Pat Buchanan is currently campaigning to become the Republican representative in the next U.S.
Presidential election. He is credited with striking a chord amongst the main stream, blue collar sector
regarding trade policy can be summarized as follows:
*Impose a 10% tariff on Japanese imports and a 20% tariff on Chinese imports. This would
generate, in his opinion, $20 billion in government revenue and reduce the trade deficit which could be
the foreign laborers who are paid a fraction of what their U.S. counterparts earn. He also resents that
the heart of what he perceives to be America’s economic problems. He feels that through tariffs the
purchase foreign goods. His underlying sentiment about his trade restrictive policies is, “This is our
The basis of international trade is that their are gains to be had from partaking in it. This was proven
(variations in productivity differences by sector) will determine the pattern of international trade.”
gains from trade. The existence of low wages in a country is not by itself a reason for the U.S. to fear
trading with them. For one thing, wages generally reflect the productivity levels of workers. If low
wages meant low costs then world trade would be dominated by Th!
more workers until the value of the product that the last worker produces is equal to the cost of that
worker. In the less developed countries low productivity, as a result of low levels of technology, is
reflected in wages. The significant measure to determine which sectors a country has a comparative
advantage is not wages, but unit labor costs. A country can have a comparative advantage in a sector
even if it is more inefficient than any other country. This is because comparative advantage is based
of inferiority smaller”. As long as a poor country specializes in sectors where it is the least
The Ricardian Model, based on differences in labor productivity, is best explained using a simple
goods, jeans and sneakers; and labor is the only factor of production. Both countries have 40 hours of
labor available but Wealthy has more advanced technology which gives it an absolute advantage in the
production of both goods. These countries will benefit from trade because pre-trade relative prices
differ. For this example assume that sneakers and jeans are traded in world equilibrium on a 1 for 1
basis and that there are constant returns to scale.
Amount of laborJEANSSNEAKERSJEANS/SNEAKERS
WEALTHYhours required to 121/2
POORproduce one unit52.52
In analyzing the production possibility frontiers of each country it becomes apparent that Wealthy can
jeans and trade with Poor for one pair of sneakers. Thus, they will gain from trade with their less
technologically advanced partner by specializing in the production of jeans. Poor can make 1/5 of a pair
of jeans in an hour or produce 1/2.5 of a pair of sneakers which can be traded for 1/2.5 of pair of jeans
on the world market. Therefore, through trade both countries are using their labor twice as efficiently
than when they had closed economies. This results in gains being realized from trade.
The U.S. signed NAFTA and became trading partners with Mexico much to the chagrin of Pat Buchanan. His
opinion, and it is a common one, is that U.S. companies will relocate to Mexico where wages and employee
benefits are a fraction of what American workers earn and environmental regulations are quite lax. It is
for this reason that he feels it is impossible to compete with Third World countries and a tariff must be
imposed on them for their social injustices. Buchanan should be asking himself what causes American
firms to relocate in Third World countries and is it really a problem worth addressing. From a
humanitarian perspective it is concerning that some countries are attracting companies due to the lack of
comparative advantage is sweatshop labor and unregulated pollution. However, it is a misconception to
think that trade is only beneficial if both countries receive !
high wages. Whether these companies relocate because of low wages or higher productivity is irrelevant.
The reality is that it is cheaper for America in terms of its own labor to trade for these goods than
The root of the low-skilled job migration problem lies in the fact that America has a highly skilled
is more demand than supply in the world for high-skilled labor. However, some sectors of the American
economy are based on labor intensive, low-skilled labor. In the U.S. there is a relative shortage of
low-skilled workers so they receive a relatively higher wage than the world wage for low-skilled labor.
It is therefore more efficient for companies who use low-skilled labor to move their operations to
countries that have an abundance so that they can reduce their labor cost per unit. Labor productivity
is the real reason behind why firms are relocating. Buchanan should recognize that by trying to preserve
jobs that Third World countries can perform more efficiently, he is!
actually weakening the very country he is trying to strengthen.
Every country has a comparative advantage in producing certain goods. If a Third World country has a
comparative advantage in certain labor intensive industries due to their low wages then America should
not focus their efforts in these sectors. It is important to take into account the productivity of
foreign workers when analyzing wage rate discrepancies between countries. The Ricardian model has shown
that there is a correlation between labor productivity and comparative advantage. All countries have
limited resources which limits the amount that they can produce. Therefore, the U.S. must decide where
to allocate its factors of production and it faces a trade-off in that when it produces more of one good
it will produce less of others. In choosing which goods to produce the U.S. will have to take into
consideration what its products can be traded for on international markets. This results in them
choosing to produce goods that have a relatively high value in world mar!
kets and abandoning the production of goods that consequently have a relatively low trading value. The
U.S. should be specializing in the production of goods whose relative price exceeds the opportunity cost
foregone by not producing alternative goods. It is currently accomplishing this by letting various
sectors of its economy, like the textile industry, migrate to Third World countries like Mexico. The
relative labor productivity between the U.S. and Mexico across industries will lead to them specializing
in the production of different goods. A country like the U.S. has an absolute advantage in production of
all goods and yet the Ricardian model proves that it still gains from trade because of comparative
advantage. It is neither efficient nor economical for the U.S. to try and protect industries that can be
done relatively less expensively in other countries. It is cheaper for the U.S. in relation to its labor
force to produce high value goods and trade for lower valu!
e goods than to try and produce them both. The free market will guide private enterprise toward
industries where the returns are higher and with higher returns comes higher wages.
Focusing on industries that produce goods with a relatively high trading value allows individuals to
maximize their earnings, and this is consequently reflected in their wage rate. This is the second
argument against protectionism, especially in low wage, low-skill sectors of industry where Third World
countries are attracting U.S. companies. The Stolper-Samuelson theory states that trade affects relative
prices and that the real return to the factor used intensively in the production of a good (labor) will
increase accordingly and the return of the other factor which is used scarcely will decrease. According
to this model trade has a significant impact on income distribution within the countries involved. This
can be seen in the U.S. where the low skill, low wage jobs are being lost to Third World countries who
have an abundance of these workers. At the same time the U.S. has an abundance of high-skill, high-wage
jobs and this is resulting in a serious gap between the up!
per and lower classes of American society.
Pat Buchanan has gained favor with the lower classes because he wants to apply tariffs to Third World
countries and try and protect American jobs from being relocated to other countries. There are serious
long term ramifications to a country who holds onto industries that are no longer competitive in the
Third World countries are situated but it is necessary for the further development of the American
Economy. Imports and foreign competition have taken a lot of jobs from U.S. workers but this economic
the future lies and they offer higher wages and require new skills. Trade has shifted industry from the
assembly lines into complex products with specialized designs a!
increased and this “forces firms to be more productive, and that desperate drive for productivity makes
the entire economy more dynamic.” . A dynamic economy has lower inflation due to intense competition and
gives consumers more variety to choose from in stores. Furthermore, since low-wage workers spend a
higher percentage of their income at the store than the high-wage workers they see a greater proportion
of their earnings being saved as less is going towards necessities like food. Buchanan should focus his
attention on the real problem at hand which is the retraining of those workers who currently find
themselves in low skill jobs. The Stolper Samuelson effect has shown that low skilled labor is earning
less while statistics show that skilled labor wages have risen. The next logical move is to try and
close the gap by retraining workers for the demands required of them i!
n today’s work environment
America’s current account deficit with Japan has received a lot of press coverage and been the subject of
and indebts them to foreign nations. Pat Buchanan stated in a speech,
“our merchandise trade deficit is a $166 billion. As this vast transfer of U.S.
wealth and technology was taking place….our share of world GDP had fallen
However, without questioning the source of Buchanan’s statistics, it is important to review his
underlying premise. The current account deficit that the U.S. is currently running is the reason for the
blue collar workers’ problems. Furthermore, he has stated that the gains from trading with these
countries are minimal.
Why should it matter where America’s imports are being made as long as it is relatively cheaper in terms
of factors of production for foreigners to make them.? Buchanan is concerned that Japan is not
practicing fair trade and this is reflected in the trade deficit the U.S. currently has with them. Yet
Japan is a member of GATT and as such is subject to the same rules of trade as the U.S. Furthermore,
they have never asked the U.S. for voluntary export restraints and did not complain when it was asked of
them. However, while visible trade barriers are in line with other developed countries Japan is accused
of abusing the use of non-tariff or intangible trade barriers. It is perceived as difficult to export
manufactured goods to Japan due to their “product standards and testing procedures, the wholesale and
resale distribution systems, and government procurement.”
A common them in the U.S. is that the current account deficit signifies that exports are being restricted
as a result of non-tariff trade barriers in other countries much like the aforementioned Japan case.
Before analyzing the current account deficit it is important to clarify what it is composed of. The
current account consists mainly of imports and exports of goods (visible trade balance), the flow of
receipts on overseas investments);private transfers from workers…and official transfers (such as
foreign aid).” When a country is running a current account deficit they are actually becoming indebted
to foreigners. Subsequently, the reasons for taking on this debt should be the main concern of
politicians like Buchanan, not the existence of the debt itself. If the U.S. was using this debt to
finance consumption rather than increasing production capabilities then there wou!
ld indeed be cause for concern. The increase in ability to produce goods and services through investment
is what gives a country the capability to service and eventually pay off their debt. Another aspect of
the current account is that it is affected by domestic fiscal policy. This is because the majority of
government expenditure is on transfers and subsidies. Consumption spending of this sort can be dangerous
because it does not help to generate the necessary resources to repay the debt.
Tariffs on Japanese and Chinese goods will have numerous effects on the U.S. economy. The main goal will
be to raise the price received by domestic producers of that good and reduce imports . By raising the
goods that they have incorporated into their lifestyle and will see a decrease in selection.
Substituting domestic goods for foreign ones could result in a further loss by consumers if they receive
less value, variety, or substandard products for their money. Competition breeds competitiveness and if
Buchanan makes it harder for foreigners to gain access to the U.S. market then he is creating an
uncompetitive environment. If a tariff were put into place it would raise the price of the applicable
goods in the U.S. and create an incentive for domestic producers to increase production. However,
consumers will demand less and look for substitute goods. Imports will de!
cline because Japan and China will have to lower their domestic prices which will lead to less producers
and an increase in demand. The end result is that the U.S. current account deficit will decrease and
might even become a surplus. However, this is the most inefficient way to accomplish such a goal.
Increasing savings or reducing the government deficit is the first-best policy to reduce the current
account deficit. Unambiguously the terms of trade gain will always be outweighed by the efficiency loss
and attract too many firms to enter the protected industries as a result of reduced foreign competition
and increased profits. Buchanan feels that through tariffs (which he labels a foreign consumption tax)
import substitution will stimulate growth in the American economy. The main problem with this mode of
thinking is that tariffs allow an industry to survive but the!
y do not promote efficiency. If Buchanan feels that America needs jobs and has lost its dominant role in
the world economy he should focus on promoting exports. The very countries that he is condemning for the
downfall of the American economy all have followed “industrialization oriented primarily toward export
rather than domestic markets.” However, the solution that he should be looking at for the current
account deficit is staring himself in the mirror every morning. Politicians must act fiscally
responsible and reduce government spending because it is the deficit that causes the problem. As the
deficit goes, so goes America’s current account balance.
Pat Buchanan feels that protectionism is the answer to re-establishing the U.S. as the world’s dominant
many his means of achieving it are economically fallible. If he implemented his policies he would
accomplish the very result which he is condemning. Buchanan’s economic platform is pandering to the
notions of ill-informed people. If we think of the U.S. as a boat, he is trying to patch a leak, and in
doing so, has created two new ones. Lets just hope that level heads prevail and he is not elected or we
might just have to bail water to prevent the mighty U.S. from sinking.
Buchanan, Pat, “An American Economy for Americans” http://www.buchanan.org/america.html
Buchanan, Pat, “Time for Economic Nationalism” http://www.buchanan.org/econ1.html
McGraw-Hill Book Co., 1990
“Not so absolutely fabulous”, The Economist, November 4, 1995
College Publishers, 1994
The abuse of economics: Common economic fallacies, UK: The Economist, 1996