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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.
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Or anything else, it seems. Epidemic on both sides of the aisle.
You have claimed that there is virtually-key word, there, virtually-no scenario where we are cut off entirely from resources……making a claim is not really the same thing as pointing something out.
Do you have any idea what is involved in getting a steel mill up and running and fully staffed with qualified people? Not to mention an iron ore mill? Do you have any concept of what it would take to do something like that in a country where such production hadn’t been done in 50 or 100 years?
I was referring back to my comments #120 and #145, but I will elaborate.
Through the importation process, I buy a “Bernie Sanders Action Figure” from China that costs $100.00. This price was agreed upon by both the Chinese seller and the U.S. buyer. Now the Chinese factory owner has a piece of paper with Ben Franklin’s face on it, and I have my lovable Bernie. Consequently, the Chinese guy cogitates over what he can do with the C-note and discovers that he and his workers have just gotten up early every morning last week to slave away at perfecting a socialist icon doll in exchange for a worthless piece of paper.
Next, the Chinaman figures out that the only way he can get something in return is to buy something from America. Not from Russia, nor Germany, nor Bora Bora, but from America. It is the only place in the World that will exchange his worthless piece of paper for an actual good or service.
But then the Chinaman hears that his friends are buying things from Bora Bora with this green piece of paper because they will honor U.S. currency. But it is only because someone in Bora Bora will eventually exchange the greenback for something in America. Or else the Bora Boran will buy something from Hamburg, whereupon the Hamburger will buy something in America for a hundred bucks.
Either way, that one-hundred dollars eventually makes its way back home to the good ole U.S.A. or else somebody gets stuck holding a worthless piece of paper. If, for some reason it doesn’t find its way back home, then America is one-hundred dollars richer because it now has a Bernie Action Figure worth a hundred bucks, and did not have to give anything in return except for that paper.
I hope I didn’t sound too silly, but I can’t help myself. My point is that all trades between countries are even value exchanges. When they talk about an imbalance, it is only an imbalance of the types of things that are exchanged. This is an absolute necessity for trading. If we all had the exact same things to trade with each other, then there would be no point to it. It costs money to ship this stuff around the World.
Specifically, the most common thing referred to as “a trade imbalance” is when we buy tons of doo-dads from China and in return they buy lots of financial assets from us. The value is the same, but economists choose to count only the doo-dads. I don’t know why.
They don’t and I did not say they did. I used several examples and have talked about more than one thing. In no way have I said they are all the same thing.
Mike H argued exactly that.
Everything I have been taught by Free Traders is that increased supply reduces prices, and trade restrictions increase them. Here, you are telling me removing trade restrictions will increase prices across the board.It sounds like you say Americans are stuck footing the bill for development, while the rest of the world is a free rider, and free trade does not address this problem at all, other than to force them to be less of a free rider.
The problem that I see with your math is that if the Drug company won’t sell at $6, the other nation will just make it locally, and then the Drug Company gets nothing at all. That is how it works. If Re-importation was allowed, Americans could just buy the stuff being built on the stolen IP at $6 + shipping and still undercut the price of the Drug Company locally.
We cannot be. We grow our own food as we own a continent, and we are a net food exporter. Food, Production, and Energy are the key pillars of power. The world’s greatest power should be self supporting in all three. Thanks to Trump, we are moving fast on the 3rd. We easily can retool on the 2nd, and have always been there on the first.
I am pretty sure there are actually people afraid of homosexuals
Well said!
Calling others ignorant is not the way to win the argument. It is rude.
I appreciate the people who have not been rude. I have learned quite a bit so far.
Are you actually interested in having your opinion changed on this issue? You said so, but your comments in this thread indicate otherwise. If you are interested then I suggest you read I, Pencil.
Or any Hayek, especially his Nobel speech.
I find this whole discussion frustrating in that we have to fight the anti market wars beginning at zero in every generation. It used to be just with progressives and unions, now it’s even with our own people. Part of the problem is the cavalier way so many economists dismiss the impact of an accumulation of bad policy, from regulations, the role of the dollar, government overspending, and the arrogance of post war corporate management and their unions who had monopolies for decades that allowed them to misinterpret their success and get fat and sloppy. Then along comes Japan then China who developed different trade strategies we’ve had difficulty understanding and dealing with.
A risk has to be insurable for insurance on it to make sense. Insurable risks are unlikely (else they’d just be the normal state of things) but they still happen predictably-enough in this big world of ours for us to gather data on them. So-called black-swan events are hard enough to make insurable, but a neon-pink-swan event, where the worst imaginable happens, with no other data on it than we can imagine it being the worst thing imaginable, is uninsurable. Ryan is right about that.
How would we estimate the right price of insurance on a neon-pink-swan event? We wouldn’t. No price would be too high, and no price would be too low, either. The spread in possible prices to compensate for the risk would not be bounded:
“Risk is insurable when the risk is calculable, so an insurable risk is one in which there is either data which feeds statistics, or a known quantity that feeds probability. If a river floods 853 times in a millennium, that flood is an insurable risk. However, you can’t insure against a person’s business failing or a marriage failing. With so many factors, there’s no way an actuary could reasonably calculate anything meaningful. That’s the essence of uninsurable risk.”
Read more: Uninsurable Risk https://www.investopedia.com/terms/u/uninsurable-risk.asp#ixzz5Mq5fCT00
Where on earth have you been taught that trade restrictions increase supply?!
It is exceedingly discouraging to hear trade arguments that hinge on misunderstandings of basic economics, when the conservative tradition is rich with amazingly insightful intellectual history. How many of us have read “The Wealth of Nations?” Or Milton Friedman, or Frederick Hayek? I am less disappointed that people on Ricochet (who at least are somewhat willing to engage in conversation) have not taken advantage of these resources, and more disappointed in the ignorance of our president, and others’ willingness to take his word as gospel truth. For all the good that Trump has done for conservatives, he is economically illiterate, and that is a problem when we view the president through such an uncritical lens.
There is a very short book on the subject of the global economy, called “Globalization” by Don Boudreaux. I’ve linked to it many times. It discusses “globalization” in the sense of a global economy (as in I, Pencil) not in the liberal sense of a global culture. One thing it explains is how nonsensical this idea of trade deficit actually is – but it also does a very good job of explaining the sheer interdependence of the global economy. You want an insurance policy? Perhaps the absolute best insurance policy ever created is the one where nations rely on one another for trade. Having an understanding of how trade actually works is crucial – the more economically isolationist we become, the more we achieve the exact opposite of our stated goals, creating a situation where we actually reduce the cost of conflict for hostile nations.
A very easy introduction to Boudreaux is available through EconTalk, which is one of the best examples of the richness of conservative intellectualism we have, today.
I second this having purchased it upon Ryan’s recommendation.
I see that I misread what you were saying; you said that trade restrictions increase price, and that is correct. I’ll go back and read the comment to see what you are referring to with someone saying that removing trade restrictions will increase prices.
I think it would be more accurate to say that trade restrictions create artificial prices. Eliminating restrictions will allow prices based on actual market signals, which is necessary for the most efficient allocation of resources.
Actually, I think he’s complaining about Price Equilibrium.
Maybe the status quo?
We say that we have “free trade”. This is based on bilateral and multilateral trade deals that are thousands of pages long, full of technical details out lining the trade restrictions and tariffs that will be applied between the countries. Every trade deal we have is protectionism. It is just less protectionism than might exist without the trade deal. We call this reduction Free Trade but it isn’t
Since we don’t have actual free trade with any nation on earth, all of this discussion of trade is simply changing the existing terms of the protectionist policies that already exist.
If we can’t get to true free trade, trying to get a “better deal” seams reasonable. The EU wants the best deal they can get for their people and we want the best deal we can get.
The carrot and the stick is a pretty old negotiating tactic. Come to the table with a proposal to reduce tariffs and restrictions in both countries, or we will raise our tariffs.
Right. But it is useful to know why that is a good thing.
As Milton says in the video we saw a few pages ago…
Actually, let’s put the whole thing another way. Let’s say you want to give yourself a comparative advantage. We do this every day. I gave myself a comparative advantage by going to law school. Then, further, by specializing in a particular field. Slowly, I’ve furthered it even more by gaining experience. That’s just called specialization, and it’s how we get expertise and innovation. There are illegal ways to gain comparative advantage (hell, this is essentially what unions do!), but that virtually always involves force (sometimes through government action and protectionism). We see this with taxi drivers in New York, and you see a ton of it in the EU with restrictions on production (certain wines and cheeses being good examples).
China and Japan (as referenced by Friedman) might attempt to increase their comparative advantage by taxing their own citizens. As Friedman says, it is highly dubious that this actually occurs, but let’s say that it does… Every increase in comparative advantage comes at a cost. My student loans are testament to that. If a foreign country taxes its citizens to gain comparative advantage, they are paying that cost and we benefit from it. It remains to be seen why they would want to do this. More likely, they actually have advantages, in cheap human capital or whatever else (speaking of which, the best way for us to combat that would be to eliminate or greatly reduce welfare, as was pointed out above). It is actually a testament to the strength of the United States that we quickly re-allocate our capital into other areas. We are exceedingly good at finding and exploiting (in a good way) market needs. But, it’s that whole “seen vs. unseen” thing. The auto industry suffers (unions, anyone?) or the steel industry suffers. But that’s the beauty of the market – perhaps we do need to find ways to absorb workers who lack mobility, but industries? No, industries adapt. The elimination of one doesn’t create a hole, it creates a surplus in labor, capital, etc…, and the US economy is especially good at re-allocating and re-investing.
The only way this can happen efficiently is to have accurate market signals, accurate prices. It doesn’t matter how artificial these signals are abroad (except with respect to the global economy, which would clearly be much better without interference), they exist as realities within our own economy. Virtually everything we do to create artificial signals (protectionism, welfare, unions) results in an inefficiency, and we will always pay the cost of that.
It is tempting to suggest that we can pass that cost onto, say, China – but it doesn’t work like that.
So because trade isn’t perfectly free it should, therefore, be less free than it is? The problem with the current administrations, and by the transitive property of politics “conservatives”, position on trade is that they assume its zero-sum. That there are winners and losers. It’s just a fundamental misunderstanding of how trade works. When trade occurs there are no losers, only winners. Trade is made of win.
A nation’s economy does not consist of a blob of benign, purposeless, and isolated interactions. Instead, it closely resembles an ecosystem in the natural world wherein every event or action affects several others nearby.
There is no single event (or change) such as trade between nations that can be evaluated usefully by itself. When we look at trade between nations, we have to look at the effects of increasing or decreasing the prevailing levels of trade on the other factors within the economy.
Government fails spectacularly all the time because it fails to take a 360-degree view of its policies and actions. For example, we raise the minimum wage and increase OSHA regulations, add pension and healthcare burdens to employers for every employee they take on, and then we wonder why unemployment has gone up.
We need to have overarching goals for our actions. General principles such as “free trade is good for us” don’t always hold true in real life. The reason is that human beings are adaptable, and they are always trying to position themselves to their best advantage.
That’s why trade agreements need to be flexible and carry expiration dates–to discourage our being taken advantage of. Our own government needs to review them within the framework of what is best for the citizens of the United States at this moment. Free trade–that is, trade without tariffs–between nations is neither good nor bad in and of itself. It’s a tool, and we should use it to further our own interests, always keeping in mind that what is advantageous for us one minute may not be the next.
The problem with long and complicated agreements like NAFTA is that they are hard to get back into when they need to be adjusted. If trade agreements stay unchanged for too long, people start to take advantage of them. Milking the agreements becomes a way of life after a while. The politicians in the countries involved in these agreements want very much to herald these tomes as their great achievements, but what’s good for them and their careers may be harmful to others.
We need myriad agreements that can be changed as needed easily. And we need to keep a watchful eye on changes in the assumptions underlying the agreements.
Whether we agree with Donald Trump’s aversion to our standing trade agreements, I’m grateful that they are being revisited.
Who decides whether the risk is black swan, neon pink, or realistic? @ryanm has already stated in this thread that he doesn’t think the technology gap played much of a role in our winning WWII, therefore, he sees no problem with us giving technology away to China. Do you agree with him about that?
Actuaries. Underwriters. Insurance is a heavily-regulated industry, and the regulation creates its own problems, but insurers do have some idea of what they’re doing.
The government can and does hire professional insurers, too. But of course that takes politicians willing to listen, who tend to be more like your pencil-necked Paul Ryan type than charismatic fire-breathers.
In any event, our national defense is probably not so historically incompetent as to have failed to consider what’s just a black swan and what’s a neon pink one. They may have political incentives working against giving straightforward answers, but that doesn’t mean elected officials playing to the crowd with sensationalized fears have better political incentives to get it right.
whoa – back up a little bit, there. Let us revisit this argument in chronological order.
It was expressed that we ought not import technology from foreign countries because we don’t want them knowing how our stuff works. I pointed out that if some foreign country has gotten itself to a point where it is exporting a particular technological good, it very likely understands full well how that particular good works.
You have to stick to the initial fear being expressed. I did not say that the atomic bomb was not a difference-maker with respect to Japan. Obviously, it was. But the atomic bomb is not something that was created in the private sector, either, nor is it the sort of thing that we would be importing, and even if we did wish to import it, we would only be importing it from someone who could make it more reliably and at a cheaper cost than we could. In this instance, that person already has the knowledge of how to make it, correct?
Do you think that the axis powers lost the war because they lacked our technology? You could certainly argue that innovation in the United States plays a pretty big role in our ability to be militarily dominant – but in doing so, you’re making my point. When we import goods that some other country (say, China) can make more efficiently, we free up our economy for innovation. It enriches us directly, but it also enriches us by allowing us to pursue new and innovative fields.
Where on earth did you hear me say that we ought to “give away” technology to China or to anyone else?
It has been repeatedly pointed out by me and others on this thread that most of the technology China has was either stolen from us or given by us: you seem to be totally unconcerned about this. You keep saying that China already has the technology, but you completely ignore how they acquired the technology.
As for importing an A Bomb from another country, good luck convincing people in any country that is a good idea. You probably think most people are too paranoid, most people would probably think that you are far too trusting :)
That whole “China steals our intellectual property” thing not sinking in? One of the unfair trade practices that we’re trying to get china to stop is the blatant thievery of our intellectual property.
The accusation is:
Apple wants to build a new iPhone.
Apple manufactures it’s microchips in China
China uses that manufactury to learn how Apple builds it’s chips
China can now build the exact same chips
The paradigm is extremely stupid when applied to military hardware. “Please! Please spy on us!” I’d call it far fetched except that apparently it’s happened already. Thanks Mr. Clinton.
I think what you’re arguing is
The U.S. Army wants a new shipment of trench shovels. They order them from China.
China steals our shovel making technology.
It’s a freaking shovel. Whoop-ti-do. China learns nothing.
That scenario is much less troubling.
That is Friedman’s point about the seen vs. the unseen. It might be argued that innovation creates losers, so to speak. But this is very short sighted. Uber and Lyft have created losers out of the taxi cab system, but who are the winners? Consumers of taxi services are big winners. So, on the one hand, we might see a person losing his job. On the other hand, there are a lot of things we do not see. We do not necessarily see the countless people saving money on taxi services, getting where they need to be easier and faster, freeing up time and money to be spent elsewhere. We don’t see all the gains that happen down the line. We also don’t hear about the new jobs done by former taxi drivers (heck, maybe they just start driving Uber). With protectionism, we see the employed taxi driver (look at New York, Seattle, London, other places that have sued Uber). All of that unseen stuff disappears, but because it was unseen doesn’t mean it didn’t exist.
When we pretend that economics is zero-sum, we are ignoring the organic nature of economics. We are ignoring the unseen. This is, perhaps, the allure of government control and a “directed” economy. We create a monster, but it is a visible one…
There’s a serious risk that we will one day realize that animal suffering has moral worth and by eating them you are contributing to an evil many times over that of the Holocaust because of the billions of animals that are slaughtered every year. Their moral worth could be very small and still be overwhelmed by the numbers.
If it turns out they don’t have moral worth or it is so microscopic as to not matter, then all you do by becoming vegan is give up momentary pleasures of some foods you like.
Are you willing to make the bet by giving up animal products, just to play it safe?