Missing my point on free trade

Aretae responds to my anti-free trade posts here.

Again, I’m not sure I disagree with anything he says, but I think he misses my point.

By way of background, I’ve ardently pro-free trade for as long as I can remember. List, however, raises two points that I had never previously considered: 1) pro-free traders assume that general wealth maximization is the goal – specifically they are concerned with international benefits – the game changes when you are thinking of a specific country’s welfare (i.e. thinking realistically); and 2) pro-free traders assume that free trade is occurring in free economies.

Additionally, pro-free traders are making some very strong claims. The idea that free trade is always better than any restriction on free trade for any period of time however brief is an incredibly strong statement. Statements this strong are almost always wrong.

Unfortunately, I don’t agree with either of the assumptions and I distrust such strong statements. Nations will be concerned with maximizing their own wealth, not global wealth. I thinking of this is here, not the ought. If every nation was looking out for every other nation, the story might be different, but we’d also being living in a fantasy land. Further, our economies are not free. It’s impossible to measure the costs of free trade, but they must include welfare benefits, job re-training costs, etc. These costs are not borne privately in our economy.

For the record, if I was in charge, trade would be much freer than it is.

There is one additional reason why I’m so intrigued by this issue: mainstream economists holds two absurdly contradictory positions: 1) it’s best for a economy if the money supply is managed by a group of economists; and 2) it’s terrible to manage trade in any manner. Surely, it’s impossible for a rational person to believe both of these positions simultaneously? Unfortunately, these positions are held simultaneously by all mainstream economists. What am I missing? Why is it easier to determine the number of dollars needed in the economy at any given time than to determine how trade should flow across national boundaries?

Anyway, I’d like to respond to some of Aretae’s objections:

1. Alan grows Apples and Betty raises Beef. Since Alan has so darn many apples, and Betty is drowning in cow patties, Alan and Betty will both benefit by trading some apples for some beef. Chuck raises cows, but his cows are far more expensive to raise than Betty’s beef. Free trade says: Let Betty and Alan trade. Alan is better off, and so is Betty. Protectionism says that since Betty lives in Canada, we should prohibit Alan from trading with Betty, and instead make Alan trade with Chuck. In this case, Chuck is better off, Alan is worse off, and Betty is worse off. . . .

All true. Now let’s say that Alan makes guns and Betty makes butter. They’re better off if they trade with each other. Consequently the manufacture of guns moves to Alan’s country. Is Betty’s country really better off if it can’t make its own guns? Really?

2. Who gets protectionist policies? Politically connected folks. Duh. Are there any other choices? Protectionism is a transfer of control from free market decisioning into the political realm. ALL transfers of power from individual decisionmaking into the political realm are (a) net-destructive of liberty, and (b) creating inequality, and (c) generally welfare destroying.

This is the best objection, I think. List (and I) actually agree with this point. List merely argues that for some time during a country’s development, it’s better to have some tariffs to allow domestic manufacturing to have a chance.

3. Blatantly stealing ideas from others: Did you know we have a huge floating factory in the Pacific that takes corn and turns it into cars? The factory happens to be called Japan…so we don’t think about it properly…but it’s really just a factory. Indeed, to an American, foreign trade is EXACTLY, 100% equivalent to a factory or process that does something better than how it is currently done. . . . The only way of distinguishing between a labor-saving device (machine) and foreign trade is by noticing that the other country is also benefiting. Prohibiting foreign trade damages both my country and the other country. My consumers and the other country’s producers lose. My producers win.

Again I’m not sure that I have enough information to agree or disagree with this statement. What happens to US workers that no longer produce cars? How much do we spend on unemployment, welfare, and knock-on effects of having additional families on welfare. I think the only honest answer is "I don’t know." Further problems arise if the country has lots of workers unsuited to the only industries remaining in the country – the Chinese may be able to do things cheaper if we only look at direct costs, but we can’t all be computer programmers. Too often when I read the arguments of pro-free traders, they assume that dis-placed American workers are going to be the next Bill Gates. This is not realistic – variations in cognitive abilities exist and they’re a bitch. Finally, we need to clarify what the goal is. If the goal is higher GDP, free trade may be optimal. But one country with a higher GDP and 12% unemployment that has no chance of dropping lower may not be better off than a country with a slightly lower GDP that is running at full employment. Economics can tell us which policies will result in higher GDP. It can’t tell us what is optimal for society beyond that.

4. Hayek. ’nuff said. Actually, most folks don’t understand Hayek yet. Hayek says, correctly, that the primary problem with government action is that there is high uncertainty, and even an uncorruptible superhuman central planner cannot make decent decisions about which industries will prosper if given protection, and which ones won’t. Indeed, empirical studies, which I’ve linked to in the past, but can’t find now, indicate that Infant Industry protection does not make for competitive industries any better than does no protection. Turns out that central planners suffer from Hayek’s knowledge problem in planning infant industry protection as well.

I’ve read my share of Hayek and I agree that he’s a complicated thinker. Isn’t it just possible that other government programs could create an environment in which free trade was no longer the optimal outcome? Just potentially, slightly possible?


14 Responses to Missing my point on free trade

  1. aretae says:

    Very well said. Addressing your responses:

    I’d claim that the key argument is #3. From the point of view of someone inside the American economy…you can’t tell the difference between a machine that makes cars 30% cheaper (using 30% fewer employees) and sending corn to japan and getting back cars. NO DIFFERENCE. A claim (like List’s) that we should intervene to protect infant industries against foreign trade is 100% applicable to protecting candlemakers against Edison as well.

    Guns and butter? I will admit to national security issues on not being able to produce your own guns. Still hurtful to consumers in the country, but might be that the non-economic concerns trump the economic ones here.

    Hayek says that there may be some cases where free trade wasn’t an optimal outcome, but it’s somewhere between hard and impossible to find which ones those are.

  2. aretae says:

    Now, your up-top claims:

    Consumers are screwed by protectionism. Foreign producers are too. Local producers are the only beneficiaries. Further…the politics of protectionism mean that 9/10 (? 6/10?) times, the foreign country retaliates with similar tariffs, thus driving hurting their consumers and your local producers…thus generating a substantial net loss to each country individually, AND a notable gain to the most politically connected folks in each country.

    2. Free traders are concerned mostly with what is good for the consumer … It doesn’t matter what kind of economy we’re in.

    3. As per a CF comment in my original post…It is also true that direct subsidies are a better idea than trade restrictions for any problem for which you’d use trade restrictions. Only reason to use tariffs is to whip up anti-foreign bias in your own population, or use anti-foreign bias to win political points.

  3. aretae says:

    notification comment

  4. Jehu says:

    Here’s the thing about tariffs. Tariffs hurt the economy. But so do taxes, and tariffs can also be used to raise money for the expenses of the nation. In fact they used to be the overwhelming majority of the US’s taxes. Tariffs require way less auxilliary power than do corporate and individual income taxes and are far less invasive. Remember this: fundamentally, if you’re ‘free trade’, you’re also effectively pro income and corporate tax. My suspicion is that free trade isn’t ‘good enough’ to offset how bad the income tax is. This is probably part of why the US prospered under an effectively merchantilist first century and change.

  5. Jehu says:

    Oh, one last thing: A government that raises most of its money from tariffs also has an actual incentive to CONTROL THE BORDER. Incentives matter.

    • Foseti says:

      Great points. If some trade restrictions radically reduced my tax rate, I’d happily take some trade restrictions.

      • Jehu says:

        The true choice would be not having an income tax at all, while having significant tariffs, on the order of 15% vs having insignificant tariffs and the tax system we have now. If you have an income tax at all, you have most of the compliance costs and enforcement costs of such taxes. An income tax collection system is terribly expensive and terribly invasive.

      • Foseti says:

        If that’s really the choice – and I think some work would need to be done to show that that is the choice – I would love me some significant tariffs.

      • LB says:

        But if free trade leads to a higher GDP, doesn’t that mean an increased tax basis, allowing for lower domestic tax rates?

  6. Jehu says:

    Obviously this didn’t work for the US, for as we’ve lowered our tariffs, our income tax rates have headed upwards (they started at only a couple percent). Also, we grew at a much higher rate in terms of GDP before the days of income taxes. So history isn’t providing data points in favor of your thesis.

    • LB says:

      Jehu- do you think that the reasons for the increase in tax rates was for economic reasons, or because of political reasons? In other words, perhaps the government realized that it could increase taxes without suffering severe political backlash – not because that was optimal for the economy.

      Another thought I have is that the significant expense of administering the complicated tax system may offset the ability to decrease tax rates; that tax rates are not lower because the system has to pay for itself.

      You mentioned that income taxes increased as tariffs decreased – at what period are you saying that tariffs deceased? Because, income taxes may have started very low, but before the 1970s and 1980s they were much higher than today (with the highest marginal rate at well over 50% – http://upload.wikimedia.org/wikipedia/commons/e/e5/MarginalIncomeTax.svg).

      (btw, I’m more asking questions than setting forth theses – my minimal background in economics means I’m fairly open to criticism).

  7. Tschafer says:

    “(It) might be that the non-economic concerns trump the economic ones here”.
    That’s exactly the point. Not everything is economics, and not every policy that produces the greatest GDP is the best policy. And incidentally, We do not have a factory in the Pacific that turns corn into cars – the Japanese do, and that makes a difference – at least it did in 1941. It’s natural for economists to strive for maximum efficiency, just as it is natural for military men to seek absolute national security – but we shouldn’t take their advice as Gospel. All policies involve tradeoffs, and not all rewards are economic.

  8. Jehu says:

    As to whether the tax increases were political or financial (ie needing the money), I think part of both really. People were way more naive about income tax back then and actually bought into things being ‘only for the rich’.
    Prior to WWII, we raised most of our money from tariffs. Yes, we had our highest marginal tax rates in the 1940-1960 time period, but if you look at government spending then as a fraction of GDP (excluding WWII, which was an elephant in the python), you’ll see that we didn’t effectively tax all that much more than we do now. What we did have back then (and up through Reagan, and creeping back now) was a massive web of exemptions, shelters, and other tax dodges that ensured that nobody actually paid the top rates. They spent a lot of time and energy though avoiding taxes, which is why actual taxes paid increased to some degree after JFK and Reagan’s tax cuts.
    You’re correct that the income tax has a huge administrative cost, much of it hidden, and an even higher compliance cost. That’s why at some point you should talk about eliminating tax types rather than reducing them. It’s kind of like some of the tiny tolls in Florida that probably don’t even offset the cost of collecting them.

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