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Source link: http://archive.mises.org/7889/free-trade-versus-free-trade-agreements/

Free Trade versus Free-trade Agreements

March 10, 2008 by

The Mises Institute has consistently favored free trade–the real thing–while criticizing “free-trade agreements” as mercantilism in disguise. The position is a lonely one, except that looking back history we find that the Austrians were against trade agreements from the beginning, even battling as forms of Keynesian planning. So there is a tradition here that would lead modern Austrians to oppose efforts like the North American Free Trade Agreement and all the others that have followed.

It is great that Manuel Ayau, in a book that is, for now, only available from the Universidad Francisco Marroquin, writes against trade agreements as well. This is in a book that provides an outstanding explanation of the division of labor. The title is Not a Zero-Sum Game.

Here is what he says:

Free trade requires no treaties. All that is needed is to remove (unilaterally or multilaterally) artificial barriers to trade: England did this in the mid-nineteenth century, Hong Kong in the mid-twentieth century. In 1789, the Constitution of the United States need just fifty-four words to establish free trade among the states. NAFTA, the “free” trade agreement between Canada, Mexico, and the United States has two thousand pages, nine hundred of which are tariff rates.

The sheer size of these trade agreement with their myriad stipulations and controls–such as rules of origin and the corresponding inspection, verification requirements, and the interference in sovereign affairs such as labor laws–belie their name.

Trade agreements are filled with “exception.” A favor is protection from foreign competition for those who wield political influence through vested interests, typically the producers of essential items. Ironically, man government efforts allow producers of basic consumer items to charge high princes, redistribution income upwards: from the poorest members of society to the privileged few. Rather than free trade these agreements create a regime of managed trade and, not least lots of expensive useless wealth-consuming jobs for bureaucrats.

To supervise and control trade between countries makes as much economic sense as supervising and controlling trade between the states or provinces of the same country….

Trade agreements have other detrimental implications. They discriminate against lower-cost imports from countries that are not part of the treat. Trade is diverted away from them to more expensive tax-exempt suppliers, in countries that signed that FTA. Now, the importers of these higher-cost goods need more foreign currency to pay for them. And as a bonus, part of the tax revenue the government gave up with the tariff exemption winds up as income of the pocket of the favored supplier.

{ 23 comments }

john March 10, 2008 at 5:07 pm

I understand the objection that free trade agreements are needlessly complicated and bureaucratic, but from a free trade perspective are they usually worse than the situation they replace? Has trade between Mexico, the United States and Canada been more restricted since NAFTA was signed?

jeffrey March 10, 2008 at 5:22 pm

I would love to see some data on this. But how exactly can you measure trade diversion?

newson March 10, 2008 at 6:12 pm

apart from pandering to lobbies from all sides, “free-trade” pacts, with their myriad conditions and stipulations, reinforce the idea in the public’s mind that trade must be managed in order to be fair.
here in australia, we have a treaty with the us (signed in 2004) – the ip sections alone cover more than 1 000 pages! lots of work for useless bureaucrats!

Nasikabatrachus March 10, 2008 at 6:22 pm

“lots of work for useless bureaucrats!”

Oh, they’re fulfilling their intended function, alright,

Stephane March 11, 2008 at 1:25 am

The European Union has also achieved free trade between its member states under the impulsion of people like Robert Schumann.

Omar March 11, 2008 at 4:18 am

I absolutely agree with you. However, two points. First of all like the above poster, I think that perhaps these agreements are a lesser evil than having no free trade at all. I don’t think its free trade, but it certainly seems to be freer trade.

Secondly, I totally agree that these agreements are done in ways to favor the stronger nation – i.e. the United States. The Realist strand of international relations theory states that hegemons will wield their powerful influence to achieve what they think is in their national interests (not very libertarian). However, the no. 1 economic fallacy is that economic transactions are zero-sum games. If Canada and Mexcio are signing on to NAFTA – then it must benefit them as well as the United States. It might not be free trade but managed freer trade agreements is better than tarrif setting trade wars without any free involved.

Luke March 11, 2008 at 6:03 am

Keep in mind, though, Omar that ‘Canada’ & ‘Mexico’ don’t sign on to NAFTA. *Politicians* from those countries sign the document. Some industries may in fact benefit, but others will surely not.

jeffrey March 11, 2008 at 8:03 am

The problem with the “lesser evil” point is that it negates all the criticism since, ultimately, it implies the need to support these agreements. How well I recall this from the whole Nafta debate when the DC libertarian and conservative crowd ended up printing press releases from the US Trade Rep office, while adding some proviso in there about how this is not perfect but it is better. Taking that position ultimately means signing up with the power elite.

It is not at all clear to me that somehow these are a step in the right direction. Hemispheric trade had become ever more liberal in the decade leading to Nafta. One of the goals of Nafta was for government to get control of the process. What they are calling free tree is really trade management.

Fephisto March 11, 2008 at 8:59 am

Anyone remember the Law Merchants?

Where have they gone?

newson March 11, 2008 at 9:55 am

i’m totally with jeffrey on the flawed and dangerous “lesser evil” argument that gets wheeled out to make these managed trade agreements less odious than they otherwise might appear.

the us/australia trade agreement heightened latent mercantilistic spirit (we run a trade deficit with the us, ergo they’re screwing us). political tensions arose – the us sugar lobby, in particular, wrote itself out of all competition from australian producers. other us agricultural interest groups made sure they weren’t hobbled by foreign product, either. this didn’t go down well here, and libertarians have nothing to gain from defending a concept that is morally flawed or corrupt.

even boosters of these bi- or trilateral deals acknowledge that excluded parties are likely to suffer trade diminution, as other posted have mentioned.

enemies of free trade use these deals to woo the public with their siren-song “free trade creates losers. no, to foreign dumpers”. who’s going to temper the cruel offshore competition, and their dirty tricks? good old nanny state, with her handbag full of tariffs, quotas, codicils and regulations!

he who lies with dogs wakes up with fleas.

Person March 11, 2008 at 2:51 pm

I accept that NAFTA (for example) is not 100% free trade.

I accept that 100% free trade is better than any other trade policy.

I do not accept that NAFTA is not an improvment over previous trade policy.

I do not accept that endorsing NAFTA over previous arrangements means “signing on with the power elite”.

I only very rarely find libertarian opponents of NAFTA who are able to cite specifically how previous trade policy is superior and by what standard.

As with the FairTax, “taxes are bad” … just ain’t gonna cut it.

newson March 12, 2008 at 12:06 am

person:
“I only very rarely find libertarian opponents of NAFTA who are able to cite specifically how previous trade policy is superior and by what standard.”

i refer you to bastiat’s window – where the glazier’s earnings would have been spent is unknowable. empirical evidence of an opportunity loss is a nonsense.

in the same way, preferential trade deals must cause distortions and trade diversions. whether there results therefrom a gain or a loss is impossible to know. real administrative costs exist in setting up and policing preferential trade regimes.how could one possibly know the cost of countermeasures adopted by erstwhile trading partners, now excluded?

it’s much easier to attack a uniformly bad trade pact from a moral stance (why are the mexicans better than the chinese or japanese?).
managed trade deals are ably sold by politicians to a skeptical public as “free trade”, any of the negative effects will be attributed to laissez-faire policies.

there is only downside for libertarians in endorsing these measures.

Person March 12, 2008 at 10:02 am

newson: I’ve never seen a libertarian NAFTA opponent make an argument anything like that.

Again, there may be very valid libertarian points to make here. I just wish they weren’t so secret. :-/

Nelson March 12, 2008 at 10:46 am

I agree with person. I would favor NAFTA over protectionism and favor unilateral unrestricted free trade over NAFTA.

Nelson March 12, 2008 at 11:00 am

“In 1879, the Constitution of the United States need just fifty-four words to establish free trade among the states.”

First, it’s 1779.

Second, I doubt you’d be willing to subjugate Mexico so that it falls under the jurisdiction of our Constitution.

If free trade were easy to pass politically it also would be in our Constitution. It took unifying in war against Briton to create and a war amongst the states to enforce. This is a steep price for “purity.”

jeffrey March 12, 2008 at 11:03 am

Actually, the idea that the Constitution was needed to establish free trade is nothing more than federalist propaganda.

Sorry about the 1789 typo, which was mine and fixed.

Nelson March 12, 2008 at 11:48 am

The typo is no biggie, I said Briton when I meant Britain. Oh well.

But the point is, free trade… and I mean genuine free trade… is VERY hard to pass politically in the US (even in 1779). It may take generations to educate the voting public (and their representatives) about the benefits of unilateral unrestricted trade – free trade’s benefits have been known well over a century as it is.

Agreements are the best we can realistically hope for in the meantime. The benefits of compromise are real and immediate and do not preclude even better policy in the future. Not compromising holds no immediate gain and uncertain long term gain.

newson March 13, 2008 at 12:20 am

nelson says:
“Agreements are the best we can realistically hope for in the meantime. The benefits of compromise are real and immediate and do not preclude even better policy in the future. Not compromising holds no immediate gain and uncertain long term gain.”

again, i refer you to bastiat’s window. how can you know the (net) benefits are real? how are you managing to offset the increased trade amongst the pact subscribers with the loss of trade (opportunity losses) with excluded countries? as jeffrey said, the extent of trade diversion is unknowable.
what are quantifiable are the direct costs of formulating and running a very complex piece of legislation, and the indirect costs of compliance, all of which are borne by the taxpayer.

it’s like arguing to a tax rebate for a particular industry rather than an across-the-board tax cut. a tax exemption for one sector adds a layer of bureaucracy and encourages other industries to lobby for a similar deal. it’s not long then before you find the tax statute runs to ten thousand pages, and armies of tax accountants/lawyers are required to remain legal. these “compromise” measures invigorate the state, and take us in the opposite direction to the trade liberalization we hope for.

Daniel J. March 26, 2008 at 5:27 am

Free trade agreements are certainty worse than having NO free trade agreements. Some speak of trade wars without the agreements — this is a fallacy. If the United States lifted all trade barriers, its people would have goods for less, more money would be saved for the consumer, more money would be made for the entrepreneur — so it can be said people would be MORE prosperous. If foreign countries put up barriers to United States products, THEY would be the ones losing. Sure, maybe some business in the US that exports finds it harder to compete in foreign nation with trade barrier but this loss does not even come close to the amount lost from FTA’s.

With true free trade (separation of economy and state) the US would prosper, the others countries would see and follow or be destined to a harder life.

Daniel J. March 26, 2008 at 5:28 am

Free trade agreements are certainty worse than having NO free trade agreements. Some speak of trade wars without the agreements — this is a fallacy. If the United States lifted all trade barriers, its people would have goods for less, more money would be saved for the consumer, more money would be made for the entrepreneur — so it can be said people would be MORE prosperous. If foreign countries put up barriers to United States products, THEY would be the ones losing. Sure, maybe some business in the US that exports finds it harder to compete in foreign nation with trade barrier but this loss does not even come close to the amount lost from FTA’s.

With true free trade (separation of economy and state) the US would prosper, the others countries would see and follow or be destined to a harder life.

ajax March 29, 2008 at 2:51 am

Will this book be made available in the US? I don’t like the $20+ shipping charge from Guatemala.

ragnar_rahl August 29, 2008 at 12:23 pm

Bastiat’s window? I keep seeing ya’ll go back to that, ignoring that NAFTA is much more complex than that. In the Bastiat’s window problem, there was one window, it was broken. In NAFTA, there are many windows, some are broken, some are newly built.\

Of course, the best argument for NAFTA is the fact that the socialist crowd is able to point to clear examples of where it pisses them off, by blocking environmental regulation, making it harder to keep workers under the influence of (read enslaved by) Mexican unions, etc.

Econ December 16, 2009 at 2:52 am

Protectionist Agreements against America is called Free to Confuse people

Huge trade imbalances because of Protectionism against the US with help from a few US multinational corporations have caused havoc on the US economy. The Congress was lobbied to sign protectionist agreements called free trade that it never read that allowed many countries almost free access to the US market but kept and even added more barriers for entry to foreign markets for US exports produced on US soil. If this wasn’t true, then the weakening dollar would have eliminated the huge trade imbalances with manufacturing goods along time ago. Look at that, the US can’t even stimulate exports with a weaker dollar because countries we run manufacturing trade deficits with have many barriers to US exports. Additionally the weak dollar raises the dollar value of trade deficits with oil exporters because a depreciating dollar will raise the price of oil in dollars.

The dollar weakening is the markets way of telling the US economy that it has structural problems because its consuming more with newly created credit then its manufacturing in real goods. But foreign trade barriers just keep helping to prevent the correction. Also the US government loves the current policy because it can continue its large spending habits when protectionist countries prevent appreciation of their currencies by buying US government debt with newly created money.

Large amounts of spending by the government with many barriers to US exports always contributed to the trade deficit but was made even worse because many US companies outsourced to get around foreign trade barriers and many US multinational corporations that lobbied for these protectionist agreements outsourced to benefit from the protectionism of undervalued currencies. With a fiat monetary system, the way to steal almost every wealth creating job is to have one side allow free access while the other side restricts access and prints money faster to depreciate their currency in which production will always be cheaper to produce in the country depreciating their currency faster. Frequently you read a Bloomberg article and it mentions that Central Banks are thinking of intervening to prevent appreciation of their currency. Well these currencies should have appreciated if their running huge trade surpluses and are not printing money as fast relative to the dollar. The foreign currencies of most countries we run deficits with should have risen exponentially which should have made it extremely expensive based on exchange rates to import from. But it seems nowadays competitiveness is not how educated or high tech a country’s products are but who can print the most money faster and not cause the higher inflation domestically immediately. When you see foreign Central Banks buying US bonds, in most instances its a form or protectionism because they buy dollars to buy bonds by creating more of their domestic currency. So their not really buying US treasuries because its a great investment but to subsidize their exporters by keeping their currency pegged or semi-pegged in some range. Thats the main way multinational corporations are able to produce cheaper. So outsourcing then depends on continued world inflation.

The longer these policies remain in place the worse and worse it will get with more and more jobs being lost. Of couse its not foreigners fault for these flawed trade agreements but the Congress. Free trade means free trade. Free trade is not one country like the US allowing free access with other countries adding more barriers or printing money out of thin air faster purposely to depreciate their currency faster.

Besides that tax policy in the US is completely flawed. US exports are taxed by foreign countries, US companies can get tax breaks to outsource, but domestic producers can pay up to a 35% tax rate. Does it make sense that foreign products from Protectionist countries with an agenda from their governments to put US companies out of business come in for free when Americans pay high taxes to make a living on US soil? Additionally taxpayers pay to have foreign products that come in duty free from protectionist countries when these imports have to be secured coming into ports. If taxes have to be imposed, a better alternative would be to reduce corporate income taxes down to 5%, raise final consumption taxes and impose import duties. This tax policy would create more jobs than the current stimulus spending for a few reasons. First companies that want to expand will have more funds to use and companies that outsourced may think of returning. Companies that outsourced may think of returning because their main strategy is to export back to the US. So to get around import duties they may want to produce in the US and a 5% corporate tax rate would probably be much less then the rate they pay in the country they’ve outsourced to. Some people may say well the government will have less to spend, but Congress spends enough already and doesn’t even read most bills.

With people in the US starting to save more, now is the perfect time to turn around these horrible trade and tax policies or else it will soon be really too late. Calling these protectionist agreements we have entered into free trade is fraud. So of course when there is fraud the people being cheated or allowing themselves to be cheated lose. The secret to why its cheaper overseas and why some foreign nations have been successful in gaining US industries is because other nations print money out of thin air with a computer keystroke faster and they don’t allow any free access to their markets unless you share technology. Special interests could make the case that Zimbabwe is cheaper to produce which would be true. It would be only true not because of competition from a harderworking or better educated workforce, but because of a weaker currency due to higher money creation.

When it comes to trade problems Congress will just say Americans need more education. Sounds just like Weimar Germany when everything else was blamed for the total breakdown in manufacturing but not the governments money printing or bad trade policies. Every American could have a PHD in Physics and If under a fiat monetary system, a trade competitor just prints money faster, then it will always be cheaper overseas. Printing money faster to steal jobs is not the free market. The free market decided that gold and silver were to be used as money. Of course with gold and silver, countries can still cheat especially with a fractional reserve banking system, but its still harder.If anything Congress needs an education in economics. Calling Protectionist Trade Agreements Free Trade is like the former Communist countries calling themselves by formal names like the Peoples Democratic Republic of…..

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