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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
Please allow me to handle this in parts.
I am not familiar with Charles Hughes Smith, but I will point out that he is in strong disagreement with Adam Smith, Frederick Hayek, Milton Friedman, and virtually every other economist I can think of. To be perfectly frank, he sounds a lot like an economist by the name of Paul Krugman, and here’s why.
First, comparative advantage is not a lofty-sounding abstraction. Comparative advantage is an extremely useful term to define the mechanisms of basic economics. It lies at the heart of virtually all economics. It comes in many forms, either expertise, sheer luck, physical advantages, intelligence, capital, knowledge, etc… I have a comparative advantage over other attorneys with respect to my particular field, because I have developed an expertise over years. I have a comparative advantage with respect to non-lawyers because of my schooling and investments that I’ve made in education.
Those “four darwinian goals” that Smith is referring to (and I haven’t read his writings, so maybe he clarifies this) are extremely basic and you might think of them as extremely primitive economics. Might makes right, so to speak. Gain access to goods and deny access to others. There’s a pretty good reason why advanced civilizations don’t behave in this manner, and it was the basic observation of Adam Smith (and why that particular Scottish intellectual revolution led to the greatest expansion of wealth in the history of mankind). In short, the reason is precisely what he dismisses: comparative advantage.
What primitive economics leaves out is the reality of Pareto Optimality. The idea that, through trade, both parties can be made better off. Primitive economics requires a zero-sum game, finite resources, and competition based on scarcity. Pareto Optimality says that, through, comparative advantage, trade can be mutually beneficial. What Smith describes is not trade, it is warfare. That’s why warfare diminishes as trade expands.
Discussed here, comparative advantage allows me to produce a good at a lower cost than someone else, giving me a surplus, which I can then trade to another person who has produced a good that I need. I take what I can do most efficiently, and spend a great amount of time attempting to maximize that efficiency…
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You would be sued for patent infringement and probably lose.
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I am motivated to innovate because that allows me to maximize my profits (which is the difference between what it costs me to do something, and the value of that other thing to my trade partners). Simply put, it’s why you don’t build your own computer (even though Hank showed you how) or fix your own car or do your own plumbing. Somebody else is capable of doing those things more cheaply, more quickly, and better, so that it is worth the cost to pay them because your time is better spent elsewhere.
Microchips are not a military secret. The military does not manufacture its own copper wire or little screws, either.
Why do you think that company used your services instead of someone else’s? It has to do with a lot of things, rihgt?
For instance, perhaps they understand that they can trust your company. Perhaps they know that your company will do a good job and manufacture a good product. Perhaps they wanted a company in the US. Maybe, in order to protect their intellectual property, they used a company that is subject to well-enforced patent laws? That’s all “free market.” Do you not think that virtually every company makes these sorts of decisions every day? Simon just talked about iWe’s decision not to deal with China because of their reputation for shady dealing. If they engage in shady dealing, that is a pretty big disadvantage, and it is a pretty big advantage for those who behave honestly.
I am not suggesting that it is always a good idea to deal with China, or that we might not find our needs better met elsewhere. I’m saying that these are decisions and considerations that individuals and private companies make; the government does not need to interfere by telling US businesses that they cannot trade (or tax them for doing so) with anyone. If military secrets are super important to our government, it is extremely likely that they will consider “security” very high on their list of criteria for government contractors. If that is the case, why are we worried about China?
Judithann, I have spent thousands of words on this thread laying out the evidence and reasoning behind my positions. A lot of that has also been an attempt to pin down exactly what sorts of arguments you are wishing to have addressed. You’re talking about winning and losing elections. That’s one topic. You’ve talked about military secrets, and that’s another topic. You talked about steel tariffs, which is another topic, and this thread began with an overall indictment of the entire notion of free trade – that’s a pretty massive topic.
With respect to elections, are you suggesting that we should do everything in our power to win elections? I suppose that is true, to an extent. But that has to be broken down a bit, right? Gay marriage is very popular. Should republicans adopt the popular stance on that? Perhaps? What if Abortion is not a winning argument? Should they concede that one? Democrats have showed us that there are many votes to be had by pandering to special interest groups, and it still remains a bulk of their strategy. Welfare and entitlements, transfers of wealth, protectionism. Are you saying that we should adopt these policies in order to win those votes?
If so, you have to ask what we hope to accomplish as a political party. Compromise is essential, for sure, and if you’re talking about compromise, let’s be honest about that. Maybe we should compromise. But free-market economics is why we oppose massive entitlement spending, it is why we oppose massive regulation. It is fundamental to our political philosophy. So it cannot be all about winning and losing. If it is, why don’t we attempt to go after the mexican and hispanic votes and capture that massive source of political support? We recognize that there are tradeoffs, right? We don’t just want to win, we want to convince people that we are right, or winning does us no good whatsoever.
What I think might be puzzling some of us is that we know firms know they share intellectual property at their own risk, especially when they’re sharing it in an environment where intellectual property is known to be insecure.
Nobody here is going to cheer on a firm getting cheated out of its intellectual property, but we’re likely to suppose firms doing business in an environment where intellectual property is insecure are likely to factor the insecurity into their decisions, taking precautions and then only doing business if it seems worth the risk.
Way back in this thread there was pretty widespread agreement that if some kind of leverage would work to better secure intellectual property rights, it was worth trying, if the costs did not outweigh the benefits. Where there seems to have been disagreement is on which kind of leverage would be likely to work. For example, proponents of TPP said TPP was the kind of leverage likely to better secure intellectual property rights. Do we say people who hate TPP and are glad it died were against securing intellectual property? Or do we say, we seem to agree intellectual property should be secure, but we may not agree on the kind of leverage that would secure it?
And how much do we trust firms who willingly work in environments where intellectual property is not secure to know their business?
Well, I also mentioned unfair things like forced price control on threat of stealing IP.
Firms that give up intellectual property for the right to manufacture in China or access their markets are making the calculation that they can leverage the temporary advantage for profits that they can use to innovate. At the end of the day, innovation is the only way to succeed long-term. The mistake being made here, in my opinion, is the implicit assumption that the IP rights of those firms aren’t theirs to do with as they will, that they somehow “belong to America” or “Americans” as a collective. Elon Musk made all the patents for Tesla technology freely available – he made a calculation that the key to his business succeeding long term was the widespread adoption of electric vehicles by everyone. The change in infrastructure from gasoline to electric would make Tesla cars more viable even if he gave away his current advantage in technology. He bet on the ability of Tesla to innovate better solutions than its rivals. He may fail at this but it was still his IP and his choice to do with it as he will.
On the subject of microchips, I have seen some charges that they come from China compromised. Seems better not to put said microchips into military hardware if that is the case. Maybe it is not, but it does not seem outside the realm of possibility.
Do you think that the military would put compromised chips into billion dollar assets?
Is it possible not everyone here views that implicit assumption as a mistake? That could explain a lot of the disagreement.
I think a military contractor would in a second if it saved them money.
Recall how the OPM information breach happened; they gave root access to a couple of contractors from Argentina (if I recall the country correctly). I wouldn’t put it past them.
Ok, how do unfair things like forced price control on threat of stealing IP result in military secrets falling into foreign hands?
And the military does not vet its contractors or its products? Do you think Lockheed would get future contracts from the US government if it so egregiously compromised national security?
I thought that free market implies that transactions aren’t made fraudulently. Sure; we got all our intellectual property ripped off by China, but you have to understand; it was dressed provocatively.
I do not believe in the collective ownership of property and never will. If that is the belief of people here I don’t think a bridge can be constructed across that divide.
If a foreign government makes loss of IP mandatory, then the government of the country of the company ought to do something about that. That is what I am saying. Maybe not though. Maybe, in Free Trade, no matter what the other government does, no matter how much they cheat or tax, nothing, in fact, that they do, in any fashion, is ever bad, on the whole, for the citizens of the Free Trade nation. It always is better for Free Trade nation.
I just don’t see how another nation helping its companies steal my countries companies IP is a net good for me.
I was talking about drugs, not military secrets.
I don’t think the military does a great job in controlling companies like Lockheed. There might be a fine or something, but the DOJ and said companies are pretty much in bed together.
Watch The Pentagon Wars
So you believe that the US military should be careful about where it sources its microchips. That makes perfect sense, but it is not an argument against free trade – quite the opposite. The US military, as an economic actor, makes any number of decisions like that… just as individuals and businesses make similar decisions based on their own best interest. That’s the free market.
This discussion is not about whether China is the best at everything it does; whether its government is honest and whether its businesses are the best places to invest. Nobody has argued that it is. The discussion is about whether individuals and companies should be free to weigh their own risks and interests.
Why? The choice exists for the business to not do business with that country. Who are you to make that decision for them?
It’s not “your countries companies IP” it is “that companies IP” and they are free to engage in whatever deals they feel will benefit them.
So the government is bad at controlling commerce and you want to give the government more power over commerce?
And what do you think goes into a military contract? Military contracts are a highly competitive (and highly regulated) business. You think that a military contractor would take shortcuts and create a faulty product because it saves them a small amount of money in the short-term?
Look at the small example of firearms for the military. For a long time, Beretta made sidearms for military use. That contract recently switched to SIG (US made, by the way). Both companies (and all others pushing for the contract) produced products before getting the contract, to very detailed specs, which were then texted extensively, both in labs and in the field. It was highly competitive. Those companies were not cutting corners to make cheap products – they attempted to build the absolute best product in order to win the contract.
What do drugs have to do with tariffs? Drugs are highly regulated; far more so in the United States than in most other places. They are already not subject to free trade, and they have nothing to do with any sort of trade-war or tariffs.
Crony capitalism happens when we have more regulation, more government oversight, more meddling in the economy. It is extremely unnatural within free markets. A good example is from the Obama years, when he was talking about promoting green energy at the (deliberate) expense of the oil and natural gas industries. Did you oppose those policies? That is almost exactly what occurs when governments impose tariffs.
Stealing your IP is not a net good for you. Nobody is arguing that it is. Reference the comment I previously made to Hank. Why do you think so many of those sorts of sensitive products are made in the US and in other countries with strong patent enforcement? If you don’t trust a particular country to respect your IP, you maybe outsource things like mass-production of products like clothing, toys, plastic, etc… which allows you to specialize in the sorts of businesses like what Hank does, where foreign companies will choose to do business in the US rather than in China. That is the complexity of the markets at play – our strong patent laws and consistent enforcement give us a comparative advantage in certain fields. If China wishes to compete in those fields, it would need to improve its behavior – there’s no way to “cheat” that.
Fact is, you still get to choose where you do business. If a foreign government encourages theft, its economy will suffer. We don’t need tariffs to tax our own consumers and businesses in order to convince people not to do business with bad actors. That sort of approach ends up a) not serving its intended purpose, and b) artificially propping up certain domestic industries over others. The free market is actually far better equipped to issue those same protections and transfer the same knowledge than any government could ever be.
That really does not address the larger point of being forced to buy microchips from another nation which we know uses its companies as a weapon. I get tariffs are bad. Anything other than pure free trade is bad. We don’t, and never will (and unlike some people, I mean to use “never” as is defined). As such, what I want, more than anything else, is to ensure the continuity and security of the United States of America. If tariffs help secure key industries, great. If some other market distortion does it, great. Will that be open to corruption and graft and all sorts of mischief? Yes it will. It is the nature of things.
NO – the free market implies that transactions are made voluntarily. As I stated previously, there are certain things that are obviously still criminal activity, like fraud and theft. Locally, we can give our own markets an advantage by creating a system of laws that ensures this sort of activity will be punished. But, even when you have bad actors, you still have a transfer of valuable information. What happens domestically when companies behave poorly? We see things like “consumer reports” or “yelp.” Reputation is – to continue beating this drum – a form of comparative advantage. As an attorney, my reputation is very important – I might benefit in the short term by stealing from a client, but I will benefit in the long term from developing a reputation as an honest broker and encouraging others to do business with me.
If China is going around “ripping off” intellectual property (and I mean in fraudulent ways, not simply by purchasing products and attempting to copy them), you will see people ceasing to do that sort of business with them. That will drive people to places like the US, where our companies can promise good behavior and that is backed by our system of laws.