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What do undergrads need to know about trade?

By Paul R. Krugman

The author uses the term “pop internationalism” which refers to people who speak impressively about international trade while ignoring basic economics and misusing economic figures. There are some misconceptions, which are very popular nowadays, that undergrads should know about international trade.

One of them is the statement: "We need a new economic paradigm, because today America is part of a truly global economy”. An economic paradigm is an informal rule created in the market place as a result of the transactions between buyers and sellers. Pop internationalists are teaching us that everything is different now, when US is an open economy.

Undergraduates should better learn that trade is just another economic activity and that US’s economy is not as open as we might think or as it is stated. America value-added consists of non-tradable goods and services, while imports and exports are only 1/8 of output. This means we were misled into believing that US is open to trade, even though it would have been more effective to learn the truth about the Americans’ scepticism towards free trade.

Another popular misconception is that: “To maintain its standard of living, America now has to compete in an ever tougher world marketplace”, which is utterly untrue. The undergrads should know that international trade is not about competition, it is about mutually beneficial exchange. Moreover, they should know that imports (and not exports) are the main purpose of trade. A country gains from trade when it has the ability to import all the goods and services that it wants. The United States want everything for them, which is why the prospect of mutual satisfaction does not please them.

Students learn that “high productivity and product quality are essential since we have to compete in the marketplace”. It is true that high productivity is very important; that is not because it helps a country compete with another one, but because it lets a country produce and consume more. It is essential to understand that competing in the global economy is not the reason for achieving high productivity.

The fourth misconception is that: “We need to move the American economy into the high-value sectors”. Pop internationalists believe that international competition is a struggle over who gets the high-value sectors. We cannot believe that these sectors truly exist; if a country is more productive than another in two or more industries it means that the first country has a higher wage rate and, therefore, whatever sector that is specializes in will be high-value.

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Another topic that pop internationalists focus on is the creation of jobs. It is true that unemployment is a macroeconomic issue that needs to be taken into consideration, but trade policies should be debated in terms of its impact on efficiency; the number of jobs lost or created should not be that relevant.

The last popular misconception that Krugman presents is that: “The only way we can be competitive in the new global economy is if we forge new partnership between government and business”. Undergrads need to understand that the growth of the world trade provides no additional support for the proposition that the government should become an active helper of domestic industry.

The author’s intention was to warn the undergraduates about some popular misconceptions related to international trade that are so frequent nowadays.