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Were the Mercantilists Right After All?
An imaginary seaport with a transposed Villa Medici, painted by Claude Lorrain around 1637, at the height of mercantilism.
I have found my views on free trade “evolving” over the past year or so. The Red Fish of 2010 or so would have happily provided a lengthy dissertation on the benefits of NAFTA and free trade to any group who wanted to listen. Or didn’t want to listen. 2010 Red Fish was like that.
I read this morning over at The Federalist an interesting piece detailing the way many Republican Party candidates no longer support free trade. Why is a base that went ballistic a year ago over the attempt to force the Ex-Im Bank back into existence now ready to back candidates who don’t support free trade? And more importantly (to me), why am I starting to agree with them? It’s 2016 now, and Blue Fish is starting to make sense to me.
I used to hear more from Mickey Kaus in the Ricochet podcasts, particularly when he was so dead set against immigration for economic reasons. He would always tie that back to how NAFTA and other free trade agreements hurt working class people. In response, Rob and Peter would talk about how free trade lifts all boats, provides new types of jobs and new industries, and results in a net positive economic effect. I still believe that’s true.
But what I am now having a hard time reconciling, particularly as I watch Trump do what he does, is that the benefits of free trade, which are near-impossible to identify in individual lives, don’t seem to compare very well to the very real impact that free trade has on specific people who lose their jobs and see negative pressure on their wages. If we make that argument about immigration, why shouldn’t we make that argument about free trade? One is shipping the job overseas, and the other is importing the employee. But it’s the same effect on the American who lost his job or took a pay cut, no?
Okay, so goods are cheaper. But what does that mean to someone without a job? Again, a benefit that is generally available (cheaper goods in the market) and a specific harm (an employee who lost his job).
The new information (to me at least) that’s weighing heavily on my mind is a better understanding of how the rest of the world is manipulating markets, providing subsidies, setting up barriers, etc., to limit our access to their markets or pull our businesses away. Yes, Boeing is in fact moving a plant overseas because the Ex-Im Bank is no longer giving them what they did previously. In the real world, where dismantling the Ex-Im Bank means Boeing planes are moved to factories overseas, isn’t subsidizing Boeing a good way to spend taxpayer money? It’s better than endless unemployment insurance and welfare, right?
Is it right to disarm mercantilist protections in a world where we’re the only ones really doing that? Why aren’t we protecting those workers from foreign competition?
Ricochetti — explain to Blue Fish why he is just wrong on this.
Published in Economics, Foreign Policy, General
I have no expertise in the economics of free trade other than what I might conclude from common sense and strong bias for freedom of action by individuals. But it seems to me that one cannot have significant imposed artificial requirements on business, e.g. minimum wage, unemployment compensation taxes, health insurance benefits, mandatory leave, penalties for dismissing employees, to name just a handful, and then try to pretend that one is participating in a free market economy. The concept of free trade seems meaningless in such an environment.
More new jobs are created than old jobs lost. By every objective measurement there are fewer and fewer poor people, and more and more rich people in the United States.
Real median family income has been flat for 40 plus years in the States. While income at the top has exploded. Factor in welfare payments, and I understand we get a different picture.
I generally don’t think that income inequality per se is an issue to be concerned about. But what if free trade is causing real median income to remain stagnant while increasing that at the top? In other words, what if its government policy that is creating the income gap? Should we care if the government is causing it? And is free trade causing it?
To be clear, I am not an advocate of mercantilist policies, and I generally don’t care much about income inequality. But I am starting to question if our assumptions on free trade are really correct.
You can make more rich people and fewer poor people while at same time making it harder for middle class people to build a decent life.
This isn’t quite true. The data that shows this to be so is household income. The problem of looking at household income is of course that the richer a society becomes, the more likely that individuals are to break out into their own households that have lower income than if they had remained consolidated.
It is true that incomes haven’t increased a great deal on a per capita basis, but those dollars go further due to innovation. Nearly every American walks around with a marvel of technology in their pocket that allows them to talk to anyone from anywhere, have non-stop access to the sum total of human knowledge, and get their ricochet fix at all times.
Such people cannot be said to be “no better off” than they were fifteen years earlier when such technology didn’t exist, or did so only in a primitive, expensive form.
I wish I could. I’m struggling with this myself. I think Bob Thompson has a good point in that we can’t import/outsource to foreign labor at the same time we over-regulate business at home if those “free trade” jobs are ever to appear.
Since we live in a tech/pharmaceutical corridor, the H1-B issue springs up a lot around here. Employers are obviously very pro-H1-B but employees contend the system is easily gamed for cheaper labor. It’s not just the wages, either. You can work an American IT employee 40+ hours on a project, but the worker will ask for overtime. You can run an H1-B worker into the ground and it’s unlikely he’ll complain about overtime pay — or anything at all really. They’re a docile bunch, which I guess is what happens when you get shipped back home if you lose your job.
If I have this all wrong, please set me straight. In fact, I would love that, since I have a kid considering a STEM major/career.
New technology harms more folks than free trade. I don’t want my government picking either because they will pick the ones with the biggest richest k street presence. People used to say free trade is good in theory but not in practice. Milton Friedman turned that on it’s head as it’s protectionism that is good in theory but cannot deliver better results than free trade for the same reason central planning can’t deliver the goods. However, the US is and has been disadvantaged in trade, first because we wanted a prosperous market based world as a bastion against the Soviet Union and secondly we wanted the dollar to be the world’s currency. The latter means we can’t devalue like normal countries so are vulnerable. There are ways to deal with this but we have to know what we’re doing as the interests will twist all efforts out of shape unless we are very clear and have very simple goals. Our openness has been good for the economy, for advancing technology and keeps us sharp and competitive, but it imposes adjustment costs and these costs turn large portions of the population against markets, including big old corporations who are losing their edge.
Here is a pretty good summary.
A good question to ask is: why is it the government’s job to protect specific jobs in specific industries at the expense of other citizens?
Do we ask a similar question about specifics such as those I listed in #1?
Ah, ye olde problem of The Seen vs. The Unseen.
Conservatives and libertarians do.
Who is protecting the sugar producers of Brasil and other such places from the corn lobby in the US, which pushes regulations to keep out sugar in favor of high-fructose corn syrup? Who protects the Mexican economy from spikes in corn prices due to a larger percentage of the corn crop going to ethanol production, and for all that’s holy, it’s not even to drink, but to burn! And have you ever heard of The Chicken Tax? We’re playing the game, too, Brother Fish. Trust me on that.
It is often easier to see the cost of free trade than the benefits. For an example, lets look at tires. We pay a 35% tariff on imported tires. The day the tariff went into affect, all tire prices went up 35% regardless of whether they were made here or elsewhere. If we didn’t have the tariff, plants would (may) close in Akron, OH. That would be very visible. A one minute video of hundreds of workers walking out a plant for the last time would show the negative impact of free trade.
What is harder to show is the impact of the tariff. The market for tires is roughly $30 billion. So consumers pay roughly $10 billion per year more to buy tires than they would in a free market. I don’t know how many jobs are saved by the tariff, but assume 50,000. Then we are paying an extra $200,000 for every job saved. If we spent that same $30 billion on other goods, how many jobs would be created? We can’t see that. However since most jobs pay less than $200,000 per year it is safe to assume more jobs would be created than lost.
Even though we can’t see jobs that are not created, the impact of the tariff is real and more people are unemployed.
It also needs to be pointed out that if you measure median wages by the CPI and household income, then wages have been stagnant since the 60s.
Will anyone seriously suggest that people are not better off than in the 60s? Few people had air conditioning for goodness sake.
Yes, and cell phones and free internet downloads, games, music were really lousy back then and my 10 million dollar computer really sucked.
We don’t have free trade, so free trade is not the cause of anything currently. NAFTA is not “free trade.” Any treaty 20,000 pages long is not about free trade. Truly free trade takes one page.
Yes, government is a major cause of income inequality. Some call it crony capitalism, but I prefer the more descriptive crony profiteering.
It’s not. The problem is, “Free Trade” doesn’t just happen if the government does nothing. Free trade requires the government to affirmatively negotiate agreements and open up markets. Trade takes two partners. In doing that, they are already picking winners and picking losers. Question is, when the rest of the world is going to be mercantilist and often protectionist, and the government needs to take some action, which winners and losers to pick? Thinking about it another way, even if we all agree that opening up free trade brings about broad benefits and is in the best interest of the larger group, should we be doing that when the government’s actions also quite directly result in large groups of people losing a job here in the States?
Yeah, but your $1000 college education was immensely better.
No. One country does not win when they enforce tarries and subsidize their industries.
If country A has free trade on their side, but country B enforces tariffs and subsidies, both countries are more prosperous than if country A also used tariffs and subsidies. If both countries have free trade, both countries become even more prosperous for it.
The notion that your country loses if you loosen your trade requirements but the other side doesn’t is an economic fallacy.
That’s not what I am saying. What I am saying is that the government needs to act to open markets. Even accepting that the overall benefits to the country from free trade are positive, and largely positive, should the government nonetheless be negotiating agreements that will harm large groups of Americans?
Not every American experiences the positive result of free trade. To many, its a very specific negative result. Doesn’t that person have a legitimate gripe if his government negotiates a free trade agreement that results in him losing his livelihood, his ability to provide for his family? Wouldn’t we normally really object to the government taking that away from someone regardless of the use? I mean, we all hate Kelo, right?
It is absolutely not accurate that free trade requires governments to negotiate agreements. Governments can also unilaterally eliminate tariffs regardless of what other countries do.
If free trade required negotiated agreements then every single product exported or imported would have a tariff upon it in the absence of a trade agreement. This simply isn’t the case.
That’s not correct. You can create “Free Buying” and (to a lesser extent) “Free Selling” without agreements. You cannot create “Free Trade” when the government of the trading partner has erected barriers.
In other words, enforce possibly coerced trade on other nations? Make them buy our goods? Not exactly free trade, depending on what you mean by this.
Negotiating agreements is not necessarily free trade in the first place. Often it is nothing more than a “tit for tat” of negotiated tariffs.
But let’s look at the statement itself.
Define “large”. Large compared to what, or to whom? Getting rid of the ethanol mandates and subsidies, and getting rid of sugar duties will harm corn and sugar beet farmers. Is that a bad thing?
Protecting or shielding businesses from foreign competition gives such firms excuses to avoid innovations, or engage in price gouging. Detroit sure employed a lot more people 40 years ago, but do we really mourn the horrendous quality of that time? Yes, it was painful for the workers involved, but then through extensive welfare and unemployment, we have subsidized people staying put in places like Flint, or Wheeling, or Detroit for decades after the work left those regions. Isn’t that long term dependency itself a great harm?
Look at another massive US industry: Cotton Farming
We protect and subsidize the heck out of cotton farmers. Many of the trade barriers to selling US cotton abroad are a response to these massive payouts. Moreover, we grow cotton even where you wouldn’t normally grow cotton, producing far more than we would under normal circumstances.
We drop the subsidies and price protections, and engage in actual free trade, and thousands of cotton farmers would be harmed. But millions of Americans would see an easing of their clothing budgets, and millions of acres of unsuitable farmland would come down in price and be redirected towards more productive ends per normal market forces.
This is an important note. Some cotton farmers are hurt initially, but their land is still usable for other farming. The transition is not pleasant I’m sure, but will happen.
There’s a difference between “withdrawing help” and “causing harm”.
When a parent stops supporting a child financially, is that the same as the parent harming the child?
If they are four, yes. If they are eighteen, no. Get a job. Get a real job.
I agree. We are not starting from some natural state of man where barriers don’t already exist. They do. We build them. They build them. We then negotiate agreements to take them down (mostly in part), for specific products, with maybe quotas. It’s hardly free. It is, however, Freer Trade.
Is the answer here that the government should negotiate agreements that get rid of barriers that protect American workers because those barriers should not have been created in the first place? Maybe that’s it. In that case, it’s more like pulling back welfare than it is picking winners and losers.
But then to Trump’s point – what if we are pulling down those barriers, getting something in return from China, and then they manipulate their currency to recoup what they just gave away?
The other thing to consider is the bizarre and often unexpected market distortions that come with tariffs. Due to fears of Japanese minivans, we have (still) a high tariff on imported minivans. This goes back to (I think) the early 90s. Didn’t save the Detroit firms from losing market share at all – Toyota and Honda pulled 2 tricks anyway. First, they went upscale. Can’t beat ’em on price, get ’em on quality and features. Then, when people were used to paying more for those brands, they built factories here in the US. My wife’s van was made in Indiana. Toyota, by the way, never dropped their premium prices. Toyota is now benefitting from the very tariff that was designed specifically to keep them out.