The Iowa Car Crop

Did you know that Iowa grows cars in their corn fields? It’s pretty remarkable; you’d think it would garner more media attention. Okay, you got me. Cars aren’t literally grown in Iowa. But through the wonders of trade, for all intents and purposes, they might as well be.

There are many misconceptions about international trade. I think a few of us understand the concepts of comparative and absolute advantage. However, there are a lot of protectionists in this country looking to keep other countries from “taking our jobs.” We get caught up in ideas like competition in economics. In global trade, we compete with other countries to sell goods and services. President Obama’s staff even coined a new catch phrase to embody this ideal: Win The Future. Winning the future means out-innovating, out-educating, and out-building the world competition. We compete with one another in our quasi-free market economy, and it’s a fundamental building block to free market economics. But economics is also a collaborative effort. Comparative advantage is about competing to be the best at something, and sharing that output with others. China, for example, sends us a lot of cheap goods. We chastised them for undervaluing their currency to gain an “unfair” advantage in the global marketplace. However, I’m not sure how you make the case that the Chinese hurt us by sending us cheap products. The only people that need to be concerned about an undervalued yuan is the Chinese … for inflationary pressures and asset bubbles. For China to move forward and help themselves, they must help American consumers and their real incomes.

Roundabout means of production was first communicated by David Friedman and later by Steve Landsburg in The Armchair Economist. Landsburg describes the Iowa car crop phenomenon:

There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First, you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and send the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars.

Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on ‘imported’ automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.

Protectionists tell us that the US manufacturing sector has been hollowed out. We actually still make many things in this country. Recently, manufacturing has looked pretty good, showing gains over the last year and a half. Fourteen of the 18 industries that the Institute of Supply Management (ISM) tracks grew in January. Manufacturing in this country has become far more productive per worker with better technology, worker skills, and deeper division of labor. Manufacturers are hopeful about their prospects in the coming months, and if anything, complain about rising material costs i.e. inflation.

While it is cheaper to make many goods abroad, we still make many things here. Both of those things are okay. It’s about doing what you do best, exporting it, and maximizing quality of life across the globe. And somehow I have a feeling that we’d make more things in this country if the unions didn’t have the stranglehold they do. Legacy costs, above-market compensation, and the inability to get fired for not doing your job well doesn’t help. Economics is just as much about collaboration through global trade as it is competition.

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