I know "Buy American" is all the rage right now -- support your local economy buy purchasing things "Made in America". It sounds great, especially when our economy is down and we constantly read about all these companies moving jobs overseas. The problem is trade isolationism doesn’t work across national borders any better than if we stopped trading across state borders.
It sounds counter-intuitive, I know. How could we be worse off if we didn’t import goods from countries like China? Wouldn’t that protect American jobs? To answer those questions all we have to do is look back at 1930 and the Smoot-Hawley Tariff Act. After the stock market crash in 1929, there was a huge populist push to protect American jobs from foreign competitors. 2 politicians were able to capture that populist anger and got a law passed that increased import tariffs to historic highs on 20,000 goods. After peaking at 9% after the crash, unemployment actually declined to around 6% by the time the law passed. Less than 5 months later the unemployment rate had nearly doubled. What happened? Well, we have to remember that nothing occurs in a vacuum. When we increased the tariffs on foreign imports, our trading partners retaliated with their own import tariffs on US goods. Stopping trade with other countries nearly stopped our economy, and if repeated today would have exactly the same outcome.
Trade isolationism/protectionism is bad because it also reduces our standard of living. Instead of being able to buy a package of undershirts for $3 and have $12 to spend on other goods and services, that package of US-manufactured undershirts will cost $15, and now I have no money left over to buy anything else. My standard of living has now fallen as a result of having the undershirts made in the US. Consider that a half dozen or more countries touch the iPod during its assembly process. Imagine how much that $150 iPod would cost if it had to be built in the US. Subsequently, how many people would be able to afford one? How would we get coffee or rice or any number of other goods that we simply can't produce in the US?
I know it gives people the warm and fuzzies because they think they’re doing a good thing and they’re helping their local economies. Unfortunately, outside of a few isolated circumstances that's just not reality given the global nature of our economy. But don't despair -- that’s a good thing. Free trade with other countries allows us access to a greater number of goods and services than would be available to us otherwise. It allows those countries with comparative advantages to do what they do best and trade for what they don't. It means more choice, better quality, and a higher standard of living. Why would we want to give that up?