Why reasonable people believe in free trade *conceptually*
Last edited Tue Aug 14, 2012, 05:51 PM - Edit history (3)
Some contemporary attitudes about free trade throw out a lot of baby with the bathwater.
Nobody in her right mind questions that free trade does create more net wealth. That is almost as basic in economics as supply and demand. Almost all economists know this.
But that does not mean that anything somebody calls free trade is benign, or that newly created wealth will benefit common people.
What happens to that new wealth is largely a political issue. If a nation's politics are wicked then free trade will work out wickedly... as will any other approach.
The 50 United States are an excellent example of the conceptual beauty of free trade. North Carolina has a lot of pine trees. For that reason, NC makes a lot of furniture. Because there is a lot of furniture made there, wood-milling and upholstery companies locate there. The local work force is full of people with specific skills—people who know how to work in a furniture factory.
NC becomes more and more efficient at making furniture. That efficiency makes NC furniture better and/or less expensive. And because our system forbids states from barring products from other states, all that NC furniture is exported to other states without any tariffs or barriers.
If each state tried to be furniture self-sufficient the average cost of furniture would sky-rocket. It is not practical for every state to have the timber and the clustered factories and the furniture-skilled workforce.
As transportation becomes more efficient (like railroads), the cost of moving furniture gets low enough that almost everyone gets a better deal buying furniture from NC than making it in their own state.
Ideally, State X is as efficient at something else as NC is at furniture. If State X is good at growing corn the people in NC do best buying State X corn and people in State X do best buying NC furniture. Working people in both State X and in NC get better value for their money. They are wealthier than if NC and State X were both furniture and corn independent. They all can afford more corn and more furniture.
This is why all economists value free trade, conceptually. In the abstract it creates far more net wealth than protectionism. In the abstract, efficiency is good for everyone.
The problems are largely political. How is the maximized wealth distributed?
A system that creates a bigger pie but does not share that pie leads to less pie for the average person. But that is not the pie's fault!
Say State Z has plenty of pine trees and a furniture industry, but NC bans unions while State Z does not. NC workers get paid less, making NC furniture cheaper. This hurts unionized furniture makers in State Z. So State Z imposes a big tax on NC furniture to protect their furniture industry. But to New York (huge market) the NC furniture is still cheaper. There is only so much State Z can do. It cannot order New Yorkers to buy her furniture.
But that is not a problem with free trade, per se. It is a problem with NC banning unions. It is a political problem. There is nothing intrinsic to free trade that forces NC to ban unions. It is NC screwing workers to benefit the owners of furniture factories. The furniture factory's desire to screw the workers would exist with or without free trade.
The political decision to ban unions in NC destabilizes what was a perfectly good system, and it serves to export NC's crummy labor law. Poltical policy lowers wages to gain a competitive advantage for factory owners. But free trade didn't ban the union. Free trade greatly increased the market for exported furniture, so it should have benefited those workers.
I do not know that "fair trade" between nations is possible. If everyone cheats and everyone creates subsidized advantages and disadvantages it's a problem. It is possible that in the real world the US will get hosed in every trade scenario.
But there are compelling reasons why almost any economist will consider herself a free-trader in general terms because comparative advantage creates wealth and protectionism is inefficient by design and is bound to lead to a somewhat smaller pie.
But if business rigs things so that workers don't get their share of the bigger free-trade pie then workers will not like free trade.
Here's the big thought experiment. If we stopped trading with China would the average American worker's standard of living go up or down? Would wages go up more than prices would? What would the effect be on the US environment? Is there a reason that Americans' time making plastic crap would be so much more valuable than a Chinese worker's time making plastic crap?
Summing Up: The problems with free trade are not problems with free trade as a concept. They are practical problems with governments... problems that can be so large that they outweigh the benefits of free trade. The evidence that free trade creates net wealth for somebody is vast. If you were designing an ideal world it would have free trade. It would, however, have vastly different government approaches to accumulated wealth, environmental issues, human rights, and minimum guaranteed standards of living.
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