Comments (19)

• P.M.Lawrence

  That's an artificial and rigged question, with the thumb especially on the scales since real examples aren't allowed (yes, of course there are disturbing factors - that's why you should cover a range of cases and seek enough correlation and sequence to back up causation).

  Anyhow, the largest confusion here is between "people" and "country". I bring this difference out in a letter I have at http://member.netlink.com.au/~peterl/publicns.html#AFRLET6. Since you won't allow historical cases like Scotland, England, and Ireland, I'll offer a thought experiment that shows how a country can be better off even while a proportion of its people are getting worse off.

  Consider rural A trading with industrial B, in trade balance with B importing food and exporting industrial products. A's population consists mainly of farmers and farm workers.

  B starts exporting fertiliser. A's land becomes more productive, and its farmers are forced to compete by buying that too. During the transition, the early adopting farmers get better off, since they produce more at similar prices.

  Eventually, all have adopted fertiliser. However, total food exports are about the same; the increased productivity works through to fewer employed on the land, and more land falling out of farming use.

  At this point the former agricultural workers are worse off. The country is "better" off in nominal terms, but a closer examination shows that the increased value of imports includes fertiliser - less of the other industrial products are now being imported. That is, even the farmers and remaining farm labourers are getting less for themselves, since the increase now includes farm inputs.

  What is more, the displaced often drop out of the statistical base and are not noticed ("survivor bias"). In the historical cases I am not allowed to mention they even died. That certainly leaves more nominal income per head for those still in the statistical base, and of course it can even happen that they are better off.

  Even that can be further distorted in the favour of B, if the working capital for the fertilser was financed by loans to A. This is what Pigou thought might be a kind of externality. It isn't, but it can mean that more than 100% of the gains go to B - it depends whether ypu count this as part of free trade. It gets more lopsided still if fiat currencies are involved and B can buy up rental property in A with it.

  Anyhow, if financing is left out but only genuine trade is material, we have a thought experiment that:-

  - confirms the idea that free trade benefits the countries involved, in aggregate, measured by total GDP and so on; but

  - also shows people working more for less in aggregate for themselves, and much less going to certain groups.

  If nothing else, that should show that free trade isn't what it's cracked up to be, and that there are a great many other relevant questions that should be asked too. And I haven't even touched on some serious transitional issues.

  Published: January 5, 2006 8:44 AM

• Neil Craig

  2 related ways in which I think free trade should have a long term positive effect on growth:

  1) Innovation is a major reason for growth but most innovation is, by its nature, adopting ideas from somebody else before everybody else has done so. With free trade it is proportionately easier for new products & thus productive ideas to enter society.

  2) In practice tariffs tend to work more towards helping maintain dying businesses, which have the political clout, rather than supporting potential new producers, who don't until they come into existence. This tends to distort the whole market towards investment in dying industries.

  Published: January 5, 2006 9:22 AM

• r gambel

  Yeah, but aren't there exceptions? Should we sell cruise missle technology to the Chinese? Should we allow companies to make deals with China where the companies agree to export their technology as a quid pro quo for entrance into Chinese markets?

  Published: January 5, 2006 9:33 AM

• Stefan Karlsson¨

  ""[Rodrik] looks in vain for the success stories of three decades of neo-liberal orthodoxy"

  He must have failed to look at Hong Kong. The success of the East Asian countries was of course by some attributed to their relative protectionist policies in some areas, yet the fact was that Latin American countries pursued similar policies and failed. This difference was due in part to the East Asians pursuing better policies in other areas as well as probably cultural factors. Meanwhile the most successfull country in East Asia have been Hong Kong, who have surpassed Japan in GDP per capita to become the richest country in Asia . And Hong Kong have never had any MITI-style "industrial policy" and have had no import restrictions at all.

  Another reason why empirical comparisons of countries with relative free trade and protectionism will be misleading is that the policies of the protectionist countries willb hurt not only themselves but the free trade countries as well. If the U.S. put up a across the board 50% tariff on all goods Canada would probably do worse than the U.S. as it is more dependant on trade with the U.S. than U.S. is on trade with Canada. Assuming Canada did not restrict U.S. imports, this would seemingly "prove" that Canada's relative free trade policies is worse than the U.S. protectionist policies, even though it just is the case that the U.S. policies hurt Canada more than the U.S. itself.

  Published: January 5, 2006 9:45 AM

• Yancey Ward

  P.M Lawrence,

  If the objection to free/er trade is that some are worse off than before, then it would appear that stasis is the only alternative in your scenario, otherwise someone's life will be disrupted. For example, the same displacements would happen if some in country A produced fertilizer for all of the farmers. Again, farm productivity would rise, land would fall out of production and some former farmers and farm laborers would be out of work, though some fraction might find employment in fertilizer production.

  However, the reality is that the displaced workers do not die or otherwise disappear, but will continue, in the absence of state intervention, to produce for themselves at a subsistence level in the minimal case. The displaced workers are an asset that will find employment in some other enterprise for which country A previously had no resources available.

  Published: January 5, 2006 9:55 AM

• Michael A. Clem

  More than that, Yancey, if there were no productivity gains and displaced workers, then the country could never diversify and become an industrial nation.
  
  Strange how some people complain about success...

  Published: January 5, 2006 11:16 AM

• Yancey Ward

  Michael,

  To be fair to P.M. Lawrence, I don't think he was complaining but was, instead, pointing out that many free-trade proponents make the mistake of claiming that everyone is immediately better off when trade restrictions are removed. I would, more or less, concede this point, but to argue against free trade for this reason is short-sighted.

  Published: January 5, 2006 12:20 PM

• Paul Marks

  No doubt Mr Lawrence is thinking of (for example) deaths in Ireland. Claiming that Irish farmers had not been allowed to export food lots of Irish people would not have been so weakened by a poor diet in the 1840's (after the blight hit the potato crop) that they would not have died of various forms of sickness.

  Of course the whole subsistance peasant plot system was created by centuries of government regulations in the first place (such as the various restrictions on Roman Catholics owning land and the ones insisting that the estates of Roman Catholics be broken up on the death of the estate owner). Most of the restrictions were gone by the 1840's (indeed long gone) but they had done their work, there was a large class of peasant plot people - hopelessly vulnerable.

  Of course Irish peasant plot people after the blight did not have money to buy food anyway - so they would not have had the money to buy food exported from Ireland if exports had been forbidden (not that exports of food from Ireland in the late 1840's were vast).

  Millions of pounds were spent on poverty relief, but even this had its bad side. For example the road building projects (building roads that went from nowhere to nowhere) brought large numbers of people together in one place - making them a perfect target for the spread of sickness.

  People were also told (by various trouble makers) that they should shun private help because they would be made to change their religion in order to "take the soup" (such stories were mostly lies).

  The Scottish case is more complex, but the oft attacked "Highland clearances" were often an effort to get people to move (either to other areas of the United Kingdom or overseas) BEFORE the collapse of a primitive system of farming.

  As the system had not collapsed yet the landowners are considered black hearted swine who pushed the people off the land. And if the landowners had waited till the system of farming was in total crises (and all the people to weak with hunger and sickness for them to move) they would have been black hearted swine who left the people to their fate.....

  As for the landowners themselves. Many families had great plans to make money in the Highlands (by sheep on whatever) - but in reality the place has been the graveyard of fortunes. The Highlands look fine in the summer - but the facts of the climate and of geography can not be ignored forever (by smallholder or landowner), whether there be trade restrictions or not.

  Still the above is history not economics - the economic case against trade restrictions is a logical one, which is why supporters of trade restictions have to flee from reason and seek refuge in, misunderstood, episodes of history.

  A more general point:

  Has a copy of the posting been sent to the "Guardian" and to the author of the Guardian newspaper article?

  Sure they (most likely) "will not print it, they will not even read it". But it still has to be tried.

  Published: January 5, 2006 1:20 PM

• Paul Marks

  Word blindness strikes again.

  The first line of my comment should include the word "if".

  Mr Lawrence may be claiming that IF Irish farmers had not been allowed to export food in the late 1840's.....

  The English case is quite interesting:

  For all the talk about people being driven off the land in the industrial revolution, the number of people working on the land (in simple numbers - not as a percentage of the workforce) went UP till the mid 19th century.

  Indeed inspite of the repeal of the Corn Laws in 1846 English farming prospered till the 1870's.

  There was trouble in certain types of farming after this (although how the people who cry endlessly about the "poor people in the city slums" can square that with wanting to keep out cheaper food from overseas is beyond me), but farming recovered from the 1890's onwards (as farmers adapted and went in for different products).

  Of course then the First World War came along in 1914 and messed things up (as it messed up a lot of things).

  Still even in the modern world of fiat money, credit bubbles (boom-bust cycle), crushing taxation and endless regulations - the example of New Zealand shows that farming does not have to be organized on a totally irational basis.

  Of course none of the above is economics (it is history and current affairs), but people who can not (or will not) understand economic law sometimes can be reached by this sort of thing.

  Published: January 5, 2006 1:36 PM

• Paul Edwards

  “…The government of an "underdeveloped" country, often controlled by a corrupt military dictatorship, runs its economy into the ground while piling up massive debt. At the point of bankruptcy, the regime turns to the International Monetary Fund and/or the World Bank, which bail out the fledgling despots from the hole they’ve dug.

  “In return for the loans or aid, the rulers agree to "neo-liberal austerity reforms" such as lower tariffs, improved budget discipline, and privatized state enterprises. Not surprisingly, the benefits of the "laissez-faire" policies never materialize, and often the countries end up defaulting on their loans and plunging deeper into stagnation.�

  Excellent observation. Most of the debt was spent on public works provided by American firms and the bailing out is done essentially by the American tax-payer. This is a great example of corrupt politicians, corrupt political entrepreneurs, and corrupt bankers, colluding in a manner detectible and understood by very few. What a great scam to dramatically enrich a few at a cost of very many.
  

  Published: January 5, 2006 2:03 PM

• Alan Dunn

  Paul,

  It's ashame that these sorts of policies are still alive and kicking in the 21st centry.

  My favourite[sic] is the BOOT SCHEME, where BOOT stands for Build Own Operate Transfer.

  To protect its budget position (surplus), the government organises for a contractor to say build a bridge.

  The private contractor organises the finance, and builds the bridge.

  The government, so thankful that they didnt have to "pay" [sic] for the bridge, allow the private firm to collect a toll on the bridge for X amount of years.

  In addition, the government also guarentees that the private firm will make at least X% return on its investment.

  Once the private firm has recouped its contracted returns for its effort, the bridge is then transfered back to government ownership - usually about a week before it's no longer safe to use.

  The worst part though, is that the tolls rarely provide the returns promised the private contractor, and as a result, the government makes up the windfall by slugging tax payers.

  Published: January 6, 2006 1:44 AM

• William

  The folks against individuals trading outside their own borders seem to purposely ignore the point that without this commerce then these poor citizens are completely at the mercy of their government.

  The folks against trading also fail to mention the successes of protectionists states like:
  North Korea, China prior to 1990, the Soviet Union, etc and tout the minor issues in the trading countries like Hong Kong, Singapore, the US, UK etc.

  Published: January 6, 2006 8:59 AM

• tz

  Do we care where the goods in commerce come from or how they are produced or obtained? I think it would be considered more "free" in a sense if thieves and robbers could fence their merchandise out in the open (but far enough away so the victims are unlikely to find it - Once something like this actually happened when the insurance companies demanded used parts, and a man's car was stolen for it's door, and he ended up getting the same one back via a chain of chop shops). Do we really want to trade in organs? (I forgot which Robin Cook novel, Coma I think).

  But the moment you can say it is a valid question to ask where the goods you are buying came from, and that people ought not buy from certain sources, you no longer advocate "free trade" in the sense most use of totally unregulated cross-border trade.

  This is the only thing I can remember ever disagreeing with Ron Paul about (but I could see his point) - China's MFN status. In a world of fiat currencies, and where everything is asymetric. Regulatory arbitrage.

  We would like to consider the single transaction of an exchange of something in my possession with something in your possession in isolation (much like the oversimplified textbook examples). But such an exchange can be a pickpocket paying for some stolen cake. My point is that the final exchange in consideration is a product of many antecedent exchanges, and if those weren't free, then the ultimate exchange isn't either because it won't be at a "market price", it will be at a price involving subsidy or exploitation or something worse, but that will be hidden.

  A businessman who only has a few years to live can store toxic waste in barrels hidden in his warehouse and live lavishly till he dies, putting his competitors who actually bear disposal costs in real time out of business. Later he's dead, and there is a building which has a huge negative value which is a threat to the surrounding community (whom I hope is enjoying the cheap goods). But some would say this too is free trade, though I would not.

  Normally the case is made for free trade between countries like France and Germany, who might have nationalist tendencies, but have similar enough legal/property customs, educations, etc. so it is like a doctor and architect bartering.

  The problem comes in when the doctor "barters" with some kind of merchant or service provider that doesn't follow anything similar to the set of rules the doctor might live under. (I'm thinking of the Hippocratic oath of old - the one that includes prohibitions on euthanasia and abortion). This merchant might be able to get a medical instrument, a work of art, or remove an obnoxious neighbor at a far lower cost, but do we care to ask how he does it?

  Yes, China will manufacture things without all those nasty American workers - of all races - who expect to be paid a US market level of wages and benefits.

  So do we care if China uses prison labor (or even prisoner body parts for that matter)? Or if they are inflating their currency/economy although we are the temporary beneficiaries (in exactly the same way such folly is described in every other article I've read here on inflation). Somehow if we are the beneficiaries of Cheap Chinese credit at N degrees of separation it can't be a malinvestment?

  It can work both ways - we subsidize and protect some agricultural commodities, but we rely a lot on IP. I'm waiting for the G30 to declare copyright and patents void (in the main, unless the author flies down there and presents the form in person to the lone bureaucrat who will stamp the registration form - after the $100k filing fee). And watch napster.zz sites (zz=any G30 country code) appear with all your favorite new releases. Far more popular than iTMS. An there will be a torrent of internet traffic which will require investing in their infrastructure.

  (Being an advocate of opensource, such would not bother me and I would probably party and get rich on this end since I'm prepared for the failure of digital mercantilism, but I do recognize that even some obnoxious customs in a country ought to be honored - but I don't know if I would kow-tow to a chinese emperor, or why they should respect a life+infinity term for copyrights).

  Theft? Nonsense. They simply have different values and definitions of property. Even if we could demonstrate copyright is proper, can we say if they have a 20 year from publication limit they are wrong and we are right?

  I do agree that the manageed mercantilist trade agreements (NAFTA, CAFTA, etc.) are not "free trade" in any sense of the word.

  But for trade to really be free, i.e. uncoerced, it must occur on a level playing field.

  It is also not certain we aren't being the ones taken advantage of. A pusher will sell addictive drugs cheaply at first. If China - as a military and NOT an economic policy wanted to destroy our manufacturing base so there could be no WW2 like shift - I can't think of a better way to do it, and this way, we pay to destroy our machinery and to build theirs. I'm not sure I would sell my only gun and all the bullets to my neighbor who has a history of violence and a long memory.

  So "free trade" can be the opening up to a larger pool of mutual exchanges with benefits for all, or it can be like the pickpocket and thief (think corporatists and communists), or the toxic wastrel. The former is of great benefit to all concerned. The latter simply aids in the destruction of all.
  

  Published: January 6, 2006 10:30 AM

• Larry N. Martin

  But the moment you can say it is a valid question to ask where the goods you are buying came from, and that people ought not buy from certain sources, you no longer advocate "free trade" in the sense most use of totally unregulated cross-border trade.
  
  
  Nonsense. The free trade question is about governments restricting or interfering with the trade of their citizens with the citizens of other countries. Questions of illegitimate business practices are about legal rights and law enforcement, not free trade. An important but different question. Similarly, the question of governments subsidizing their businesses who then trade internationally is not really a free trade question, either.

  Published: January 6, 2006 10:51 AM

• Larry N. Martin

  Okay, perhaps I should elaborate on my last comments. Let me repeat, free trade is about how much governments interfere with their citizens's ability to trade with citizens of other countries. All other things being equal, free trade is preferable to restricted trade.
  
  
  TZ's point is that all other things are generally *not* equal, and therefore, restrictions on trade are justifiable. Are they? And if so, what kind of restrictions? If a local car dealer sells stolen cars, we don't say that justifies limiting the number of cars he can sell, or that an extra "stolen car tax" should be applied to his prices. Instead, he's prosecuted for being accessory to car theft, or if an innocent pawn, he at least loses the stolen cars and cannot sell them, although he could still sell justly acquired cars if anybody is still willing to trust him as a seller.
  
  
  Therefore, if, for example, a Chinese clothes maker uses slave labor, does it make any more sense to add a tariff or restrictions on ALL Chinese clothing imports? Justice requires appropriate retaliation for crimes committed, and cannot justify just any type of retaliation. Any government action needs to be tailored to the criminal activity as narrowly as possible.
  
  
  In general, even where all other things are not equal, we should still exhibit a preference or tendency for free trade, with "exceptions" being as limited as possible. This applies to government action, of course. Voluntary boycotts do not violate free trade, since free trade requires that people be free to trade or not trade, as they see fit. Voluntary boycotts, naturally, cannot be mandated by government.
  
  
  Free trade and access to markets also tends to encourage competition and the desire for productivity increases. Increased productivity is less likely to occur through slave labor or unskilled labor than it is through incentivized labor and education or training, thus helping to improve the welfare of the laborers. That's no guarantee, of course, but it seems work better than the attempts of governments to force other governments to pass restrictive internal laws, like minimum wage laws.
  

  Published: January 6, 2006 1:58 PM

• Michael A. Clem

  Hmmm...if specific criminal activity can be shown, then an appropriate response could be generated. But I agree that that's a matter of justice, not free trade per se.
  
  
  "Slave labor"--I suppose there probably still exists actual slave labor in some parts of the world, but is there anyplace left where it's not illegal (even if corrupt governments turn a blind eye to it)? Prison labor isn't necessarily slave labor, and why shouldn't prisoners be free to work, especially if it's used as part of a rehabilitative process? Political prisoners might be considered virtual slaves, since they're not being imprisoned for any good reason, but are we playing with terminology if we call them slaves in fact?
  
  
  On the other hand, I see no justification for restricting free trade simply because laborers in foreign countries have lower wages and less benefits than American workers. That's not an 'unlevel playing field', but simply the nature of the circumstances, no different from the fact that some places have natural resources that other places don't have.

  Published: January 7, 2006 12:34 PM

• Vince Daliessio

  tz fails to note that many of the bad things he raises (sales of stolen goods, 'slave' labor) happen here also. Thus in themselves they are no argument against trade, free or unfree, at all. And to imply that all or most foreign goods are produced or marketed that way, or would be in the event that free trade ever were allowed to happen here is a straw man to beat all straw men.

  Published: January 7, 2006 8:01 PM

• P.M.Lawrence

  Yancey Ward, I wasn't providing a general argument against free trade, I was providing a specific thought experiment refuting the idea that all free trade is always for the best.

  As it happens, in our circumstances, real free trade would be better. However, on the one hand - as the author noted - what we are being offered under the label free trade often isn't (e.g. http://www.theaustralian.news.com.au/common/story_page/0,5744,17738962%255E7583,00.html shows something in the Australian by Michael Costello), and on the other freer trade, i.e. selectively removing free trade according to an agenda, usually makes things worse. That's because, although there are fewer deviations, the ones left are more aligned; they don't randomly offset each others' distortions any more. (I've looked into the mathematics, but it's not suitable for this forum - too much and too heavy).

  Stasis is not the only alternative, but a proper transition is one option. And, of course, stasis is not to be condemned in itself, but only if it is incompatible with a society's and individuals' own aspirations - which it is, in our culture. That's still leaving out questions of pace of change, though.

  It is irrelevant that a different scenario, somewhat like mine, would produce different results. What counts is that I can find a scenario that does go horribly wrong under free trade conditions, under one particular shock.

  "However, the reality is that the displaced workers do not die or disappear, but will continue, in the absence of state intervention, to produce for themselves at a subsistence level in the minimal case." That is contradicted by historical cases, where exactly such horrors came to pass. But within the thought experiment we need merely note that the displaced workers do not have any resources of their own to fall back on (I chose it like that for that very reason).

  "The displaced workers are an asset that will find employment in some other enterprise for which country A previously had no resources available." Not in my thought experiment they aren't - mainly because there is nothing they can do that can't more easily be outsourced to the other country. But again, historical cases work against that. While some displaced Scots were able to go to slum conditions - see http://member.netlink.com.au/~peterl/publicns.html#SPEART1 - even they were worse off, and the rest died or risked dying emigrating in coffin ships; they didn't all end up Andy Carnegie. Similarly when Ireland found raising cattle for English tables preferable to keeping tenants, the number of roles for the displaced dropped. Ditto for the Palestinians displaced under the mandates when Zionists bought out their landlords and evicted them.

  In all the latter cases, though, emigration was possible, and new roles did gradually come into being - but even so time scale issues meant a sort of inertial containment. The leaks gained on the pump. In my contrived thought experiment, even that is not an option (since free trade carefully excludes labour mobility).

  Michael A. Clem - you write "More than that, Yancey, if there were no productivity gains and displaced workers, then the country could never diversify and become an industrial nation." Under free trade conditions, they can't - the existing industrial base elsewhere maintains a competitive advantage from "economies of scale external to the firm" as Marshall put it, and maybe positive network externalities as well. The only way round this is costly infant industry protectionism (which may well fail, unless there is enough of a separate base to pay for it - the USA succeeded, but Argentina failed). In some circumstances, there is a chain of further countries, and then each in turn can follow the same route to success by connecting to the nest one in the chain - but that is not the scenario I chose, and anyway it fails when you run out of further countries. Some have to remain agricultural specialists, unless some of the early comers de-industrialise.

  Paul Marks - I do have an adequate knowledge of the relevant history, and I will email you in due course. It's just that, even though the author presented an unfair and loaded question, it's not fair to say "you asked the wrong question, here's what really happened". You have to start by stopping him on his own ground and then show him where he should have been looking.Your description of those real things here is accurate, but it omits the role of these developments themselves in making old ways unworkable. I have some relevant material here: http://member.netlink.com.au/~peterl/publicns.html#SPEART1 (it's also worth reading up the introductory historical material in Keynes's "the Economic Consequences of the Peace", circa 1919).

  William, the failures of places like North Korea, measured in their own terms, don't come from lack of free trade but from the need to practise autarky at the same time as maintain a huge defence establishment. From their point of view, they could relax if the rest of the world just went away.

  There's a lot more I've researched, particularly on the problems of transitions and what happens in the presence of material market imperfections, but I won't go into them in detail here. But a good introduction would be this letter http://member.netlink.com.au/~peterl/publicns.html#AFRLET6 - it summarises quite a few of the problems that come from real life free trade moves, even genuine ones, when they hit countries too fast and/or when those countries don't have the right institutions in place inside them first.

  Published: January 9, 2006 6:48 AM

• Lyle

  If an import is subsidized by a foreign government aren't Americans accepting a commodity that is partially stolen? By accepting this "gift" of an economic subsidy from a foreign government, isn't the American consumer engaging in slavery or theft? Wouldn't a tariff imposed on imports which price is subsidized be the equivalent of a market price rather than an artificially high price? Doesn't a foreign government subsidization of export prices amount to artificially low prices? If exports are easy, or "gifts," because a foreign government robs from its citizens to give to our citizens, isn't this illusory wealth or a borrowed (or even stolen) increase in one's standard of living? Should an American producer charging the market price have to compete with foreign goods that receive a government subsidy?

  What if the Child sought a tariff against the lawn service in order to charge $7.50 instead of $10 for a lawn cut because the Child was taxed $2.50 by the government in order to subsidize the lawn service so it could charge $5?

  Published: June 8, 2007 9:35 PM