy exports, so when trade restrictions such as tariffs, quotas, and exchange rate controls are imposed, causing imports to decline, exports decline as well. Therefore, while certain industries will benefit from trade restrictions, generating more jobs, others will suffer, cutting more jobs.

* Free trade with low-wage countries like Mexico and China will reduce the wages of Americans. This is a fallacy in which many American citizens believe that if free trade with low-wage countries were allowed, with no trade restrictions, that their wages will fall to the wage levels of those workers in poor countries. However, this fallacy is due to a misunderstanding of the source of high wages and the law of comparative advantage. Workers in the United States are generally more skilled and more productive, which is why their wages are higher.

Trade restrictions are often implemented due to the people’s belief in such fallacies. As always with economics, it is important to consider all side effects-not just what is visible on the surface initially. This is essential to avoid being taken in by common fallacies.