For far too long, certainly during the course of the Bush administration with the support of Sen. McCain, the attitude has been that any trade agreement is a good trade agreement. And NAFTA did not have enforceable labor agreements and environmental agreements.

And what I said was we should include those and make them enforceable. In the same way that we should enforce rules against China manipulating its currency to make our exports more expensive and their exports to us cheaper.

And when it comes to South Korea, we’ve got a trade agreement up right now, they are sending hundreds of thousands of South Korean cars into the US. That’s all good. We can only get 4,000 to 5,000 into South Korea. That is not free trade.

Somehow many of the politicians in our country have come to the conclusion that free trade is somehow harmful to Americans.  The above quote is from Barack Obama in October of 2008 during a presidential debate.  He touches on virtually every major qualm that politicians have with free trade, so I figured it was an applicable quote.

First, trade is trade, not a transfer, but trade.  When a trade takes place, whether it be in business, sports, or anything else, both sides have a selfish interest to get as much as they can and give up as little as possible.  This leads to negotiation, which inevitably leads to a trade that both parties are content with.  If both parties were not content with the negotiation, no trade would take place.  For example, when you go to the store to purchase toothpaste, you happily hand the clerk the three dollars it costs for that tube of toothpaste and they happily give you the toothpaste in exchange for your three dollars.  Since both parties are satisfied with the transaction it is typical for both parties to say “Thank you.”  In such a circumstance, you valued the tube of toothpaste more than you valued your three dollars and the opposite was true for the store clerk.  If this was not true then no transaction would have taken place.  Trade amongst countries is no different.  In any voluntary transaction, both parties benefit.

A major misconception about trade comes from the way it is phrased.  “And when it comes to South Korea, we’ve got a trade agreement up right now, they are sending hundreds of thousands of South Korean cars into the US. That’s all good. We can only get 4,000 to 5,000 into South Korea.”  That quote is a perfect example.  It makes it seem as though the nation of South Korea is sending the nation of the United States hundreds of thousands of automobiles.  In fact, Hyundai, a private company held by private stockholders, which happens to be located in South Korea, is sending its customers its products for an agreed upon price.  Of course, the cars go through a dealership first, but at the end of the day it is Hyundai sending a Sonata to Joe Schmo in Memphis.  It just so happens that the car Joe Schmo bought happened to be produced in another country outside of his own.  It was not the nations of South Korea and the United States that were trading; it was a company and its customer.  Hyundai made the decision to sell the car to Joe because they preferred cash to a car, and Joe decided to buy the car from Hyundai because he preferred the car to his cash.

Let’s go through President Obama’s quote step by step and explain why Mr. Obama is wrong about free trade being a negative thing.

For far too long, certainly during the course of the Bush administration with the support of Sen. McCain, the attitude has been that any trade agreement is a good trade agreement.

In typical bureaucratic phrasing, Obama makes strong implications that free trade is a negative thing that has gone on for far too long, though he does not come right out and say it explicitly.  Is any trade agreement a good trade agreement?  Well, no, not one that prohibits free trade.  But this is not what was implied by President Obama.  Based on the rest of his quote we can infer than Obama was stating that free trade has been a problem.  So, then let’s answer this question, is free trade ever bad for a nation?  Outside of the sale of arms and intelligence that could be used against that country in a wartime situation, free trade is always good for every involved party.  All we need to do is look back and realize that no trade will take place if both parties are not content at the time of the trade.  Because it is always the hot topic of debate when it comes to trade, let’s consider the American love for goods produced in China.  About 60% of all bicycles in the world are produced in China.  A good number of those bikes are then shipped off to the United States where they are sold for very low prices, lower than the bikes that are produced in the United States.  The obvious result of this is that the bike-riders of the United States benefit because they are able to purchase bicycles for lower prices, saving them money.  The company producing the bicycles in China benefits because it is able to make a profit on the bicycles sold.  What the politicians harp on are the employees of the bicycle manufacturing companies in the United States that went out of business as a result of the competition from China.  There are repeatedly stories of how these fine people lost their job because of the predatory practices of American retailers and overseas manufacturers.  Regardless of all of the hoopla surrounding the loss of manufacturing jobs in the United States, the number of people employed as a percentage of the population has grown consistently over the last forty years – despite the number of people employed in manufacturing jobs falling from 9% of the total population to under 5% of the total population.  Additionally, people are making more money than they did forty years ago.  In 2007 dollars (to remove the effect of inflation), the median personal income in the united states has increased from a little over $13,300 in 1967 to a little over $26,800 in 2007.  So, more people are employed and people are making more money than they ever did in the past when there were more manufacturing jobs.  As long as trade is left to be free then both parties in the trade will benefit.  As Milton Friedman said, “The most important single central fact about a free market is that no exchange takes place unless both parties benefit.”

Data source: U.S. Census

Date source: Bureau of Labor

There is another part to this portion of the quote, the word “agreement.”  Bureaucrats act as though it takes an agreement for free trade to take place.  It doesn’t.  We can trade freely with any nation, even if they refuse to trade freely with us.  Suppose Country X requires that all goods imported from the United States be subject to a 100% tariff, essentially making anything that costs $100 to be taxed an extra $100, doubling the price for the consumer and essentially blocking any goods from the United States to be imported.  Typically what our wise leaders would do is to counter this tariff by instituting a tariff of our own over here, effectively cutting off trade between the countries.  However, just because Country X won’t allow the import of American goods does not mean that the United States can not benefit from opening up free trade on our end.  Though it would be preferable to be able to export goods and services to Country X, the United States will almost certainly have at least one item that they wish to consume that companies in Country X can produce much more efficiently on a comparative level than the United States itself or other nations that the United States trades with.  For example, Country X may have some of the largest and most efficient mango farms, allowing for cheap mangos in the United States.  If the United States were to counter Country X’s high tariffs on imported goods, then the citizens of the United States would have to either grow their own mangos or import them from elsewhere, in either circumstance they would be more expensive and would cost the mango consumers of the United States more money.  Free trade is ideal when both countries open up their borders, but it does not necessarily take two to tango.  Both countries will still benefit from one-sided free trade.

To be continued . . .