the consumer nation

Often a lot is made over the large, sometimes described as excessive, consumption of the American public.  Officials from both parties decry that the U.S. cannot continue to consume at the rate it does, importing products from all over the world, and only exporting a few select products to the international community.  According to these officials this consumption is unsustainable and will eventually cost America its status as the economic leader of the free world.  But what causes these officials to make these accusations?  And are they right in their hypotheses?

The answer to the first question is almost always the same, regardless of the product or industry.   When American consumers buy cheap international products, the artificially low wages of foreign workers and subsidies of foreign governments make competition between the international producers and domestic producers fundamentally unfair.  American producers, with higher labor costs and large costs associated with complying with both state and federal industrial standards, cannot produce the products as cheaply as 3rd world labor.  In order to insulate American industries, the federal government should impose high tariffs on imports from these countries, thereby protecting the domestic industry.  Therefore the American industry will be able to compete with the international competitors, and the American workers will not lose their jobs because of cheap labor overseas.  

Now this all this sounds great, and its easy to make soundbites that can convince people that this is the right policy.  However, in reality this practice does more to harm the American people than it does to protect them.  First, we must understand that if another country can produce a good cheaper than we can domestically, it is the best interest of the large percentage of the American people to buy at this lower price.  As I stated above, the U.S. is a nation of consumers, and by allowing the consumer to purchase a product at the lowest possible cost, the maximum amount of people will see a benefit.  

Additionally, if Americans choose to buy strictly foreign products at the expense of purchasing domestic products, there is a market mechanism to counteract this balance.  The reason international labor is cheaper is because foreign workers are willing to accept less for the same work that American workers in the same industry will accept for the job.  Now these international workers are not paid in U.S. dollars, but in their home country's currency.  However, American consumers purchase their products using U.S. dollars.  In order to pay their workers, international producers must change the U.S. dollars paid into their own country's currency.  When Americans are buying large amounts of international products and few international consumers are buying American products, instead buying from their own domestic industry or another nation other than the U.S., the result is that more people will attempt to change dollars into the international currency than the international currency into dollars.  As a result the exchange rate between the international currency and the dollar will change, with the dollar becoming relative less valuable than it was in relation to the international currency.  In turn, this means that the international labors will become more expensive in terms of the amount of U.S. dollars it takes to pay for their labor.  Additionally, U.S. exports will drop in price in the international market, making U.S. exports more competitive abroad.  In the long term, if the market is allowed to function properly, an equilibrium will be struck, and the U.S. consumer will be able to buy the cheapest products, and products that the U.S. can produce most cheaply will be purchased both domestically and abroad.  

Now many are quick to point out that this equilibrium point may occur at a price where many industries that are currently being subsidized would no longer be able to operate profitably (easy example is the domestic auto industry) and thousands of people would lose their jobs.  Well this is probably true, but in the grand scheme of things it will maximize the country's benefit to let these industries fail.  The benefits to the consumer of lower prices for goods far outweigh the benefits to workers of a government subsidized industry.  In most any industry, the amount of workers is small relative to the amount of consumers of the product.  Even if some workers lose their jobs, a much larger number of people will see the benefit of lower prices.  And the people that do lose their jobs can either get a new job in a similar industry that has a business model that can compete with the international  producers, or they can get jobs in a different industry where American producers can create the cheapest products.  

Opponents of free trade like to portray economic problems as a winner/loser dichotomy.  According to their arguments, when U.S. consumers buy international products at the expense of domestic producers, the foreign country wins and the U.S. loses.  But in reality economic transactions are win/win situations.  The transaction would not take place if both producer and consumer saw a benefit.  In this case, the international producer benefits from sales of its product, and the American consumer benefits by receiving a product that he desires at the lowest price he can find.  If the U.S. is importing more value than it is exporting, than exchange rates will change until the equilibrium is reached.  If the U.S. is truly a nation of consumers, which it surely is, than it is the free market, and not the tyranny of government controls that will provide the maximum benefit to the American people.