14 June 2011

On Free Trade

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.

8 comments:

  1. I second SP - very good post. One thing that generally gets lost in such debates, though Foseti is good at discussing it, is that free trade arguments are made from a philosophical standpoint that ignores the reality of the US' actual market policies. We do not have a free market. Arguing the benefits of hypothetical free trade against the reality of what actually happens in the US, which is most decidedly not a free market, misses the forest for the trees.
    -Ulysses

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  2. 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.


    That's where Hale goes astray. He keeps saying "freedom is good" without any realization that while freedom may be good, it is one of many goods that must be balanced in order to have a society that can sustain itself. I found it rather telling that he simply dismissed the points about China buying our "worthless paper." It clearly didn't occur to him that China is doing so because they have more than just economic goals at play here.

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  3. Hey, I'd _love_ to see free domestic trade done first. Just like I'd love daily unicorn-back deliveries of huge sacks of gold to my front porch. Guess which one I'm thinking is more likely.

    "Free trade" ultimately comes down to a lesser-of-evils problem. Is "free-er international trade while domestic trade remains highly regulated" the best system? Of course not. But it seems to be that it can't help but be an improvement, to limit the effective authority over international trade of the same sort of people who screwed up the domestic kind so thoroughly.

    If we all acknowledge that the domestic situation is bad (and it seems that we do), then how does it make sense to give more power to the people who made it so bad?

    It could be argued that international trade regulations need not _necessarily_ destroy value and exacerbate poverty and stagnation. It is, I suppose, _hypothetically possible_ to find a set of regulations and regulators who wouldn't do that. But is assuming that it will _actually happen_ that way really the smart bet?

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  4. Professor Hale apparently had some technical difficulties which prevented him from commenting here. I am going to correct this problem by reposting his entire comment:

    Yes I also support free domestic trade. I have to because I see no difference between domestic and international trade. Both are equally the free choice between a willing buyer and a willing seller. You can measure trade macroeconomically, but the mechanism for all trade is micro. One buyer and one seller agreeing on a price. To the extend that a third party butts into that relationship, usually to help a fourth party profit at the expense of the first two (forcing the buyer to pay a higher price and forcing the seller to forego sales), I am against it. Speaking as both a buyer and potential seller, I want the freedom to buy and sell with whomever I please without someone else deciding that, in the interest of spotted owls or sotted congressmen from districts I have never visited, my trade arrangement isn't good enough.

    I am as willing to buy from a Chinaman, a Mexican living and working in Virginia, A Mexican living and working 5 miles south of our border or an Arizonan living and working 10 miles farther North. They are all the same to me and I owe none of them my commercial loyalty. Each must trade with me by offering a product I want at a price I am willing to pay.

    Ulysses, I understand that the US government has handicapped American producers. That is an issue that American producers will have to work out with their government. I don't have a problem with exploiting the laborers and lax environmental laws of other countries in exchange for lower prices. This is not an all or nothing kind of argument. Our government is choking American business for no other purpose than to kill it. That is the problem, not trade. All trade is good. It is good for the two parties trading and that is as good as it needs to be.

    BTW, I am seeing in my town a "buy locally" campaign. The local shops are trying to boost their sales by appealing to local loyalty. At the same time, I doubt they are turning away customers from outside the local area. I am not sure where they draw their arbitrary line between Us and Them. If taken to its illogical extreme, there is no doubt that state and local lawmakers would gladly establish local industry protections. Just as Walmart is driven out of some communities. Just as California still does Agricultural inspections at its state borders.

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  5. Prof Hale - Eh, I'm not a tariff guy, I just wish that arguments about trade included discussions about why so much of what we can afford to buy is limited to shoddy Chinese junk. Trade isn't bad, but why is it so often the only affordable option? I think all these things need to be discussed in relation to one another rather than separately.

    Buy locally cracks me up for the same reasons. It's essentially, 'Buy some shoddy Chinese junk from a local person who charges more, has lower profit margins, and has no employees.' Maybe other places have a plethora of craftsmen making goods for sale; where I live does not.

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  6. Blogger is starting to piss me off. This is the third or fourth time that I've devoted significant time to writing a comment, only to submit it and get a 404 error. I'm not going to rewrite it, mostly because I'm too pissed off right now.

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  7. I'm (mostly) over my anger at Blogger, so I'm going to try to post my response to the comments on the post again.

    @SP- Thanks.

    @Ulysses- Thanks as well. Theory is good for directing application, but only if one accounts for all relevant variables.

    @Mike T- what reasons, other than economic, does China have for purchasing American paper?

    @Matt- "If we all acknowledge that the domestic situation is bad (and it seems that we do), then how does it make sense to give more power to the people who made it so bad?"

    If current policy is screwing domestic producers over, how does it make sense to advocate a policy that exacerbates the problem?

    @Professor Hale- I completely agree with your first two paragraphs. People should be allowed to trade freely with whomever they want, whether foreign or domestic.

    However, the government doesn't see it that way. And, furthermore, the government should look after the interests of its citizens, both consumers and producers. The current foreign trade policy is detrimental to producers, and yes, this is of the government's doing. Ideally, the government would go completely laissez-faire. This doesn't seem likely, so the only acceptable (albeit considerably inferior) solution is to put domestic and foreign producers on the same plane, preferably through a system of wage and parity tariffs.

    Incidentally, parity tariffs would make it easier for American producers to work out the issues they have with their government since consumers will be pressuring the government to lower prices, which can be readily accomplished by ending subsidies, corporate taxes, and burdensome regulation.

    I would like to reiterate that the ideal is a system where individuals can trade freely with whomever they want, with no fear of governmental interference. However, foreign policy must deal with the reality of the current situation.

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