By Simon Grey, on June 20th, 2011
The current support for free trade is based on the supposition of defending consumers from higher prices. What the higher prices would indicate, if they were allowed to occur, is that American production is being destroyed. The laws of supply and demand would bear this hypothesis out because the cumulative effect of domestic economic regulation is to reduce supply of goods produced. Since demand either stays the same or increases (population trends in America aren’t negative yet), the net effect will be increasing prices.
As noted, foreign trade counterbalances potentially rising prices by increasing the supply of goods offered. Foreign nations do not have the restrictions on labor or environmental effects that plague American businesses, which means that they can produce goods cheaply, enabling them to remain profitable.
Foreign trade, then, redirects consumption away from American producers, who could be competitive if the government allowed them, to foreign producers. Free foreign trade policy coupled with oppressive domestic regulation has the same effect as direct subsidization of foreign business, which begs the question: why is the American government subsidizing foreign business?
The answer is not particularly clear-cut. Most conservatives who support free trade don’t view it as subsidizing foreign producers; they view it as defending consumers. And most leftists don’t view foreign trade as a way of destroying business; some see it as imposing proper regulations on business. Actually, leftists are all over the map on this. Pro-union leftists oppose foreign trade; enviro-leftists either support it as a way to encourage raising foreign environmental standards while some oppose it as a way to encourage raising foreign environmental standards. It might help to note that Bill Clinton signed NAFTA into law, and Paul Krugman has written a book defending free trade.
Additionally, multi-nationalists generally support free trade because it destroys national identity and power, and because it undermines the American economy. Of course, some of the latter is America’s own doing: there’s no need for America to handicap its own business with high taxes and excessive regulation.
At any rate, the current policy of foreign trade is quite damaging to the American economy. This does not require import quotas and high tariffs per se, but it requires that foreign producers be held to the same standard as domestic producers if they wish to sell in America. To have a policy which grants special advantages to foreign producers at the expense of local producers is simply asinine.
By Simon Grey, on June 15th, 2011
Vox has recently leveled his formidable intellectual barrels at free trade (see here, here, and here). The conclusion that he has reached has been that free trade has had negative effects on the American economy for the past several years, and that the Ricardian theory upon which the defense of free trade rests is largely bunk. He is correct in both these assessments. However, there are a few things that need to be clarified. First, the macroeconomic approach to free trade is different from the microeconomic approach. Vox’s argument rests on determining the ratio of imports to exports, which is the mainstream view. The microeconomic approach is to simply acknowledge that there is an exchange takes place, usually of currency for a good or service. The exchange is considered to be equivalent, in that the two parties consider that which is traded to be of at least equal value to what is being received in exchange. Thus, trade is always in a state of balance. It should be noted that the microeconomic view of trade balance is a tautology.
In the second case, Vox’s argument is based on macroeconomic reality, not microeconomic theory. The reality of American trade is that we are running what is defined to be a trade deficit, due in no small part to being willing to import cheap goods into the country. This has, in turn, shifted manufacturing jobs overseas. This is a matter of fact. Furthermore, Vox would be correct in recommending a tariff or a quota system as a way to remedy the trade deficit.
Third, it should be noted that it is economically foolish to pursue international free trade while maintaining a high degree of domestic market interventionism. If the government is going to mandate, say, a minimum wage for all workers, then domestic workers are legally prohibited from competing with foreign labor on price, to a limited extent. Having partial market freedom is just as distortive as complete market intervention. As such, it is entirely reasonable to hold all producers to the same production standards, whether said producers happen to be foreign or domestic. Karl Denninger, for one, has recommended wage and environmental parity tariffs, which are the entirely logical response to domestic market interventionism. Quite simply, it is utterly asinine to support free international trade without also supporting free domestic trade. And it is even more foolish to show stronger support for foreign trade than domestic trade, especially if the one showing support is the government.
Fourth, it should be noted that “free trade” is a bit of a misnomer. “Foreign trade” would be a more accurate description, for most of what passes for free trade today is actually governmental interference. One of the most famous examples of “free trade” of the last two decades, the North American Free Trade Agreement, begs the question: if this is really free trade, why are the governments in three different countries involved? Tautologically, free trade needs no governmental interference, regulation, or oversight. In fact, it only requires that the government get out of the way. Getting out of the way does not require prolonged discussion with foreign governments.
Professor Hale objected to Vox’s claims, saying essentially that people should be free to trade with whomever they want. I agree with this assertion as well. However, there are a few things that need pointed out here as well.
First, using microeconomic theory to argue macroeconomic policy can be troublesome, especially if one does not account for the relevant alternative variables. I cannot tell if this is the case with Professor Hale, mostly because I have only been reading his blog for a rather short amount of time. I assume that he supports a free domestic market as well. I will simply say, then, that if one is going to support free foreign trade than one must first support free domestic trade.
It should also be noted that most online arguments do not easily lend themselves to hyper-qualified, highly nuanced arguments. Trying to explain how one’s foreign trade prescriptions are identical to one’s domestic trade prescriptions takes time, and doesn’t always strike directly to the heart of the matter. In Professor Hale’s case, it appears that he supports market freedom both internationally and domestic. Unfortunately, given the nature of online debate, his defense of freedom comes across as supporting international trade.
At any rate, these are my thoughts, thus far, on international trade. I’ve addressed this subject before, but since the debate seems to be breaking out again, I decided to revisit it. One other thing that I think is worth mentioning is that ideals should be given their proper place. In this case, freedom and prosperity are the ideals. These ideals should neither be ignored nor used as a substitute for reality. Instead, they should be principles by which one makes policies in light of the current reality.
By Winton Bates, on May 9th, 2011
‘Again, trade is a social act. Whoever undertakes to sell any description of goods to the public, does what affects the interests of other persons, and of society in general; and thus his conduct, in principle, comes within the jurisdiction of society’ … . The ‘so-called doctrine of Free Trade … rests on grounds different from, though equally solid with, the principle of liberty … . Restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraints qua restraint, is an evil: but the restraints in question affect only that part of conduct which society is competent to restrain, and are wrong solely because they do not really produce the results which it is desired to produce by them.’ J S Mill, ‘On Liberty’, 1859, Ch. 5
  This passage has puzzled me since I was a young man. It seems to me that individual liberty is obviously violated when governments intervene in trade. If a government imposes a tax on a good for the purposes of assisting the producers of a close substitute, this must be just as much an infringement of the liberty of consumers as when it imposes a sin tax on a good to discourage consumers from purchasing that good. However, it is now clearer to me what Mill was trying to say. The first key to the puzzle is that Mill refers to ‘the principle of individual liberty’ rather than just ‘individual liberty’. What Mill means by the principle of individual liberty is explained a couple of paragraphs earlier as the maxim ‘that the individual is not accountable to society for his actions, in so far as these concern the interests of no person but himself’. According to that view, the individual should be accountable to society for ‘actions that are prejudicial to the interests of others’.
  Friedrich Hayek and others have noted that the distinction that Mill sought to make between actions that affect the acting person and actions that affect others is not very useful because there is hardly any action that may not conceivably affect others in some way. According to Hayek the relevant issue is whether it is reasonable for the affected persons to expect legal protection from the action concerned (‘Constitution of Liberty’, 1960, p 145).
Now, in the paragraph immediately prior to his discussion of international trade, Mill acknowledges that damage to the interests of others does not necessarily justify the interference of society. In this context he discussed the views of society toward various forms of contest in which people who succeed benefit ‘from the loss of others’. He notes: ‘society admits no right, either legal or moral, in the disappointed competitors to immunity from this kind of suffering’.
The second key to the puzzle is that in the passage quoted above Mill suggests that all restraints are evil. If Mill is referring to coercion, as seems likely, then it seems to me that at this point he is close to recognizing the merits of the definition of liberty that Hayek later adopted. Hayek defined liberty as ‘a state in which coercion of some by others is reduced as much as possible in society’ (‘Constitution of Liberty’, p 11). This definition meets Mill’s desire to acknowledge that restraints are necessary to protect citizens from force and fraud, and may be appropriate under some other circumstances where individual conduct adversely affects the interests of others.
Mill seems to have been attempting to establish that the attitude of society toward individual conduct should depend on where it lies on a spectrum. At one end of the spectrum, where conduct affects only the individual actor, other people have no right to intervene. At the other end, force and fraud should obviously be illegal. At other points on the spectrum the effects of individual conduct on the welfare of society are ‘open to discussion’. (Mill uses these words are used in the introductory paragraphs of Ch. IV.)
In asserting that the ‘doctrine’ of free trade rests on equally solid ground to ‘the principle of liberty’ Mill is clearly implying that in our discussion of trade there should be a strong presumption that free trade enhances the general welfare of society. It follows that he must believe that government intervention in trade is generally an unwarranted form of coercion. That seems to me to be just another way of saying that such intervention is generally an unwarranted interference with individual liberty.
By Simon Grey, on April 12th, 2011
Later this year, the Obama administration and Congress will seek bipartisan votes to pass free trade agreements with South Korea, Colombia and Panama. With 87% of global economic growth over the next 5 years taking place outside of the United States, trade supporters believe these agreements will create jobs and prosperity by helping American companies tap into fast-growing export markets.
Opponents disagree. They argue that “NAFTA-style” trade agreements hurt rather than help the U.S. economy — and polls show that much of the public agrees.
But is this conventional wisdom correct? Or do trade deals work? As Washington gears up for hard-edged debates about trade, it’s worth exploring some common misconceptions about free trade agreements.
This line of argumentation reminds me of Milton Friedman’s attempt at defending central banks. Friedman took the approach that the free market was the bees’ knees at everything, except money. Likewise, trade proponents take the approach that the market is good, but then somehow manages to conclude that we need the government to step in and a) create an artificial legal entity (the corporation) and b) enter into trade treaties with foreign nations.
Somehow, all this government interference is defended in the name of the free market, and those who don’t accept this new gospel are branded as ignorant or worse. There is good reason to be wary of governmental interference, seeing as how virtually all interference is destructive, inefficient, or counterproductive.
If trade proponents are truly concerned about free trade, they would first oppose the massive tax and regulatory burdens placed on domestic production and trade. Then maybe their message of increased foreign trade would seem more sincere.
By Ajay Shah, on January 31st, 2011
One of the many fascinating facts that you see in Economic History and Modern India: Redefining the Link by Tirthankar Roy (Journal of Economic Perspectives, Summer 2002) is about India’s trade/GDP ratio. The trade/GDP ratio rose dramatically from 1 to 2 per cent in 1800 to 20 per cent in 1914.
By 1970, the trade/GDP ratio had dropped to 8 per cent. It was only in the mid 1990s, the trade/GDP ratio had got back to
the 20 per cent value seen in 1914.
Most people in India today are not aware of the pre-War world, where goods and services flowed freely across the boundary, when
people in India diversified their portfolios across the globe, travelled freely within the British Empire, etc.
After the War, there was a big push worldwide to reduce trade barriers. Governments, then, made the call that agriculture was not
worth fighting for (since it was a fading share of world GDP but a large number of votes), and focused on manufacturing. By and large,
this worked. Trade in manufacturing is pretty free worldwide.
But world GDP shifted away from manufacturing. Today, world GDP is dominated by services. World GDP is now 5.8% agriculture, 30.8% manufacturing and 63.4% services.
Crudely speaking, if we have full free trade in goods, but zero trade in agriculture or services, then 69% of World GDP is submerged
in autarky.
Over the last 20 years, manufacturing trade liberalisation has continued, but the share of services in world GDP has risen. I suspect
that overall, this has made the world less hospitable to trade.
An interesting article on voxEU by Sebastien Miroudot, Jehan Sauvage and Ben Shepherd points out that in the aggregate, the costs of trade have dropped sharply for goods from 1995 onwards, but not for services.
We need to work harder on removing a variety of barriers to trade in goods. But we need to work much harder on removing the barriers to trade in services.
In this sense, the globalisation project is far from done. By and large, the world has done well on removing barriers to the movement of goods and capital (though India is as yet a laggard on both fronts). The two great frontiers are now trade in services and the movement of people. Given the huge footprint of services in world GDP, it is not even the case that we are exposing the world economy to as much global competition as was the case a few decades ago, when manufacturing was a big part of world trade and there was a lot of trade in it. 
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By Winton Bates, on October 29th, 2010
Somewhere in Africa more than 100,000 years ago, a phenomenon new to the planet was born. A Species began to add to its habits, generation by generation, without (much) changing its genes. What made this possible was exchange, the swapping of things and services between individuals. That gave the Species an external, collective intelligence far greater than anything it could hold in its admittedly capricious brain. Two individuals could each have two tools or two ideas while each knowing how to make only one. … In this way, exchange encouraged specialization, which further increased the number of different habits the Species could have, while shrinking the number of things that each individual knew how to make. Consumption could grow more diversified, while production grew more specialized (Matt Ridley, ‘The Rational Optimist’, 2010: 350).
 Ridley’s bold claim is that human progress can be explained mainly in terms of exchange and specialization. Eric Jones, a scholar who has written extensively on the history of human progress, considers that Ridley makes the case very well, based ‘on the few knowns of early pre-history’. Jones also considers that Ridley gets the story of the industrial revolution ‘mostly right’ (Review in ‘Policy’, Spring 2010, 26 (3)).
The weight that we can place on exchange and specialization as explanations of human progress depends importantly on the extent to which advance of knowledge and innovation can be attributed to exchange and specialization. It is possible to go some distance in explaining technological progress as a consequence of specialization. As Bill Easterly points out in his NYT review, however, many breakthroughs come from creative outsiders who combine technologies generated by different specialties.
Ridley mentions that government actions of various kinds in different countries have often inhibited innovation, particularly the introduction of new products and new ways of doing things that threaten the survival of established patterns of production. The implication is that freedom is a necessary condition for progress comes through clearly in Ridley’s recent contribution to Cato Unbound:
‘I am saying that there have always been liberals, who want to be free to trade in ideas as well as things, and there have always been predators, who want to extract rents by force if necessary. The grand theme of history is how the crushing dominance of the latter has repeatedly stifled the former. As Joel Mokyr puts it: “Prosperity and success led to the emergence of predators and parasites in various forms and guises who eventually slaughtered the geese that laid the golden eggs”. The wonder of the last 200 years is not the outbreak of liberalism, but the fact that it has so far fought off the rent-seeking predators by the skin of its teeth: the continuing triumph of the Bourgeoisie’ (p. 252).
I can’t help thinking that this sounds more like rational pessimism than rational optimism. According to Ridley, the industrial revolution is largely a story about coal – and progress since then has been possible mainly because of abundant cheap energy from fossil fuels. He notes that his optimism wobbles when he looks at the politics of carbon emissions reduction and the potential this has to load economies with further rules, restrictions, subsidies, distortions and corruption (p. 347).
Cartoon by Nicholson from “The Australian” newspaper: http://www.nicholsoncartoons.com.au/
The optimistic note on which Ridley ends his book comes from his view that innovation is such an evolutionary, bottom-up phenomenon that it will continue as long as exchange and specialization are allowed to thrive somewhere in the world.
In the end, it would seem that the gains from innovation, exchange and specialization all depend on liberty – liberty is the key to human progress.
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By Russ Nelson, on September 17th, 2010
Sigh. From time to time, leftists get up on their high horse, and think that they can come up with a single objection to freedom which completely smashes all arguments. Today’s version of that objection may be found on elementropy, where it goes:
another question unanswerable by neoliberal economists: Who is our economy for?
I’m thinking that the author is not open to new light, but let me venture to answer today’s unanswerable question:
An economy is for people who trade goods and services with other people. Consequently, any interference with trade goes against the best interests of the economy. Government regulation of trade counts as interference.
Now, readers of that blog may think I’m INSANE. That’s okay. 240 years ago, nobody thought a country could exist if it didn’t choose a religion for its countrymen. A country without an established religion?? INSANE! Of course, we now know better (although there are some fundamentalist religionists who still disagree). In time, we will be able to convince people that freedom of trade is a civil right along with freedom of association, freedom of speech, freedom of the press, and yes, freedom of religion.
Not that I expect this one posting to change anybody’s mind. It takes many drops to turn a wheel, singly none, singly none.
By Ajay Shah, on December 15th, 2009
I wrote two columns on trade liberalisation in Financial Express:
Also see:
By Rok Spruk, on October 14th, 2009
The World Bank has recently released the latest Doing Business 2010 report, measuring the level of business and economic regulation around the world. In spite of the financial crisis and the global recession, Singapore, New Zealand, Hong Kong and the United States retained the leadership as the most friendly locations for doing business. Notably, some countries have achieved high ranks. For example, Saudi Arabia moved to 13th placed and Georgia, once the bastion of Soviet-style state capitalism, now ranks as 11th most friendly place for doing business with open investment environment and low regulatory barriers to trade, entrepreneurship and investment. Countries such as Georgia, Thailand and Saudi Arabia have surpassed countries such as Sweden, Finland and Iceland although there is a notable difference in international comparison of those countries when it comes to the issues of the rule of law, property rights and institutionaly quality.
Douglass North, the 1993 Nobel-winning economist once famously wrote the essence of institutional quality for economic development. He said that the inability of societies to develop effective low-cost institutions is the major reason of today’s contemporary underdevelopment of the third world. In terms of the ease of contract enforcement, 3 out of top 10 countries are Iceland, Finland and Norway where institutional quality and the rule of law are on the high level by all international indices and comparison.
In recent decade, embracing free-market ideas has had a significantly positive impact on the institutional quality, regulatory barriers and the overall quality of business environment – all of which affect the size of transaction cost and, by empirical evidence, the standard of living and the wealth of nations. Global economic integration further induced institutional competition in terms of tax structure, regulatory environment, administrative barriers and labor market structures. Thus, when countries such as Georgia, FYR Macedonia, Moldova, Liberia and United Arab Emirates, enacted the liberalization of the business environment, the results were significant ever after. The World Bank also published the list of top 10 reforms in 2010 among which are Rwanda, Kyrgyz Republic, FYR Macedonia, Egypt, Moldova, Belarus, Columbia, United Arab Emirates, Tajikistan and Liberia (link).
The efforts to deregulate and liberalize business environment worldwide, will have a strong impact on high-income countries to remove the existing barriers to trade and investment such as high tax burden, rigid labor market structure and government size relative to private sector. 2008/2009 financial crisis and the growing role of government in the economy will probably deteriorate the country ranking in the next year. However, the leadership in the quality of business and regulatory environment will depend on further liberalization of the business environment, particulary the labor market, which is a major backbone of high-income countries where union density and regulated labor markets are widespread.
If countries such as Italy, France, Germany and the rest of the developed world will hesitate in reforming the remaining barriers to trade, more direct investment flows will move to high-growing emerging markets where macroeconomic stabilization is proceeding and where policymakers impose reforms faster then their peers in the developed world.
If such trend continues, emerging markets will soon reap the benefits and could become the leaders in reforming the business environment, attracting direct investment and, by and large, in economic growth and catch-up with the rest of the world.
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By Dan McLaughlin, on March 16th, 2009
Life is full of uncertainty. A plane might fall on your house. You may total your car. The value of your investments may crash. But, then again, you may find valuable mineral deposits on your land. You may inherit lots of money. You may find that the old trinket you bought at a flea market is worth thousands of dollars.
People make decisions based on their assumptions about the present circumstances and expectations for the future, whether that future is the next second or decades away. People act only because they expect to be better off, in some way, emotionally or physically, by acting. Those expectations may not hold up to reality, however, because, as we have seen, life is not a sure thing. Some people win and some lose.
There seems to have been a lot of losers these days. Investors, business owners, home owners and mortgage holders are taking a collective hit in the pocketbook. It is difficult in times like this to step back and see the overall picture, which is actually a quite wonderful thing, in spite of the mess created by monetary authorities. In societies where property rights are secure and people are protected from fraud, coercion and violence, including that by politicians, free trade leads to an amazing phenomenon. Whenever two people enter into voluntary trade, both sides win. Both sides to the transaction expect to be better off. If that were not the case, the transaction would not have taken place.
At the store, the customer values the shirt more than the money used to buy it. Conversely, the seller values the money more than the shirt. At work, the employer, the buyer of labor services, values the efforts of the employee more than the money he pays. The employee, the seller of labor services, values the money more than the time and effort given up to obtain it.
Because people create value by the things they do, they can give value for value received. That is the basis for the advancement of any society. Those societies that honor property rights and voluntary trade advance at a much quicker pace than those that don’t. The expectation of gain, and the ability to benefit from it, is a powerful incentive for people to create value. The expectation of ownership encourages people to invest in processes and equipment to create value more efficiently, thus benefiting everyone.
Some see the market process as systematic exploitation, a situation where every transaction has a winner and loser. They may point to the housing market or the stock market and explain that if someone buys at a high price and sells at a low price, that seller loses and the buyer wins. In this case it is important to identify what the loss actually arises from.
Using the stock market as an example, if someone bought at the peak of the bubble, they may indeed lose half of their investment if they sell today. The decision to sell is based on present circumstances of the seller and expectations for the future. There is a risk that the market can go lower. Neither seller nor buyer can predict the unknown future. If someone buys from the seller who’s stock lost value, the buyer assumes that the market will go up. He is willing to assume the risk of the unknown, which the seller is no longer willing to bear. The loss came only from the decline in the market prices, not from the selling. The decision to sell cannot affect what happened already. The seller benefits from being relieved of the risk of further decline. The buyer benefits from assuming the possibility of turnaround and future gains. In the transaction, both sides must necessarily feel they are better off by consummating the deal. They may regret their decision afterward, but that is because of events independent of the sale.
It is similar to totaling your car. The collision with the tree was the loss. If you make a deal with someone to buy your car, the person will pay the price of a wreck, not the price of a new car. The accident with the tree changed the present situation. Given the present reality, the decision can only be whether you are better off with the wreck than you would be with the money the buyer offers you.
The recent economic meltdown is like running into the tree. It arose from various factors, but chief among them is the inflationary credit expansion, and the inevitable collapse that results. Responsibility for the bubble and collapse rests squarely on the shoulders of the central banks and the fractional reserve system. Given that the loss in market prices is a fact of life, however, trade can only benefit the participants, as it did with the owner of the wrecked car.
In every voluntary trade, if you decide to sell your car or your stock or anything else, you win. You are better off after the trade, even if it is just because you don’t have to worry about any more losses. If the buyer decides to buy, he is also better off. Subsequent events might turn him into a loser also, but at the time of the deal, he was a winner. Both sides necessarily win with honest, un-coerced, voluntary trade.
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