The Importance of Trade

A blog about business and economics.
Dec. 13 2011 8:28 AM

The Importance of Trade

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Blohm + Voss shipyards in Hamburg, Germany

Photo by Joern Pollex/Getty Images

I'm going to continue to disagree with Kevin Drum about manufacturing, and instead agree with him that it's very important for a country to have a healthy sector involved in the production of tradeable goods and services. The reason for this, roughly speaking, is that if you're producing things for trade you can't suck. When I was in Copenhagen, I saw some really appalling pizza for sale. Firms are able to get away with that, presumably, because everyone else is selling terrible pizza. By contrast, Lego has to compete with toy companies around the world. It's not that to succeed in a tradeable sector you need to make the Best X In The World (most car companies are deliberately not competing for that title) but you have to be offering people a reasonable value proposition. When trade isn't happening you can easily get stuck in a low-quality, low-productivity, poor-value equilibrium. American doctors, for example, earn vastly higher wages than the doctors in other OECD countries but because they're not subject to international competition there's no meaningful pressure on them to provide greater quality or lower prices. Instead, since it happens to be the case that America is a very high income country, our doctors more or less soak us for all we can afford to pay—which is a lot.

But once you start talking in terms of what is and isn't tradeable, about where there is and isn't international competition, then it's easy enough to dispense with talk of manufacturing. Lykke Li songs are legitimate exports every bit as much as Volvo trucks, and we in America do a fair amount of exporting of higher education services.

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Most of all, I think talking about tradeability rather than talking about manufacturing clarifies the policy options. If manufacturing is good because the only kind of "good jobs" are the ones that involve "making things" then what you want to do is protect your domestic manufacturers from interational competition. By contrast, if manufacturing is good because it's tradeable then you draw the opposite conclusion that we need to be working harder to open other sectors of the American economy up to more international competition. You're obviously not going to pack doctors' visits up into boxes and ship them around the world, but there's no reason in principle that we can't have more international competition in this sector. We could encourage medical tourism, we could offer to pay lower-cost countries to treat our Medicare patients, and most of all we could create clear guidelines saying to people born abroad "if you do X, Y, and Z you'll get a license and a visa to come to the United States and work in the health care sector" (ideas all stolen from Dean Baker). 

Anyways, I know people sometimes feel like this is just all so much hair-splittng but I think it's crucially important to be clear what we're saying. If we need more tradeabilty, then we need to open new sectors up to competition. If we need more manufacturing, then we need to reduce competition in that sector.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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