24 January 2011

Fallacies in the Defense of Free Trade

Scott Lincicome answers a question:

3) The state showing a "preference" is merely another way of saying the state picking winners (protected American businesses) and losers (American consumers). And, again, that preference is exercised at gunpoint. I, and my fellow libertarians, seek a government preference for freedom, in particular free trade (which, again, has proven to be, by far, the most economically just and beneficial approach).

Before I address his fallacies, I think it best that I clarify my assumptions.  In the first place, I believe that the stateless society is the ideal society.  In this event, there would be no free trade issues at all.  In fact, there wouldn’t be any argument over any governmental policies at all.  That said, for purposes of argument, I will assume the current situation, in terms of society and government.

The first fallacy expressed here is the request that the government not pick winners or losers in the realm of trade. What seems to be ignored is that any government, whether totalitarian or democratic, by nature has to pick winners and losers (aka “show a preference”).  Also, by nature, any government that exists will have to enforce through coercive measures whatever preference is selected.  This is what government does, by definition, which is why in an ideal world the state wouldn’t exist.  Therefore, since the government has to pick winners and losers, why is it preferable to pick consumers over producers?

Theoretically, all consumers are also producers, since, for the most part, no person can trade with another person without first having produced something of value.  Why then the emphasis on consumption over production?

This, then, leads to a Keynesian fallacy, in which it is assumed that consumption is the key to wealth.  Keynesians are correctly lambasted for arguing that boosting aggregate demand is the key to building wealth.  At the risk of being too simplistic in my approach to this subject, it seems rather obvious that production is the key to wealth, not consumption.  And yet, libertarians are arguing that increased wealth is consumption based.

To be sure, there are a ton of problems clouding the issue.  One of the reasons America is so dependent on foreign manufacturing is due to the high cost of operating manufacturing firm in America.  There are onerous environmental regulations, high corporate taxes, a plethora of labor laws, and more besides.  If these government-induced restrictions were removed, perhaps free trade wouldn’t be such an issue, especially since America has the most efficient labor force in the world.

At the risk of being called a liberal, it simply seems unfair to hamstring American production at home and encourage its replacement abroad.  For some reason, I was under the impression that the government was to protect the interests of its citizens.
Since increasing one’s wealth is certainly in one’s best interests, and protecting production encourages the growth of wealth, it seems logical to expect the government to favor a trade policy that sympathetic to production instead of consumption.  Of course, if the government is going to take this stance, it is then behooved to remove legal barriers to national production as well (i.e. it should cut taxes, deregulate, etc.)

Furthermore, if the American people, as evidenced by their voting record over the last fifty years, have demanded that production be hampered by environmental regulation, taxes, labor laws, etc., it is only right that the American people pay for this.  Either American labor and environmental standards are good or they are bad.  If they are good, than Americans should pay for them one way or another (Karl Denninger has suggested wage and environmental parity tariffs).  It is only just.

Finally, I would like to note that advocates of free trade are also essentially advocating a “soft” form of welfare.  I noted earlier that theoretically every consumer is also a producer.  Realistically, there are some who consume without ever producing (more accurately, they consume more than they produce).  These people are known as welfare recipients (this also applies to credit users, but that issue is considerably more complex).

Welfare recipients especially benefit from free trade because their purchasing power increases through the decrease in consumer prices.  Stated in the obverse, if America adopted a protectionist policy tomorrow, the only way welfare recipients would maintain their standard of living would be if they received a nominally larger check.  Thus, the lower prices function as an increase in people’s welfare check.  Since producers are the ones suffer as a result of free trade, the conclusion to be drawn is that free trade functions as a tax on producers.

It should be stated that I’m not opposed to free trade.  However, if the government is going to both exist and interfere in the market, the least it could do is pursue policy that is generally beneficial to production. Right now, it appears to be on a course that is determined to hamstring production and encourage Americans to work in the service sector.  This isn’t necessarily immoral, but it seems foolish given that the service is more marginal production. (Which came first: the computer or the computer repair man?)

I’m not trying to accuse of free trade proponents of subverting American interests (yet, anyway).  However, they need to remember to work with reality, not theory, on this issue.  Free trade is sound within the proper theoretical framework.  Unfortunately, that theoretical framework bears little resemblance to reality.


  1. I notice a couple of what I would consider fallacies in your argument.

    First of all, it is strange to think of an American "dependen[ce] on foreign manufacturing" when American manufacturing output continues increasing -- it is up nearly double over the past 30 years. We have a lot of products that are now assembled in China, for example, but for which very little value is actually added there.

    Free trade ultimately favors neither consumers nor producers necessarily. If I own a construction company and can import steel more inexpensively from, say, South Africa than I can purchase from Pittsburgh, I'm able to be more efficient and competitive. The company wishing to build a new factory is able to pay less for construction and, depending on what it is making, perhaps less for raw materials.

    Meanwhile, the opposite approach is to protect domestic companies from competition by making imported products more expensive. This certainly helps those specific companies being protected, but also keeps them from making investments in technology, trimming unnecessary costs, or other improvements that over time would actually make the company more productive and competitive, perhaps even opening up new markets for its products worldwide.

    There are certainly plenty of government intrusions onto the marketplace. I don't see encouraging even more such intrusion as the proper response.

  2. In reference to dependence on foreign manufacturing, it's helpful to ask if American producers are more inclined to manufacture at home or abroad.

    Again, my issue isn't with theory, it's with application: does it really make sense to advocate for free trade when in light of the onerous restrictions on "local" businesses? Or, to state it another way, is it really good to respond to the hamstringing of American businesses by making it even easier for continue in that vein?

  3. If American businesses are being "hamstung", then I would think our time is better served removing those obstacles rather than trying to combat them with more government-provided obstacles to freedom of exchange.

    What we've seen is that American producers are more likely to have low-wage, low-skill labor performed where the price is commensurate with the productivity.

    A great example is the iPod. iPods are assembled in China from a hard drive made in Japan, plastic made in the United States, and software/operating system developed in the US. Less than 1% of the value of the iPod is added in China, yet 100% of the purchase price of an iPod goes towards our "trade deficit" with China. Not only American consumers of iPods but American workers themselves are thus affected negatively by government-sponsored "protective" interference in the mp3 player market.

  4. "If American businesses are being "hamstung", then I would think our time is better served removing those obstacles rather than trying to combat them with more government-provided obstacles to freedom of exchange."

    My point in all this is that it would behoove libertarian-minded proponents of free trade that it is better to prioritize deregulation over free trade. Both are good, but if they are going to seriously advise political leaders, they need to make sure that their advice has proper political priorities, which would be American production ahead of American consumption.

    I'm not sure I understand your last point. Are you saying that America is better served by paying Chinese people for labor instead of any of the 10 million+ unemployed Americans? Are you also saying price is a function of cost?