On protectionist Obamanomics

This morning I was listening to XM Satellite Radio's POTUS '08 channel as I often do and they often play clips of the candidates talking about different issues. This morning it was trade. I heard Obama say something that betrayed his complete lack of understanding of how market economies work.

I searched to find the remark and found this NYT article from a couple of months ago with almost the same exact quote:

Last week, near Detroit, he asserted that “if South Korea is selling hundreds of thousands of cars to the United States and we can only sell less than 5,000 in South Korea, something is wrong.”

There's a basic concept in economics called "comparative advantage". It's based on the very simple idea that some people (and some countries) are better suited to conduct certain activities than others. South Korea, for a variety of reasons, has proven that it has a comparative advantage in manufacturing at least some types of automobiles. The Obamessiah makes the leap that our low sales in South Korea MUST be a result of trade barriers. That simple answer is meant to obscure an even simpler one. Perhaps South Koreans don't want American cars in the same numbers Americans want Korean cars.

The NYT article points in that direction:

As for automobiles, Korea’s auto imports have grown nearly tenfold in the past decade as trade barriers have eased, and Japanese and European car manufacturers have been more successful at capitalizing on those opportunities than their American competitors.

To me it's obvious that America has lost the comparative advantage that it once had in automobile manufacturing industry. Labor and other costs are simply too high in America for American-built cars to be competitive in the global marketplace.

There's a basic flaw in all the populist protectionist rhetoric about free trade is that it's all rooted in the premise that the economy should be static. Since we were once the world's leading automobile manufacturer then we must always be the world's leading automobile manufacturer. Things don't work that way. It's called competition.

In order for America to continue to have the world's leading economy, we can't be married to one industry or group of industries. We need to innovate, create new industries in areas we have a comparative advantage in. Longing for yesterday when other countries didn't have the know-how and capable work forces they have now ain't going to cut it.

By the way, these protectionist populists always raise the specter of trade deficits. But very few people know what a trade deficit is much less how they work and what the implications are. There's considerable evidence that trade deficits are not a bad thing. They aren't necessarily good either. They just are.

In general protectionist policies end up hurting the consumers of the country that implements them. Essentially Obama is saying that we should all pay more for cars in order to protect the jobs of people in that particular industry regardless of the fact that other countries can produce cars cheaper and perhaps with better quality. If you apply that logic to all American industries then there would be no foreign trade at all and we'd all be paying prices much higher than the rest of the trading world.

The world economy moves fast and so do consumer preferences. What protectionists are in essence saying is America can't compete. I think they are wrong.

Posted by Henry Louis Gomez at August 8, 2008 12:57 PM

Comments

Posted by: readytoshoot at August 8, 2008 01:15 PM

Posted by: Henry Louis Gomez at August 8, 2008 01:38 PM