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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
How does the Free Market and Free Trade manage the fact that a government says to a company “Sell you product at this price, or we will build a factory and sell it here and you get nothing?”
I look forward to your answer.
And for the people killed in the process, oh well?
Was there a blowback from that? There are fierce legal and economic ramifications when this sort of thing happens. It’s nobody’s business model to get away with something once and then bolt – with the exception of actual criminals. When there are data-breaches, what do you see? You see companies apologizing profusely, but also attempting to earn back that trust. Bank of America and Chase (both of which I use) have both been in this situation. They spend massive amounts of money attempting to avoid those situations and to make amends when those problems occur. And what else do you see? You see competitors advertising based on consumer fears – “we are the most secure data company ever!”
Again – literally nobody here is arguing that bad actors don’t exist, or that mistakes don’t happen. What we’re arguing is that the most effective way to avoid and remedy these problems is through free market forces (and, in the US, consistent laws). You can always find flaws in virtually any system, because no system is perfect. The economic philosophy of Smith, Hayek, et.al. does not say that problems won’t happen, it says that the free market is the most effective and efficient manner of transferring valuable information, and that individuals and firms are the best equipped to use that information in the best manner.
I don’t quite understand the dilemma. That’s what the free market does. That’s what prices are. Nobody needs to tell you to sell at a particular price; you sell at whatever price will be profitable to you. If you are wanting to sell X in my city, and I am capable of building a factory that will produce X for a lower price, I don’t have to tell you to lower your price, you’d have to do that to compete. If you can’t, then you don’t sell your product. If a government wishes to tax its citizens in order to build a factory and produce a product locally, then more power to that government. Why do I care if it does that?
Of course, it is extremely unlikely that any government would do that, unless it has some sort of advantage which allows it to produce the product at less than someone else is willing to sell it to them. And if it does have that advantage, it would be foolish to buy higher-priced goods.
So what’s the problem?
Who is forcing people to buy microchips from another nation?
Who are all of these people getting killed? How exactly are people getting “killed in the process” when some company has its IP stolen and then ceases to do business? AND – in order for the government to effectively regulate that, it must necessarily have some information or knowledge that is otherwise unavailable to those companies. The government doesn’t need to say “don’t do business because X is a cheat.” If the government knows X is a cheat, than so do whatever companies who might otherwise do business with X, and if they don’t want to take the risk, they won’t do business.
What does that have anything to do with people getting killed?
Is there a problem of someone being forced to buy microchips from a nation that uses its companies as a weapon? Two questions arise from this assumption:
If people are being forced to purchase goods (hmm… Obamacare?), then that is a problem. But it’s not a “free market” problem.
Fairly certain that fraudulent transactions aren’t considered voluntary. If you allow fraud most of the logic of free markets becomes suspect. Both people benefit from the transaction as long as neither are lying, in which case one or both of them could lose. But you’re saying it’s criminal activity, which means it isn’t a free market anymore since there are government restrictions on fraud. I guess I don’t understand your point here.
I get what you’re saying about fraud providing signals to avoid that actor, I just don’t understand what your opening line means at all.
I understand that’s not your area of the law, but that sort of thing is still considered illegal. To quote Mr. Lockett from earlier this page:
Guess that presumes the thing you’re purchasing has an enforceable patent..
Innovation and quality.
Who is being killed?
What sort of blowback? Did people lose their jobs? I don’t know. The U.S. government offered about two years of credit monitoring to all the people affected, for what good that does. Does the government do things more securely now? I doubt it. Are they attempting to earn back trust? Being a monopoly provider of things like military force and the police power tends to mean they don’t have to.
So a true Free Market assumes no patent protection?
If you no longer make them domestically, the market is.
I don’t understand how you get from this dilemma to the policy of giving the government more control over the actions of corporations.
Folks doing business in China. Have the one as a personal account.
Right – I get all of this. I don’t really understand where we are supposed to be disagreeing.
If you engage with a fraudulent actor, you are still doing so voluntarily. A free market means that there are feedback mechanisms to punish these bad actors. Laws do not make a market less free. For instance, contract laws actually help people to contract more freely. They give both parties the confidence of knowing that the contract will be enforced.
We can set up laws like this domestically. Internationally, it’s a bit trickier. I understand the argument that tariffs could act as a sort of punishment. If we catch someone behaving badly, we could say “ok, now we’re going to make it illegal for you to sell your product here!” That sounds good and makes some sense in theory, but that is the whole point of this discussion. In practice, it does not serve the intended purpose, and it does a great amount of harm. Internationally, there are other forces that act as enforcement. I already mentioned reputation – we don’t have to make it illegal to buy a product, consumers will do that themselves. But there is loss of profits when companies behave badly, etc… there are all sorts of incentives. One that I’ve mentioned a few times is the fact that companies will prefer to do business in countries with strong laws.
This is a wonderful case for treaties, which essentially internationalize our laws and make trade more efficient.
Hard to sue someone for infringment when the other nation’s government is doing it.
And what’s to stop people from making microchips here if that is one of the requirements? We’re discussing a very specific and narrow issue: military applications of technology. It seems reasonable for the government to make that a requirement of RFPs for military products. Why does that necessitate raising the price of microchips for all other Americans?
Again – that analogy was your US company stealing IP from a firm that you do business for. That firm is motivated to do business with you precisely because it understands that it can obtain an enforceable patent and that you are subject to US laws.
Where did I say that?
Another government is forcing an American owned company to either sell at a distorted price or said government will steal the IP.
Now explain to me how Free Trade still means that Americans are not being harmed but in fact helped by that.
If you cannot, then admit that Free Trade is not always, in every single situation, the best option.
Again, I don’t understand. You are saying that people go over to China and get murdered? What does that have to do with what I said, above? And how would tariffs solve that issue? Are you suggesting that the US government should make it illegal to do business with China because there is a possibility that you could get killed if you go over there? How does the same not apply literally anywhere else in the world?
I have been talking about they way other governments price fix drugs for pages. How they violate Drug Companies IP. Are you confused because I did not use the word “Patent”?
If a foreign government engages in practices which involve killing American citizens to steal their product then some sort of sanctions are in order. Free Trade does not resolve this issue.
Correct, I suppose? But what’s the point?
If goods are to be sold in the United States, they must be imported. A company has to import that good and then sell it, and that company is virtually always a US company (or has US offices). If you suddenly see a flood of eyePhones on the market, it is very likely that Apple will sue whatever company is selling them. Of course there is a black market for pirated goods, but it’s a black market because those things are already illegal in the US.
Right. That sounds like our own government behaving badly. How exactly do we solve that problem by giving our government more control and more opportunity to behave badly? Isn’t the solution for this problem precisely what we’ve been arguing for?
What on earth does this have to do with someone selling pirate goods of American companies in other nations abetted by those governments?
How are you getting from point A to point B, here? You are saying that some other government is forcing an American owned company to sell at a distorted price or they’ll steal the IP… how exactly does that occur? Do you have examples of this occurring? What does that have anything to do with free trade?
If some other government – let’s just stipulate your position, which frankly I don’t understand how we would do that – is literally forcing companies to sell at certain prices in their countries, than I agree that what you have in that country is not the free market. We would all be better off if the free market existed everywhere. But how do you get from there to suggesting that the solution is to make our own markets less free?
If it is not profitable for company X to sell its product in that country, that company will leave. The only reason they’d sell at a higher price is because they want to, because they can still make a profit.
Let me give your scenario the best possible interpretation. You are saying that Apple goes into China and sells its product. China builds the eyephone and says “sell your iphones cheaper or we’ll start selling eyephones.” Right? So, the US says to China “we’ll put a tariff on Chinese goods because you did this!” And then China will stop making eyephones? Am I getting that basically right?
The logic of the market.
Another example; nearly every desktop on the planet has a hard disk drive in it. (The others have solid state drives). How many companies manufacture hard disk drives? Today it’s three. Western Digital, Seagate, and Toshiba. To connect the disk to the outside world there’s a little armature in there. How many companies manufacture that armature? Two. MPT and NHK (can’t tell you what those acronyms stand for.) The wires on that armature (called a “suspension”, by the way) are on a little bit of metal and plastic called a flexure. How many companies in the world manufacture flexures? Two; Hutchinson Technology (right here in Eau Claire WI) and Nitto-Denko (in Japan).
Two companies build flexures, which are a critical component in suspensions built by two companies, which are critical components in hard disk drives built by three companies, which are found in nearly every desktop, laptop and server in the world.
Note, by the way, that MPT and NHK are both foreign companies. How come there isn’t an American manufacturer of suspensions? There was; Hutchinson Technology used to manufacture suspensions ourselves (in a plant in Thailand, mind you). We weren’t making enough money to survive on. We got bought out by TDK (a Japanese concern), and they split off our assembly division and merged it with MPT, who was already their subsidiary.
The logic of the market moved to the cheapest producer, which happened to be overseas. You can’t buy an American suspension now, even if you wanted to.
You seem to be suggesting that we should use tariffs to discourage the selling of pirated goods. But we can’t put tariffs on pirated goods, because it is already illegal to sell them here. In that sense, the only impact our government can have, through tariffs, is on our domestic market. However, if foreigners wish to do business in our domestic market, they are subject to our laws. That’s why you don’t see pirated goods in US markets.
If they are selling them in other nations, then us taxing US citizens on domestic goods does not have any impact on that.