The "Fair" Trade Delusion vs. Free Trade and Economic Growth
In the sprawling field of international relations, few debates are as persistent and acrimonious as the one between the advocates of "free trade" and "fair trade." The fair trade position takes the view that a wide range of tariffs, duties, and other conditions may be used to restrict the flow of goods and services across national or state boundaries.
The free trade position, which I heartily endorse--I explain why here--holds that national trade policy should allow goods and services to move fluidly across national borders—just as if those borders did not exist. One way to achieve this end is to sign bilateral free trade accords with other nations, with an eye to reducing tariff barriers and other impediments to the free flow of goods and services.
Right now, the United States has three pending free trade agreements with South Korea, Colombia, and Panama. Signing them just as they are will expand growth and lead to more opportunities for all parties. Although the economics of free trade are straightforward, its politics are not.
Last week, that sometime friend of free trade, President Barack Obama, announced that he would not submit any of these three free trade agreements to Congress unless and until Congress decided to reauthorize and extend the Trade Adjustment Assistance ("TAA") program that offers a rich package of financial benefits to various workers whose jobs are lost as a result of imported goods and services.
But that compromise will ultimately strangle free trade, as I explain in my weekly column for Defining Ideas.
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Dec '10
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
From your piece you say "Losing jobs in competitive markets usually leads to overall improvements in output from the more efficient deployment of resources." It seems you are implying that marginally cheaper imports in our domestic economy, in the aggregate, outweigh the 'price' of lost jobs. Do I understand correctly? And, if so, could you provide a citation?
Also, a trade deficit equals debt. If we consume more than we produce we are either working for others overseas, or selling assets produced by our forebears for the pleasure of current consumption. We all agree that debt is a serious problem for the nation right now. Our trade debt and national debt are pretty much the same thing, right? Others buy our treasuries with our own dollars.
Given this, what is it about our trade figures over the last few generations that makes you so sanguine that unfettered international free trade is good for the average American? Germany and South Korea, for example, do not subscribe to that ideology, and they seem to be doing great. (Well, Germany would be doing better were it not for the EU, but that's another conversation.)
Apr '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
KarlUB
Do I understand you to believe that it's not good for everyone that Walmart or Costco are free for me to shop at regardless what my income is. I don't profess any economic acumen so I will leave Richard to a proper rebuttal.
Mar '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
When thinking of "Fair Trade" I always think of how my inlaws will pay double the market price for coffee if it is labeled "Fair Trade". I'm always suspect of anything under the guise of "Fair Trade" because it always seems to me to be just an excuse for jacking prices, or engaging in protectionism or both.
We have "fair trade" rules already in place in this country protecting the sugar cartels from cheap foreign imports. Thus "fair trade" in that sense means that the cartels have priced sugar at TWICE the foreign price. Not fair in any way to us. The perversion this has caused has been immense. Americans have a high demand for sweeteners, and sugar is normally cheaper and healthier than the alternatives (including artificals - I'm a diabetic and let me tell you that nutrasweet, splenda, et. al. are really really bad for diabetics, worse than actual sugar).
We jack sugar prices in "fairness", so the food industry has gone to corn syrup, which is very unhealthy as it is not metabolized the same as sugar (and is NOT chemically the same, no matter what the corn lobby says).
"Fair trade" ain't so fair.
Dec '10
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
SD Spicer: KarlUB
Do I understand you to believe that it's not good for everyone that Walmart or Costco are free for me to shop at regardless what my income is. I don't profess any economic acumen so I will leave Richard to a proper rebuttal. · May 25 at 10:45am
I would be interested to learn if there is any academic literature that suggests the domestic economic benefit of lower prices at these places outweighs the domestic economic burden of jobs lost to the competition. It is my suspicion this assertion is merely an article of faith amongst free traders rather than something that has been proven. But, like I said: This is a suspicion, not an assertion. That's why I'm askin'!
And even in your specific example, the free trade downsides about which I worry probably matter most only in certain verticals: Appliances, electronics, that sort of thing. Not so much cheap sneakers and plastic toys.
Apr '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
Germany is pretty keen on trade. Opinion polls tend to suggest that it is amongst the world's keenest. Its biggest trading partners are its neighbors, with whom it has worked hard to eliminate tariffs; the single currency was partly designed to free up trade, after most of the easier border problems had been eliminated. I agree that the EU's legislation and single currency have been disasters for German, but the customs union has been pretty good. Also, through the EU, Germany has FTAs with many other countries (although they tend to call them Economic Partnership Agreements (EPAs), 'cause, you know, they're not American ;-)).
South Korea was not always so liberal, but has improved. See, for example, the FTA with the US that you've just read about in this article!
Jun '10
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
KarlUB, yours is a variant of the Luddite argument. Luddites, as you may recall were textile artisans that protested and destroyed looms and sewing machines on the false notion that that automation would result in job losses.
If you consider history since the start of the Industrial Revolution, the only conclusion you can come to is that productivity increases have continued to lower prices and increase wages. This paradoxical achievement was made possible by an inexorable and merciless attack on inefficient producers. Along the way workers employed by these inefficient producers lost jobs only to find new jobs at more efficient firms. The clothes you wear on your back are testament to this reality; for despite a much reduced American garment industry, you still dress in the height of fashion.
These historical productivity gains were always achieved through the addition of capital, which is to say at the expense of labour (read jobs). The goal of every market must be the provision of goods to consumers at the lowest possible price that is commensurate with the highest quality attainable at the market price. Anything less wastes resources, or, if you will, burns your money.
Apr '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
KarlUB
I would be interested to learn if there is any academic literature that suggests the domestic economic benefit of lower prices at these places outweighs the domestic economic burden of jobs lost to the competition. It is my suspicion this assertion is merely an article of faith amongst free traders rather than something that has been proven. But, like I said: This is a suspicion, not an assertion. That's why I'm askin'!
And even in your specific example, the free trade downsides about which I worry probably matter most only in certain verticals: Appliances, electronics, that sort of thing. Not so much cheap sneakers and plastic toys. · May 25 at 11:00am
If you want to learn about economics, I would start with the bestselling college textbook on the subject, Greg Mankiw's Principles of Economics. Unlike books by, say, Friedman and Bhagwati (both have books answering your question, Bhagwati better than Friedman), Mankiw is not selling a position on things so much as summarising the state of play. As such, he is used by liberals despite his own fiscal conservatism (I don't know his social views). He'll be useful for other questions, too.
Mar '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
Cas,
There is actually a counterpoint to your argument, which was raised in The Great Stagnation by Tyler Cowen.
The argument summarized is this: The rate of productivity gains seen during the industrial revolution is no longer sustainable, due in part to the high marginal costs of modern productivity gains. It's costing more and more to come up with devices to reduce workloads or improve life. Aside from the computer, we've seen few fundamental changes in home life since the 1950's, though the 1950's were radically different from the 1900's. We drive cars, have refrigerators, have air conditioning, washers, and dryers, same as the 50's. They're better quality, but otherwise the same devices.
Also, those gains, while beneficial to producers, don't seem to pay off in large numbers of jobs as they once did. A good example of this is the tech industry - how many people does it take to make Ipods? I think the figure is about 6000 worldwide. The tech revolution soaked up jobs lost during the latter industrial revolution, which soaked up the jobs lost during the agricultural revolution - what's taking up the slack jobs from gains today?
Dec '10
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
If you consider history since the start of the Industrial Revolution, the only conclusion you can come to is that productivity increases have continued to lower prices and increase wages.....
...The goal of every market must be the provision of goods to consumers at the lowest possible price that is commensurate with the highest quality attainable at the market price. Anything less wastes resources, or, if you will, burns your money. · May 25 at 11:32am
You are talking about market efficiency. So if your assertion is that efficient markets tend to fulfill the desires of particular consumers in particular places, I don't imagine I have much of a beef.
Yet, nevertheless, this does not guarantee economic health for a particular nation in the long term. England and Portugal, for example, had very similar economies prior to Adam Smith. How did free trade work out for Portugal since then? And how do we explain that fairly protectionist countries have built dominating economies in the long term? England and America through the 19th century. Japan, South Korea, and Germany in the 20th century. China in the 21st...
Dec '10
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
James Of England
Germany is pretty keen on trade...South Korea was not always so liberal, but has improved.
And yet I think most economists would agree that both of these countries still maintain formal and informal barriers protecting domestic production that we do not consider.
Mar '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
James Of England
If you want to learn about economics, I would start with the bestselling college textbook on the subject, Greg Mankiw's Principles of Economics. Unlike books by, say, Friedman and Bhagwati (both have books answering your question, Bhagwati better than Friedman), Mankiw is not selling a position on things so much as summarising the state of play. As such, he is used by liberals despite his own fiscal conservatism (I don't know his social views). He'll be useful for other questions, too. · May 25 at 11:54am
I'd actually recommend Thomas Sowell's Basic Economics. Also his book on economic myths. Both well written for non-economists.
Mar '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
KarlUB
James Of England
Germany is pretty keen on trade...South Korea was not always so liberal, but has improved.
And yet I think most economists would agree that both of these countries still maintain formal and informal barriers protecting domestic production that we do not consider. · May 25 at 12:06pm
Germany's informal barrier is the German People themselves. They're savers, not spenders.
Actually Germany is always a dodgy example (as are the other big EU players) because the government implicitly and explicitly backs the major companies. Basically the gov't there has major ownership stakes in much of the economy - rather like China. They have a national policy to export a bunch and import very little. Not as blatant as China, but there nonetheless. But such protectionism always leads to labor market calcification. The people expect the government to save them and care for them. Their union problems, like those in France, are infinitely worse than ours.
Protectionism saves jobs in the short term at the expense of economic liberty over the long term, and just ends up protecting the lazy. I'd hate to try and start a company in Germany.
Edited on May 25, 2011 at 12:19pmMar '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
The problem the U.S. has is that we can go through, say, 100 million dollars worth of Chinese-manufactured shirts in a month. But, even though the Chinese people outnumber us 4 to 1, it is going to take them a lot longer to go through 100 million dollars of anything produced in the U.S. because they are so much poorer. It may take them 6 months. So, in those other five months, what are we supposed to do? Suspend all trading? Force them to trade? Go without shirts? We could set up our own manufacturing but the cost of the shirts would be several times higher and they would probably not be sold. The effects of domestic manufacturing would be much greater than KarlUB states in this case.
Trade is not just about dollars; it is a function of consumption as well. We are richer so we consume more. They are poorer so they consume less. Thus, they can only buy so much of what we make. But, we can probably buy everything that they make. Tariffs are only going to make it worse for us because our products are already expensive to them.
Feb '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
I live in Michigan. Excuse me, but I'll believe my eyes on the subject of free trade. As for Mankiw the last I heard of him he was advocating the government print dollars that would expire. Perhaps his theorizing suggested this was a fine idea, but in practice it would have a disaster for this country. Just like free trade.
Mar '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
The UAW has ruined Michigan's ability to compete in manufacturing, which is why domestic auto production has moved elsewhere. Toyota, Honda, BMW, all moved into non-UAW states where they produce higher quality vehicles than are made in Michigan. Michigan's manufacturing base has been lost due to free trade WITHIN THE 50 STATES, not just to foreign free trade. The UAW drove Michigan into the ground by trying protectionism of its own labor interests, but with the 50 states trading freely with each other that industry moved out to where it could get access to motivated non-UAW labor.
The US makes more cars than ever, just not in Michigan.
Dec '10
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
GOVICIDE:
Trade is not just about dollars; it is a function of consumption as well. We are richer so we consume more. They are poorer so they consume less. Thus, they can only buy so much of what we make. But, we can probably buy everything that they make.
And even so, we manage to consume billions and billions of dollars more every year than we produce despite our allegedly spectacular wealth and productivity. At the same time China, as a nation, continues to loan us back our own money at interest so we can continue giving it to exporter nations-- including the Chinese, again-- which will then get loaned back to us again, at more interest, ad nauseum.
Is this not the type of domestic activity we deplore from our government? Why, then, do we promote such a model with our trade and industrial policy? And the Germans are savers, which was noted. We are not. Why? Whether it is because our economy is hollow, we are spendthrifts, or both, shouldn't our economic and trade policy as a nation work to mitigate this rather than assuming it as a state of nature?
Mar '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
I read, and I wish I could remember where, that there is a correlation (not a proven causation mind you), between our government deficits and our national trade deficits.
The link is that our government basically floods us with more money than we would otherwise have, thus enabling us to buy more. Our government also encourages us to take on debt and never pay it off. This is a problem requiring generations to fix and a political and media leadership that encourages personal responsibility. I doubt anyone would have the will to fix this.
Austerity measures are a start, but only major financial train wreck will change people's thinking, and then only if our government has the brass to tell people to grow up. No more bailouts, no more debt forgiveness, no more corruption.
Pipe dream really.
Protectionism feels good, though, because in the short term it will work, but in the long term it is ruin.
Dec '10
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
skipsul
Protectionism feels good, though, because in the short term it will work, but in the long term it is ruin.
Heh. Get back to me in a month or two. I'm doing some reading.
I suspect there are a lot subtly protectionist things we can do that can provide some cover to domestic production in high margin, high value-added verticals while not crippling trade. I'm not quite there yet, though...
Be interested to hear what other people think. But was it you that mentioned Tyler Cowen? Him and the crowd at Seeking Alpha seem to be somewhat receptive to the sort of thing towards which I'm fumbling, and nobody would mistake them for AFL-CIO bootlickers.
Sep '10
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
KarlUB
James Of England
Germany is pretty keen on trade...South Korea was not always so liberal, but has improved.
And yet I think most economists would agree that both of these countries still maintain formal and informal barriers protecting domestic production that we do not consider. · May 25 at 12:06pm
What, specifically, do you propose?
Being a non economist type, my biggest concern with "fair trade" is that it sounds nice in general, but the specifics are left to politicans.
Look up and down the rows of the House and Senate. Look at the White House. Do you want those people picking winners and losers?
Mar '11
Re: The "Fair" Trade Delusion vs. Free Trade and Economic Growth
That's always the ultimate problem of protectionism - politicians and lobbyists decide who gets protected and how.
The thing for me is that there actually is a rational argument for limited protectionism under certain circumstances - for instance when a country's government is subsidizing industries or products. You could argue that some barriers against China would be good both from a currency manipulation basis, and from the way China has direct ownership stakes in most of the economy. Gov't ownership is taken as an implicit guarantee of the company (too big to fail writ large), so Chinese companies can be more aggressive than if they actually had to worry about bankruptcy, thus giving them an unfair advantage.
It's like the Fannie / Freddie mess. Their implicit guarantees by the US taxpayerthat they could be far more ruthless and reckless when competing for loan business, driving out and destroying the small banks who used to sell mortgages.