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The Challenge of Free Trade: How Does One Side Win When Everyone Cheats?
I used to be a believer in Free Trade. No matter what, I thought the trade policy of America should be that there are no limits whatsoever to trade. If the other side had all sorts of restrictions, it did not matter, because it was always better for Americans on the whole to have total free trade. Why did I believe this? Because learned people said it was so, and that was good enough for me.
However, as I have aged, I have grown more an more uncomfortable with the idea that one side trading free and the other side putting up restrictions is always best for the most Americans. It is counterintuitive, to say the least. For instance, how can it be better for me as an American, that American farmers cannot sell their goods in the EU so that EU farmers are protected? How does that help Americans as a whole, exactly, when American farmers have to compete on an uneven playing field? Less competitive EU farmers get the benefits of higher prices, while American farmers have to run even leaner. How does that help the average American?
From a security standpoint, the US armed forces are buying electronics from one of our two rivals. I cannot imagine that the Chinese government is using this to spy on us somehow, but setting that aside, if we went to war with China, where will get the parts? It makes no sense to outsource a strategic industry to another nation. At least to me. I am sure it makes 100 percent sense to the Free Traders. All Free Trade, no matter what, all the time. Nothing is zero-sum, everything is win-win, even when the other partner is a geopolitical rival. Germany should not worry if it is dependent on Russia for its power, because that is the best way to get power, and if the whole Germany power industry goes down, well, that is just free trade to Russia. No worries.
So, I no longer believe in Free Trade at all times. If you are a free trader, I’d love to have my mind changed.
Published in General
On the last Libertarian podcast Richard Epstein mentions the New Zealand experience. He used New Zealand because it suffered a highly regulated subsidized and protected economy but when the UK joined the EU they got kicked off the UK gravy train and went full steam to marketization, including free trade. Their economy rebounded immediately even though back then everyone cheated even more than now and they were too small to leverage any advantages from their trading partners. The point about protectionism is that it is the most powerful tool in the progressive administrative states bag. It protects the administrative state, not the economy. We must get this straight before we seriously damage our economy. Already we’re going from tariffs to more subsidies for agriculture. It does not end. It is the reason the third world is third world. We don’t have to passively accept China’s cheating, but we have to use sustainable and effective tools, not clumsy special interest driven protectionism and subsidies. The best thing is to continue to reduce regulations, fix our schools, lower our taxes and replace distorting taxes with taxes fall on consumptions and imports not work, savings and investment. That is what caused the miraculous change in New Zealand.
I would like to see a modified form of free trade as part of our overall national economic and defense strategy.
That’s pretty much how my thinking has changed on the subject.
You are assuming that the $12 billion is permanent, like the cheese mountain we have accumulated or the sugar subsidies that paid for Marco Rubio. Maybe it is just part of the trade negotiation with China.
It’s not completely clear in this sentence, but if you’re saying taxes should fall on consumption, aren’t tariffs consumption taxes?
And on fixing schools, I agree. But (you knew but was coming) it’s not and shouldn’t be a federal matter (unlike in New Zealand). Where they went was to nationwide charter schools. It required alot of parent buy-in, time and effort. There are places that’s not going to work. Helen Ladd has written about this.
Such as?
The issue with Ricardo’s Comparative Advantage is that Ricardo assumed immobility of labor and capital, neither of which exists today. Two scenarios:
1) Capital Mobility: If America is free trade and Country X is not, and a US business wishes to trade there, then moving the business to X expands the market to that company. Now they can freely trade with the US and X. Which country benefits? X. Who benefits? The owner of the company and the X employees who now work for him.
2) Labor Mobility: If America produces a good at a higher cost than Country Y, rather than trade with Country Y ala Ricardo’s model, workers from Country Y come to America for the higher wages. Now that there are more people to work, wages drop, making production in America cheaper. The plant stays in America, however the depressed wages fail to allow purchasing power for other goods in the economy (housing), demanding more involvement from government to bridge the gap. Which country benefits? America (without considering an increased support for socialist policies). Who benefits? Business owners and Y employees who managed to get a job at a higher wage than in Country Y.
In both cases, American workers lose. In one case, America wins, but with a serious cost to freedom.
Also, NZ has a huge wage disparity. Which wasn’t very surprising to me… seems Free Trade and wealth balkanization go hand in hand which would seem to show that “not a zero sum game” has some diminishing returns at best.
To the extent it’s not permanent, it’s not a powerful lever unless it hurts China more than it hurts us. We have to undo them or we harm our economy permanently and they know that. We can do things that do not harm our economy which are far more effective as leverage while strengthening our economy. Epstein mentioned New Zealand precisely because NZ didn’t negotiate mutual reductions of trade barriers because they were too small, they radically moved their economy to a free market model and it was miraculous. He could have chosen Singapore which is also radically free market and too small to fiddle with bargaining away other countries protectionist barriers, but went from a poor, dirty colony to one of the few richest countries on earth in 30 years. Or he could have used any poor country because they are all poor because they are not free trade economies. The tariffs the Administration choose were unwise. It may work, but if it doesn’t it does great harm. Fortunately President Trump doesn’t mind writing off a mistake and changing tactics. In this case the argument Stephens offers is one that liberals and labor unions used to make all the time, that free trade doesn’t work because nobody plays fair. The free trade argument doesn’t rest on fairness, it rests on market adjustments, innovation, adaptation, and when trade hurts it’s because we’re doing dumb things that shackle our economy. Protectionism is one of those things along with regulations, taxes and rotten schools that make trade painful. Those are the things to fix, things under our control. China and 100 other countries are not.
Free trade isn’t for everyone.
I’m sure it will be fine now that both parties are for central planning of the economy.
What do you mean, for me “as an American?” Do you mean you in particular with respect to your Americanism or do you mean how is this better for the average American? Well, let’s think this through.
The price that American farmers sell things for in America has to be the same as what the EU farmers sells them for in America. So, either you get higher prices at the point of sale for farmers, meaning everyone else in America is paying more for all the products derived from farmed foods, or the farmers are selling at lower prices meaning the average American is paying less for those same products. Similarly, if EU farmers are getting “higher prices” that means everyone in the EU buying those products are being screwed over. It’s a strange area to be envious of the EU.
So, the “average American” does better when things are cheeper since the average American is not a farmer. In fact, less than 2% of the population are employed in agriculture, while a hell of a lot more people are employed in businesses who process those goods and so do better when farm products are cheeper. Why are we so worried about “farmers?”
I believe the theory is that as long as goods are getting cheaper faster than your income is collapsing you are still “richer.”
If trade didn’t make both parties better off it wouldn’t occur.
If there are national security concerns then the federal government would do better to support those businesses by purchasing from them. Lockheed isn’t going out of business anytime soon.
The other factor you seem to not mention is the massive theft of technology China has indulged in, often with the help of people like Bill Clinton who approved Loral shipment of ICBM navigation technology and Soviet theft but mostly of defense secrets which did not do them much good.
China is our big rival and they have been the beneficiary of uneven trade practice since Nixon. Like Affirmative Action, it is well past the time for us to end that favoritism. It may require temporary tariffs but this is nothing like Smoot-Hawley, that affected all of Europe.
What does theft have to do with trade?
Seems reasonable to me. I’m richer buying a $1,500 laptop now then having one that cost $1,500 in 1995.
Tariffs on specific goods are a tax on users including consumers, but it’s picking and choosing and we always pick the goods that have strong k street lobbies which makes them very difficult to undo. If you want to use tariffs they should be across the board and uniform, lowering high ones and raising zero or low ones. For us this would be the equivalent of a devaluation, which, given the role of the dollar, we can’t do. It would help us close the current account deficit which leads to the external debt overhang and we could negotiate with trading partners to come inside the tariff over many years. It’s long term if we want it to be. It’s GATT legal as well.
New Zealand offered school choice and eliminated the national educational bureaucracy; our States could all figure out what kind of choice works for them. The key is to get the Federal government, state educational bureaucrats and the unions out.
“Such as.” I mentioned an across the board tariff, but any consumption tax (it must be uniform, no picking and choosing) would reduce imports and raise savings thus reducing our current account deficit. I also like New Zealand VAT. I’d use it to replace the payroll tax, then privatize SS. Tariffs on steel and aluminum? Almost anything thing that reduces the administrative state’s power would work in the right direction and be superior to these. They are adding to the power of the administrative state which is the problem.
Freedom gives rise to disparities. The alternative is uniform poverty of varying degrees. While we’ve lots of poverty in free economies, babies survive, we live longer, we have TV, air conditioning etc.. The greater the opportunities for talent to excel the greater it will excel. Why is this not good?
Why should we tax Americans to subsidize a small minority of them?
When a government engages in trade protectionism it is essentially placing economic sanctions on itself.
Under free trade, I, living here in Indiana, have access to avocados, potatoes, automobiles, clothing and furniture made anywhere in the world.
Under trade protectionism, I only have access to those goods made in the United States.
If an effective, powerful anti-cancer drug were invented in Brazil, you can be darned sure that even a die hard supporter of Trump would prefer a regime of free trade over protectionism if he were diagnosed with cancer.
Similarly, if you really like German sports cars, you aren’t going to like the US government getting in between you and your favorite German auto import.
Free trade, free association, free speech and free enterprise.
There’s this nostalgia about rural farming America that I just find baffling. It doesn’t exist any more. You’re basically just subsidizing a bunch of big conglomerates.
Exactly.
There is a difference between being pro-business and pro-free enterprise.
Being pro-business means having the government protect American businesses against foreign competition.
Being pro-free enterprise means allowing American businesses compete against foreign businesses, with the American consumer being the judge and jury of which businesses get their support.
Yep.
Sometime I’d like to see someone actually make the free trade argument rather than just describing it.
There are still many small farms and farmers in America, but compared to yesteryear – no – those days are gone.
But if the grid goes down, we will see its return. Hope it doesn’t go down like that but one never knows.
I would like to see those better outlined.
I used them as an example, because there is an imbalance.
Does this also apply to strategic sectors?
OK, what about things like microchips and what not? Does that mean we should subsidise their manufacture at home?
I am sure I don’t like any VAT of any type. I am all for end consumption taxes being a Fair Tax guy.
This still does not address strategic issues. If we have to buy all of our computer parts from China, that hurts our security. Data is hard enough to secure now, what is to stop the Chinese from building backdoors into everything?
You mention drugs. Right now, the world steals the IP of American drug development. Brazil is not about to invent anything. The world milks off our development. Americans, right now, pays the development costs, and everyone else gets them much closer to production costs. Will the Free Traders defend that?
I won’t defend the theft of intellectual property.
But remember, Trump hasn’t been making the case for trade protectionism just based on defense of intellectual property rights. He’s been talking about trade deficits, as if trade deficits are bad.
If I buy groceries from a supermarket, I have a trade deficit with the supermarket. That’s not a bad thing.
I hope Trump talks more to Larry Kudlow and less to his secretary of commerce. He’ll soon realize that he went down the wrong road on trade. But maybe that’s hoping too much. Back in the 1980s, Trump said that Japan was eating our lunch economically. He’s been wrong on trade his entire life. Oh, well. Nobody’s perfect.