What will President Obama’s trade policy be? A Washington Post story about Ron Kirk, his nominee for U.S. Trade Representative, laid it out. It summarized Obama’s campaign rhetoric as “he generally supports free-trade policies, but also signaled a tougher approach,” and quoted Ron Kirk that “I believe in trade and will work to expand it, but I also know that not all Americans are winning from it.” That is, both favor a “for free trade, but” policy.
This leads to the question: Why do politicians endorse free trade, yet devise “but this, that, and the other” excuses for protectionism? They talk of commitment to free trade, but create restrictions instead because most people’s commitment to narrow self-interest exceeds their commitment to principle. There is always something, whether it is environmental concerns, the trade deficit, unemployment in particular industries, self-sufficiency, national defense, or a desire to pressure other countries to change their policies, which can provide political cover for self-serving actions.
This “I’m for free trade, but” approach ignores America’s history. Much of our early economic success was because the Constitution abolished states’ attempts to take advantage of each other through restrictions on interstate commerce, creating the world’s largest free trade zone. Everyone benefited, as no government could impose extra burdens on mutually beneficial trades just because shipments crossed a border.
Since then, despite the overwhelming empirical and logical evidence for free trade, it has been demoted from a central organizing principle of our society to one primarily commanding lip service. Free trade still wins all the rhetorical battles, because it is at heart just the self-evident proposition that people who voluntarily trade expect to benefit, regardless of their trading partner’s citizenship. However, even moves touted as toward freer trade bristle with restrictions.
Free trade is sacrificed to special interests, as politicians claim to favor it, but oppose it in each particular case for some other reason, transforming free trade into “fair,” “balanced” or “responsible” trade.
Much of our opposition to others’ restrictions springs not from commitment to free trade’s demonstrated social benefits, but because easing their restrictions will line our pockets, and “free trade” sounds better than “gimme money.” But when free trade threatens protected interest groups, they push for “fair trade” restrictions, because that also sounds better than “gimme money.”
What we all actually support are fewer restrictions on our ability to advance our own welfare. So we want free trade rather than restrictions when selling our own output, because that creates more profitable sales. We want freedom for those who sell to us and in deciding how to produce, because both mean lower costs. However, we want restrictions imposed on competitors, because that also benefits us. The difference is that all voluntary participants gain from freer trade, but the beneficiaries of restrictions gain at an even greater cost to others, who the government forces to make do with inferior alternatives.
Free trade creates wealth. We should favor opening others’ markets, because that benefits both their consumers and more efficient American producers, by breaking the political strangle-hold of their protected producers. But free trade is beneficial for Americans just as it is for others, and helping uncompetitive American companies harm our citizens by restricting their access to foreign products they prefer is precisely the same abuse we criticize others for.
The trade restrictions America maintains, and which President Obama intends to increase, make almost every citizen worse off (those most wrapped in government’s protective cocoon, such as labor unions, granted monopolistic power through labor laws, will face stiffer competition, but calling reductions in unwarranted restrictions “unfair” strains the meaning of the word). And even though his administration is “carefully avoiding words and deeds that directly smack of protectionism,” its proposals are merely camouflaged protectionism. That doesn’t change the fact that its purpose is to harm some Americans to benefit those politically favored, which is a far cry from advancing our general welfare.
{ 24 comments }
With free trade it’s easy to do the opposite of Hazlitt’s dictum and look only at the effect for a small group and over a short period of time. It’s politically beneficial to do so.
If I lose my job to a foreign worker and get a lower paying job, the benefit I derive from the increase in productivity (for the whole economy) may not offset my lower pay, when you consider this one instance.
So, even if I know that I would be worse off to keep my job if free trade as a whole were not followed, it’s rational to pursue a policy of anti-free trade for my personal situation if I believe that the lost productivity increase is less than the benefit I derive from keep my higher pay.
I guess Mr. Galles missed the part about how we now export half as much as we import from Mexico, and the exodus of jobs to all parts of the world because “free” trade is NOT “fair trade.” Consider learning about “true cost” through the World Index of Social and Environmental Responsibility (WISER) which documents sweatshop labor, water, and energy content of all products and services.
Bob,
I import many products from the grocery store and the grocery store imports nothing from me. Sounds like a trade imbalance. How should I rectify this?
Neal, That’s funny! But let’s look at things a little bit more deeply, shall we?
Today’s globalization is not free trade,as free trade is automatically defined within the context of the theory of comparative advantage. The result is the creation of additional excess supply and decreases in the standard of living everywhere brought on by deficiencies in aggregate purchasing power) that exist as a result of globalization.
Um, Bob, the theory of comparative advantage holds that trade allows the market-clearing quantity of goods demanded to be produced at the lowest possible marginal cost. (Not to go all neoclassical on y’all.) If goods are priced at marginal cost, and marginal cost is going down, doesn’t this mean that “aggregate purchasing power” (whatever that is) is increasing?
Today’s globalization is not free trade,as free trade is automatically defined within the context of the theory of comparative advantage.
I don’t know what you mean by that. Free trade is “automatically” defined as trade which is (surprisingly enough) free – that is, if you want to trade, and I want to trade, and we happen to be in different political jurisdictions, we can go ahead and trade without interference (just as we usually can if we happen to be in the same political jurisdiction). Comparative advantage has nothing whatsoever to do with it. (Also, of course, what Nick E said)
“Today’s globalization is not free trade,as free trade is automatically defined within the context of the theory of comparative advantage. The result is the creation of additional excess supply and decreases in the standard of living everywhere brought on by deficiencies in aggregate purchasing power) that exist as a result of globalization.”
Wait one second here. First off you say that free trade results in an excess supply of goods, which would ultimately result in lower prices. But then you go on to say that the standard of living decreases due to lower purchasing power. How could such a thing transpire?
If the costs associated with goods drop, each dollar is suddenly able to buy more. Wages wouldn’t need to be as high, and the pressures of lowering costs would probably drive then, nominally, lower. But purchasing power would increase.
Sure, we should ignore the simple fact that there are billions of people in the third world, all of them desperate and ripe for exploitation. Once one third world nation or region makes any demands on the multinational corporation they work for, they’ve just lost their dirt wage jobs since the multinational corporation will relocate somehere else.
Trade but it must be done in a humane and FAIR way. The problem is that the vast majority of the giant multinational corporations, which outsource, are in a “race to the bottom” in terms of wages and environmental standards. For them it’s only about quarterly profits.
Back to my original point….
We need to deal with the fact that Smith and Ricardo would be opponents of globalization. Globalization is not free trade, as free trade is automatically defined within the context of the theory of comparative advantage.It is of vital importance that anyone concerned about the misrepresentation of the authentic free trade position read “The Wealth of Nations.” For instance,Smith is opposed to tariffs (and quotas)only if it is the case that the purpose of the tariff is purely protectionist (sought by a special interest group of oligopolistic manufacturers) in nature. Smith would support retaliatory tariffs against countries engaging in obvious protectionist behavior, such as violations of GATT, manipulation of international currency values and/or massive dumping, such as China,India,and Mexico, as long as there is some probability that the counter tariff “…will procure the repeal of the high duties or prohibitions complained of”(Smith,p.435,Modern Library edition). Only if there is no probability of getting the offending country to stop its behavior would Smith forgo retaliation. Finally,Smith is a moderate supporter of the revenue tariff,on balance. He imposed such tariffs when he became a customs official in Scotland.
There’s much more to this debate that what this pithy article says. Sorry, but the world isn’t quite so black and white. Smith and Rocardo knew this, so it amazes me that readers here don’t understand their wisdom, as it’s still valuable in terms of today’s challenges.
If the workers were working for the company then obviously that was the best job available to them. Forcing the companies to pay higher wages will do nothing but stop them from going there in the first place. So, even if the companies that are already there stay put after the forced wage increase, your going to stop other companies from going there which will slow economic growth in that area in the long run. Thus, your desire to help the poor will of back fired, because what they need is greater capital accumulation. Greater capital accumulation will drive up there wages, not central planners such as yourself.
If someone truly wishes to help the poor in developing countries, then they should voluntarily contribute their own resources (in person or via donating to relevant organizations) to the training of the poor in job skills which will demand a higher wage in their local markets rather than try to force businesses to behave like charities.
And, as someone else pointed out, people in developing countries would not continue to work for “sweatshops” unless they believed that doing so was of net benefit to them, monetarily or otherwise. And I say that as someone who voluntarily worked in a literal “sweatshop” (i.e., corrugated metal factory with no air conditioning) here in America in my late teens, so it is not only people in other countries who have to make those kinds of employment choices.
“Much of our early economic success was because the Constitution abolished states’ attempts to take advantage of each other through restrictions on interstate commerce, creating the world’s largest free trade zone”.
Rubbish. Whether you are talking area, population or GDP, Russia and the British Empire had larger examples.
“We should favor opening others’ markets, because that benefits both their consumers and more efficient American producers, by breaking the political strangle-hold of their protected producers”.
Wrong, because there are other distortions around as well. Merely opening markets, while leaving the other stuff in place or even reinforcing it, can make things worse for one or both parties. The Opium Wars and other colonial stuff provide examples. Chad Rushing and others, that’s how sweatshops end up being of net benefit compared to what else is available and get “voluntarily” chosen – the other stuff destroys the original range of alternatives, e.g. by driving peasants off their land.
PM Lawrence – let’s take the example of China. Thanks to a lack of clear property rights and a corrupt system of eminent domain in many districts throughout mainland China, former farmers have no better choice than to go work for a factory, whereas if there were clear property rights they may not do so.
But what can multinational corporations do in this case? Pull out of China? If they do, those former farmers will still be working at factories, but not the multinational ones, they’ll be working at ones with poorer conditions paying poorer wages.
Your implicit point that many people in developing countries only work in factories because there were no clear property rights for the land they lived on and they were kicked off is well taken, but what should it mean for companies that provide better jobs given the fact that those people are already SOL?
what’s with all this appeal to smith and ricardo? this is mises.org
if you’re into smith, go see gavin kennedy – his site is:
http://www.adamsmithslostlegacy.com/
to bob stafford:
gavin kennedy sums it up neatly,
“He did not encourage laissez faire (two words he never used) because he was aware of the limitations of markets and of the usefulness and limitations of the State, and nor did he support leaving the poor without realistic opportunities of sharing in their country’s wealth.”
now can you understand why adam smith doesn’t excite the austrians much?
“now can you understand why adam smith doesn’t excite the austrians much?”
are adam smith’s views on society and political economy similar to hayek’s?
to hebe:
in “economic thought before adam smith”, rothbard (p455) quotes paul douglas approvingly:
“Marx has been berated by two generations of orthodox economists for his value theory. The most charitable of the critics have called him a fool and the most severe have called him a knave for what they deem to be transparent contradictions of his theory. Curiously enough these very critics generally commend Ricardo and Adam Smith very highly. Yet the sober facts are that Marx saw more clearly than any English economist the differences between the labor-cost and the labor-command theories and tried more earnestly than anyone else to solve the contradictions which the adoption of a labor-cost theory inevitably entailed. He failed, of course: but with him Ricardo and Smith failed as well… The failure was a failure not of one man but of a philosophy of value, and the roots of the ultimate contradiction made manifest, in the third volume of Das Kapital, lie imbedded in the first volume of the Wealth of Nations.”
for a concise view of how vehemently rothbard disliked smith’s views, read this brief paper -
http://mises.org/journals/qjae/pdf/qjae1_1_5.pdf
so it’s no surprise that bob stafford is so enamored of smith and ricardo.
Jeremy, that wasn’t my “implicit” point, I came right out and made it. The rest of what you criticise, about what foreign firms should do in places like China, wasn’t the point I was making there at all; I was only addressing the faulty reasoning in the quotation I cited.
But since you raise those other matters, I should tell you there are a few fallacies there too:-
- Very often, not so much in China as in other third world suppliers, there is a link from the firms to the dispossession. The firms lobby, bribe, or what have you to get the business conditions that suit them, which includes all that sort of thing.
- Even when there is no link to specific firms, there is still an incentive for those countries to do those things. Without the export markets, there would be less incentive to push people into the cash economy and fewer dispossessions etc. It’s like the way having a market for stolen goods encourages burglaries.
- In the particular case of cash crops (not so much for sweatshops), the increased GDP of the cash economy crowds out subsistence resources anyway, and people in those countries end up worse off in aggregate. This shows up in the poorest groups, the dispossessed, not in those that do get cash jobs.
Basically, the underlying faulty assumption you were making was that “what should it mean for companies that provide better jobs given the fact that those people are already SOL?” [emphasis added]. There’s no “already” about it, they are at the very least enabling it and at worst directly involved in it. The dilemma comes from the amount of damage that has already been done, which makes it difficult to undo things – but that neither makes it right nor does it mean that people shouldn’t try to find a way out of the bind. It was set up as a bind precisely in order to drive resources (including people) towards a “least worst” option, from not having any other way “out”. None of this is a coincidence, even when it isn’t conscious and deliberate.
to hebe:
trescott (http://mises.org/journals/qjae/pdf/qjae1_1_4.pdf) feels rothbard overly critical towards smith. i don’t like trescott’s (or smith’s) views on fractional reserve banking, but i think he makes some valid criticisms of rothbard’s smithian antipathy.
pm lawrence says:
“- Even when there is no link to specific firms, there is still an incentive for those countries to do those things. Without the export markets, there would be less incentive to push people into the cash economy and fewer dispossessions etc. It’s like the way having a market for stolen goods encourages burglaries.”
countries don’t do anything. export markets are developed by individual exporters, they don’t exist of themselves. the burglary comment is irrelevant; employing people in a sweatshop is no crime as long as the exit door is unlocked, literally.
with no specific links between land expropriators and sweatshop industrialists, jeremy’s assumption holds water.
Neal W. makes a good point. Some people, at least in the short run, are liable to be hurt by free trade. This does not mean it should not exist, but free traders should not pretend that this is so. Especially a school of thought that emphasizes methodological individualism.
In principle, it is no different from the observation that those holding monopoly privileges of one sort or another (for example, a patent or license to practice in some field) may be hurt by the elimination of those systems, at least in the short run. True, but perhaps the justification for those privileges are lacking.
Possibly I was unclear, but Newson is misreading:-
- “countries don’t do anything. export markets are developed by individual exporters, they don’t exist of themselves”. The incentives apply across the board and are not one on one like transactions. The incentives are on the countries as a whole, then individual actors within the countries are influenced by them, and aggregate behaviour results. I was covering the case where there is no specific link between dispossession and its beneficiaries.
- “the burglary comment is irrelevant; employing people in a sweatshop is no crime as long as the exit door is unlocked, literally”. Who said it was a crime? It’s a consequence of enabling past dispossessors, and in turn enables future dispossession. This is a cause and effect point, not a morality/crime one.
- “with no specific links between land expropriators and sweatshop industrialists, jeremy’s assumption holds water”. Leaving aside the fact that in some cases there are such links, it doesn’t – again, because this is a cause and effect point, not a morality/crime one. They are exonerated from blame, just as a swamp is when it forms a breeding ground for mosquitoes in a region where malaria is endemic, but still draining the swamp may (or may not) be a constructive thing to do. My own starting position (subject to adjustment in the light of circumstances) is that new entrants should be stopped but firms already present should be allowed to continue, apart from ones producing cash crops for export (even on a “fair trade” basis), since the damage has already been done (apart from the export crop stuff, which causes continuing damage). Meanwhile, other measures to undo the past damage should be sought and implemented. I’m using the passive voice, because I’m not after “the state should…” but “people thinking about this should find non-harmful ways that…”.
Sure, we should ignore the simple fact that there are billions of people in the third world, all of them desperate and ripe for exploitation.
Bob Stafford flew off a tangent here . . .
Reference to American history is educative to understand that free trade on basis of comparative advantage is quite beneficial. In fact comparative advantage is basis for regional specialization; that’s ok and acceptable. However, the comparative advantage theory also, and quite importantly, advocated free movement of labor. This advantage is not possible today because of political borders. I therefore believe this theory has lost a main part i.e. mobility of labor, which is replaced by restrictions which led the way to immanent protectionism.
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