If society's happiness increases when a plant moves from Detroit, Michigan to El Paso, Texas because costs are lower in El Paso, then what is different about the plant moving to Juarez, Mexico to take advantage of lower costs there? In fact, there is a difference. As we shall see, though, it is a difference that affects the interpretation of the numbers in the table, but not our conclusion about the impact of this move on society's happiness.

The numbers below represent the case where the firm's costs of production are $32 million in Detroit, but only $20 million in Juarez. To keep it simple, we once again assume that the $20 million plant in Juarez will produce the same quantity and quality of goods as the $32 million plant in Detroit, so that the firm's customers are unaffected by the move. We also assume that unions aren't a problem, so that the $32 million of costs in Detroit represent the amount of happiness those resources will produce in the rest of the economy when they are released.

The numbers all look the same! Indeed they do. The difference lies in their interpretation. When the plant closes down in Detroit, $32 million of resources are released to produce other goods and services for consumers elsewhere in the economy. This social "gain" from the plant closing down is the same whether the plant ends up relocating in El Paso or Juarez. But now look at the costs. When the plant opens up in El Paso, resources are pulled away from other activities that could have produced happiness for our consumers. (Remember--fewer burgers flipped, fewer "kars kleened," and fewer beers consumed at the Suds 'N Duds.) When the plant opens up in Juarez, there is no corresponding withdrawal of resources from other activities.

Oh sure, there are fewer resources available to produce happiness for MEXICAN consumers. But we don't care about Mexican consumers. That didn't sound very nice, did it? Let's put it another way: in deciding what's best for the happiness of AMERICAN society, we don't consider the effect of our trade actions on the consumers of other societies. We focus solely on what's good for American consumers. If this lack of concern for our international neighbors bothers you, take heart. We will demonstrate later that voluntary acts of trade between nations make both societies better off.

What then, is the nature of the costs to the U.S. society when this plant opens up in Juarez? While it's true that no American consumers are adversely impacted because there are fewer resources available to produce other goods and services, there is another cost. Do you see it?

The American firm is going to pay its Mexican workers $20 million to operate the plant in Juarez. What are the Mexican workers going to do with all that money? One option is to go shopping. Suppose they take that $20 million and go on a huge shopping spree north of the border. Let's imagine that they come back with a gigantic shopping cart full of American goods and services: cowboy boots, Coupe DeVille's, bar-b-que ribs, 10-gallon hats, and souvenir t-shirts ("My parents went to Texas and all I got was this lousy t-shirt"). How has this hurt American consumers? THESE GOODS AND SERVICES ARE NO LONGER AVAILABLE FOR AMERICAN CONSUMERS.

The Mexican shopping spree is no different than if a tornado tore through Texas destroying $20 million of goods and services. Whether they are taken away by a natural disaster or by Mexican workers purchasing them with dollars earned from their American employer, the fact is that those goods can no longer be consumed by American consumers.

If the price of a pair of snakeskin cowboy boots is $100, then having one less pair of those cowboy boots means that American consumers lose $100 in happiness. If $5000 worth of snakeskin cowboy boots (50 pairs at $100 a pair) are withdrawn from the American economy, then consumers in the U.S. will be out approximately $5000 of happiness. And so it follows that when Mexicans buy $20 million of American stuff, it imposes a loss in happiness on American consumers of approximately $20 million.

Let's go back to our Profit Table to review why relocating the plant from Detroit to Juarez, Mexico will improve (American) society's happiness. The resource transfers resulting from this plant relocation result in both gains and losses for the U.S. economy. When the plant in Detroit closes down and releases $32 million of resources, those resources are reemployed, producing approximately $32 million of happiness. When the plant opens up in Juarez and pays the workers there $20 million, those workers will take their money and buy American goods and services. When they do so, they remove goods and services worth $20 million from American stores and supermarkets. Since those goods and services can no longer be consumed by Americans, consumers in the U.S. will lose out on the approximately $20 million in happiness. When the social gains are weighed against the social losses, the net impact is a $12 million increase in society's happiness. Whether the firm relocates to El Paso or Juarez, the bottom line is the same. Only the story is somewhat different.

Are you convinced? Not really? Let's consider some common criticisms of this analysis. CRITICISM NUMBER ONE: "Your story is hopelessly unrealistic! The Mexican workers aren't going to be paid in dollars. They're going to get paid in pesos. And even if they were paid in dollars, they wouldn't spend all their dollars in the U.S. So what does that do to your theory, buster?"

Suppose they are paid in pesos rather than dollars. In order to get pesos, the plant had to take its $20 million and trade it with someone (or some firm) who was willing to give up pesos to get dollars. But why would anyone be willing to trade their pesos for American dollars? Because they wanted those dollars to buy American goods and services. So whether the plant gives the $20 million directly to the workers, or gives it to someone else who wants to buy American goods and services, the result is the same: less stuff for consumers in the U.S.

"Not necessarily," you say. "Suppose the someone who traded pesos for dollars really didn't want to buy anything in America? Suppose instead that they used those dollars to buy things from some other foreign country, say oil from Saudi Arabia? After all, dollars are an international currency." While this still raises the question of what that person from Saudi Arabia is going to do with all those American dollars, we concede the point. Some of those dollars may not all come back to the American economy.

Let's take the worse case scenario. Suppose none of those dollars come back to the U.S. economy. Then what? Then we just made the following trade: In exchange for the goods and services produced for American consumers by hardworking Mexican laborers, we gave up...$20 million of green pieces of paper.

Doesn't that make us poorer? DANGER...DANGER...DANGER...ECONOMIC FALLACY IN THE MAKING! Once again, the fallacy comes from taking our eyes off the ball. The U.S. economy may have fewer dollar bills circulating around it, but there are now more goods for consumers to enjoy. Do you see why? Recall that our working assumption is that the $20 million plant in Juarez will produce the same quantity and quality of goods as the $32 million plant in Detroit. This means when the plant closed down in Detroit and opened up in Juarez, the firms' output of goods and services remained the same. However, when the resources released by the Detroit plant were reemployed by other firms, we gained extra goods and services that we didn't have before. And what did we have to give up in order to get these extra goods? Absolutely nothing! Just a bunch of green paper that didn't cost hardly anything to produce. The bottom line is that there are more goods and services for the same number of American consumers. That can only mean one thing: The happiness of (American) society has increased.

A second criticism that one hears frequently in discussions of international trade is the following. CRITICISM NUMBER TWO: "There's no way American workers getting paid $10 or $15 an hour can compete with cheap Mexican labor willing to work for $10 or $15 a DAY! In order to increase their profits, American firms will close down their U.S. plants and factories and move south of the border. As the quote at the beginning of this chapter says, 'That loud sucking noise you hear is the sound of American jobs going south to Mexico.'"

Stated like that, it sure does seem like cheap foreign labor poses a threat to the high standard of living we enjoy in the U.S.¹ But consider the following. If it's a bad deal for the U.S. economy when foreign workers are willing to do what American workers do for only $10 a day, then it must be an even worse deal when those foreign workers are willing to work for $5 a day. And if it's a really bad deal when foreign workers are willing to work for only $5 a day, then it must be a terrible deal for the U.S. economy when they're willing to work for $1 a day. And if it's a terrible deal when foreign workers are willing to work for only $1 a day, then that can only mean one thing. If foreign workers were willing to work for absolutely nothing--if they were willing to produce goods and services for American consumers asking nothing in return--that can only mean ECONOMIC DISASTER!

What's wrong with this argument? Suppose Mexican workers got together and took out a full page ad in the New York Times and said: "Hola, Gringos! We love you! We're willing to produce your cars, your stereos, your tv sets, anything you want, for free. Don't bother paying us. It's just our little way of saying thanks for being such a great neighbor. And hey...Have a nice day."

Economists have a word for this. They call it Christmas! When somebody gives you a gift for Christmas, what's your response? Do you whine and complain about how all these gifts are ruining your life? Or do you sit down and write a thank you note? When Mexican workers produce goods and services for American consumers for cheap, that's just like a gift to the American economy. The cheaper they work, the bigger the gift. It's just as if they wrapped up those cars, stereos, and tv sets, put them in pretty boxes with bright red bows, and wrote a note saying, "Feliz Navidad! Love, Juan (or Pedro, or Maria)." We don't know about you, but it seems to us that there's only one response when somebody is being this nice. Smile and say, "Muchas Gracias!"

Which brings us to CRITICISM NUMBER THREE: "Your whole theory depends on those American workers getting reemployed again. If they aren't reemployed, then there's no additional goods and services to produce happiness for American consumers. That loud sucking noise you hear is the sound of your theory going down the drain."

We may surprise you by saying this criticism is true. Our whole theory depends on displaced American workers finding employment. To illustrate, consider the effect on our nation's happiness if no workers were reemployed after the plant in Detroit closed down and moved to Juarez. We assumed that the factory in Mexico ships us the same quantity and quality of goods, so American consumers lose nothing in that transaction. But then we have to ship Mexican consumers $20 million worth of goods and services as payment. So now we are down $20 million in happiness. If the laid off Detroit workers don't produce anything (i.e. remain unemployed), then we have no gain in happiness. Society's revenues from this transaction are 0, while its costs are $20 million. In order for us to say free trade is a good thing, we must be confident that workers will be reemployed. That just happens to be the subject of our very next chapter.