Free trade

Several people whom I follow wrote things on free trade last week.

For example, Dr. Φ has a piece mocking Robin Hanson. Laura Wood has some thoughts on free trade from the traditionalist perspective. The Business Insider notes that there’s a global competition for "good jobs".

Aretae has a free trade "puzzle" that does a good job of cutting to the differences I have with him. He asks: "How many people does it require before free trade is a bad idea?"

To answer his question with a question, I would ask: "How different do two populations have to be before their optimal trade policies would differ?"

For example, the free trader apparently believes that Mali and Singapore have the exact same optimal trade policy. That is an incredibly strange finding and I would be willing to wager a lot that it’s not true.

I’ve just started reading Lee Kwan Yew‘s memoirs. It’s interesting that even Singapore went through of phase of protectionism. It would be nice if the free traders at least would admit that reality doesn’t seem to comport with their theory – i.e. it seems that all actually developed countries went through a phase of protectionism. Yew feared mass unemployment much more than high-priced, lower-quality goods. Is it really too much to ask that we admit that this trade-off exists?

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15 Responses to Free trade

  1. todd says:

    It’s hard to see how unemployment would be attributable to free trade per se. Is it actually possible to run out of work? If free trade exacerbates the negative effects of bad policies like minimum wage laws, why attack free trade instead of the bad policies directly responsible for reducing employment opportunities?

    • Foseti says:

      I’ve written a lot on this. In short, free trade is a theory and it works when the theoretical assumptions hold true. In the US now, they don’t. For example, we continue to export low-skill jobs and import low-skill laborers. Either policy position is fine. Both together don’t work.

      • todd says:

        But why are we exporting / importing as you suggest? If free trade is a theory, it can’t be to blame. It must be our actual, interventionist trade policy which is to blame. Are there barriers that prevent retaining the low skill jobs in the US? Are there subsidies that encourage importing low skill labor? If there are then why not argue against them?

  2. aretae says:

    I’m, unsurprisingly, pretty much with Todd. All the analysis I’ve seen says free trade INCREASES available jobs.

    • Foseti says:

      I’ve written before that free trade is almost certainly the best policy for advanced economies – though I’m skeptical that free trade and massive low-skilled immigration is a good policy.

      Nearly all historical evidence (though not free trade theory) suggests that some amount of protectionism is necessary for developing economies to successfully develop.

      No one seems to be disagreeing with the latter contention, which was the main point of the post.

      As to the former, the question is: how does free trade in the actual US of today work with virtually unlimited low-skill immigration? My proposed answer is that it works badly. Exporting low-skilled jobs, while importing low-skilled workers into a massive welfare state is a terrible idea. Especially when the state pays for education, health care, etc.

      • todd says:

        The US does not have free trade. Legal immigration is legally limited: severely. The corporate tax code is well and truly screwed up. If you want to argue that US trade policy is crap because of who comes and what types of jobs leave, that’s fine, but it is bizarre to lay that outcome at the feet of “free trade”.

  3. ThomasT says:

    aretae and todd:
    I agree that free trade probably increases jobs. But not necessarily jobs that the population living in a given geographical region called “country” is able to perform. Let’s say a certain part of your population has an IQ under 80 and performs jobs for people with an IQ under 80. If you export these jobs somewhere else and in exchange create the same amount of jobs for people with an IQ of 120, you really have a problem unless you believe the IQ 80 people can be educated to become IQ 120 people. Now this is of course the part where free borders come in. Problem is, while it may be politically feasible to import IQ 120 people for those new jobs you have just created, it’s very hard to export your IQ 80 population to the same destination you exported their jobs to.
    So while you are right that protectionism has costs, the real question is whether it has higher costs than the costs that are incurred by a growing part of the population that free trade has simply made superfluous. I don’t have an answer to this question. But I doubt very much that you have either.

  4. Tschafer says:

    “Legal immigration is legally limited: severely.”

    I don’t think Foseti was talking about legal immigrants, but as we all know, most low-wage immigrants in the U.S. are not legal.

    Free trade works in the aggregate, over time, all other things being equal. Which means for us, right now, in a world where all other things are certainly not equal, it may not be the best policy. I’m not sure if this is the case, but free trade is a policy, not a religion, and should be examined, analysed, and treated as a policy, not unquestionable moral dogma.

  5. Jehu says:

    It seems perverse to me that debate on free trade vs protectionism are always conducted these days with a fundamental misunderstanding of the first order purpose of a tariff. A tariff is, or at least was, first and foremost a revenue measure—a tax. Some measure of taxes are necessary to pay for whatever oppression we and our elites heap upon ourselves. All taxes cause economic damage and distortion of incentives. The real choice honestly isn’t free trade vs protectionism. It is free(er) trade with higher taxes in other areas vs less free trade and lower other taxes. The USG has for quite some time been the vampire of the GDP to the tune of 15-20%. Where and how does it bite, that’s really the only political question, not whether it bites.

    But the rhetoric on free trade seems to me to be almost akin to two people arguing that the purpose of a belt is to spank people while ignoring its primary upholding purpose.

    • tenkev says:

      I agree with this. A tariff is a tax like any other. Just like any other tax it is going to have some deadweight loss to the economy. The salient issue is to compare the negative effects of the various forms of government revenue sources.

      The part where Foseti loses me is to imply that a tariff qua tariff is beneficial to the economy, which is ridiculous. It may be beneficial for other reasons; but, it is not going to benefit the overall economy.

      • Matt Weber says:

        A tariff is not be beneficial to the world economy, but it can be beneficial to the country’s economy. So then it’s a question of who are rulers are to be responsible to, the 300 million Americans or the 6 billion non-Americans.

      • Foseti says:

        Basically, combine the comments from Jehu and ThomasT. I think tariffs could probably be beneficial if you allow IQ to factor into your analysis (note that at this point you’re well outside mainstream economic theory).

        Tariffs – at the margin – will keep some low IQ people employed.

  6. Handle says:

    Here is a problem the left has with free trade.

    Let’s say you believe in catastrophic global warming and that government should intervene in the markets to address that threat. Unfortunately, the problem and its causes are global in nature, but an effective and truly international agreement is out of realm of possibility. Well, that’s unfortunate, however, if at least a collection of most of the biggest emitting nations will voluntarily agree to reduce their emissions, then it will still help a little – and potentially – the benefits still outweigh the costs. The major cost is that things which require lots of CO2 to be emitted as a result of their production become more expensive.

    However, these nations are not autarkies and there is this thing called “free trade”. Nations that do not participate in the CO2-limiting regime, such as China, will make the same objects for a lower price. There are worst things than global warming – which is the identical amount of global warming plus the transfer of an entire industry overseas for purely futile legal reasons rather than spontaneous matters of relative competitiveness and increasing economic efficiency.

    So the left says we can’t have global warming rules and free trade – because that’s the worst of all possible worlds. An own goal. So we need some kind of international system of carbon tariffs which can somehow be administered accurately and rationally without surveillance in these other countries (fat chance) and without kicking off a broader trade war which will be designed to harm us as much as possible – or at least irritate us in our most politically sensitive spots to persuade us to drop our carbon tariff policy.

    Now, this is a single species of a real and inescapable dilemma that emerges whenever regulations and national circumstances differ between trading partners. You can mandate air conditioning for sweat shops, but if they just move south of the border your welfare has decreased with the same amount of sweating in the world. Free Trade and Sovereignty are not Economically compatible in these circumstances – and so one must try to judge which policy, the tariff and the distinct law, or the absence of both, is more optimal for one’s own citizenry.

    And it is a judgment which is required for almost every law, and almost every product – a situation that is, of course, fraught with the potential for unfair corruption and abuse. But in practice, what “Free Trade” really means are bilateral and multilateral treaties between sovereigns wherein they commit to abstain from precisely these sorts of judgments.

    When someone is for “Free Trade” – in our present GATT-WTO based system that implies a great oversimplification of each nation’s Harmonized Tariff Schedule to be written in stone, and, again, a promise to not consider the effect on any regulatory change or shift in economic circumstances on the costs and benefits of the treaty. The market environment will constrain your sovereignty in a kind of “race to the bottom” – and that’s the point, actually.

    The problem is, there’s a good economic case for free trade in a sort of hypothetical, utopian world inhabited by harmonious, cooperative, and homogenous nations. That, and a general pro-free-market feeling in a large portion of the American population – creates a kind of vaguely positive “folk instinct” is support of free trade policies. But at the level of actual policy in the real, adversarial world which we actually inhabit – free trade policies are anything but clearly beneficial to our nation as a whole in the long term, though they usually benefit influential special interests in the short term.

  7. sconzey says:

    Apologies for the necro-post. As someone who regularly reads Worstall’s blog, it was really interesting to see him go head to head with Fletcher.

    What struck me was the point of contention about the national interest. Worstall essentially conceded the point that unfree trade might be in the “national interest” which — to someone who believes in a future of private ownership of government — means private interest.

    Why is it that a rational profit-maximising despot would implement a policy of unfree trade if all of the people in her country would be measurably better off with free trade? Why might those people who — despite being materially better off with free trade — prefer a country implementing unfree trade?

    Here’s where I think they disagree: Worstall is right in so far as for any two individuals, free trade between them will make both better off. A poor unskilled labourer and a wealthy capitalist are both better off if the unskilled labourer is free to sell his labour to the wealthy capitalist.

    Where Worstall’s analysis fails is that it is static. Of the two, most people would rather be the wealthy capitalist than the unskilled labourer. Fletcher’s criticism of comparative advantage notwithstanding, comparative advantage only tells us the optimum trade policy given a country’s advantages and disadvantages. It does not tell us what policy a country should adopt in order to alter it’s comparative advantage.

    A market-dominating housebuilder who also runs burger stalls at festivals, finding himself outcompeted by a young upstart does not say “ah well, I must exploit my comparative advantage in the burger flipping market” but improves his housebuilding and vies for dominance with the young upstart. Likewise with countries. Free trade may help you to make the best with what you’ve got, but it doesn’t help you get the industries you want.

    The pertinent question, and one I don’t think either of the interlocutors address, is whether protectionism *is* an effective way to foster development in desirable industries.

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