Much is being written these days about “free trade” (generally said to be good) versus “protectionism” (generally said to be bad). Not only is this a false dichotomy, but few economists bother to tell us what they mean by the term “free trade.” A notable exception is my friend, and eminent Libertarian economist, Pierre Lemieux.
The term “free trade” is dishonest unless one first admits that such a thing does not currently exist in a global context. A free trade occurs when you buy an item that pleases you for a price you and the merchant think is fair. It happens every day. It doesn’t require a 500 page “Trade Agreement.”
When traders are purchasing and selling from different countries, the terms under which they may do so is established by Trade Agreements between their respective governments. These Agreements are complex because they have to accommodate a host of interest groups that have been lobbying for terms that will benefit their particular industry.
When a country negotiates a Trade Agreement there will always be winners and losers within that country, depending on the relative influence of their lobbyists. Influence inevitably involves the passage of money from an industry to a lawmaker. That’s why Trade Agreements are often corrupt and inefficient. Also, the more parties (countries) there are to an Agreement, the greater the number of competing interests that have to be accommodated. Multi-party international trade agreements thus prove to be irrational and enormously burdensome.
This outcome might be avoided if, following the suggestion of my friend Pierre Lemieux, a country makes a unilateral declaration of free trade:
A national government could simply declare unilateral free trade — that is, allow its citizens to import at will — and this would achieve many, if not most, of the benefits of multilateral free trade. Other countries, after exporting, would have to import or use their foreign currencies to invest in the countries to which they exported: otherwise, what would they do with the foreign currencies they have gained.
Other economists, known as game theorists, have used a computer game called “Hawks and Doves” to demonstrate that unilateral disarmament doesn’t work. The game posits a universe where half the people are Hawks and half are Doves. Where Hawks attack and Doves don’t counterattack, Doves are wiped out. For Doves, the most successful survival strategy is called “tit-for-tat.” For the non-economist, that’s “an eye for an eye”.
Pierre’s argument assumes that the exporting Hawk country — say China — would be obliged to invest the surplus currency of the importing Dove country — say the U.S. — in the U.S. But that’s not the case. The American dollar is good everywhere. It could be used to invest in French wine, Swiss watches, Italian olive groves.
Furthermore, a recent study by the U.S.-China Economic and Security Review Commission warns that Chinese investment in U.S. firms is often a means to intellectual property theft by, and forced technology transfers to, state-owned and state-invested enterprises. It concludes that Chinese foreign investments are “not sufficient to rebalance the bilateral economic relationship.”
China could be obligated to reinvest in a manner more beneficial to the U.S. by the terms of a Trade Agreement. But that would only work so long as China felt like honoring the Agreement. And if the U.S. acted the Dove and didn’t retaliate against a breach of the Agreement, China would have no incentive to honor it.
So let’s acknowledge that what we have now — and are likely to have in the future — isn’t “free” trade, it’s “managed” trade. It’s managed pursuant to a complex trade agreement that, like any agreement, can have terms that have been well or poorly negotiated, managed and enforced, and amended from time to time.
Is international free trade, as it exists today, as efficient as its proponents claim? The gold standard of economic efficiency is called “Paretian efficiency,” after its creator, the Italian economist Vilfredo Pareto. To achieve Paretian efficiency, it would have to be shown that under international free trade “it is impossible to make any one individual better off without making at least one individual worse off.” And that’s clearly not the case as American manufacturing is moved overseas and millions of working Americans are reduced to the ranks of the chronically unemployed and severely depressed. It’s understandable to anyone except Republican establishment types that a 50-year-old sheet metal worker can’t easily be retrained to work in high tech industries.
As Paretian efficiency isn’t achievable, Pierre makes a more modest claim: “It is a fair bet… that the vast majority of people benefit from free international trade.” But there are problems with this claim as well. Who are the “vast majority of people” who are reaping the benefits? And what sort of cost-benefit analysis is used to calculate the alleged “benefits”?
Pierre’s Libertarian evaluation “assumes that foreigners count just as much as nationals. A contrary assumption is difficult to sustain from a moral viewpoint.” This position is not immediately obvious, and Pierre backs it up by citing economist James Buchanan (echoing Jeremy Bentham): “Each man counts for one, and that is that.” (How to argue with “that’s that”?) Theoretically, then, the loss of American jobs by is balanced by an increase in Chinese jobs.
Only for most of us, those closest to us count more. If two children are drowning and you can save only one, you’ll save your own. You’ll do it instinctively, without stopping to calculate whether your instinct is a moral one. African-Americans refuse to dilute their “Black lives matter” to “All lives matter,” and one can see that from their point of view this makes sense.
This is an intuitive truth that Donald Trump tapped into: People who claim that all lives matter to them equally don’t really care about any lives. They have a serious compassion deficit.
People who are willing to accept that some in America might lose so that others in the Third World might gain are not empathizing with anyone. They are simply people who despise working class Americans. As National Review’s Kevin Williamson so graphically put it:
If you spend time in hardscrabble, white upstate New York, or eastern Kentucky, or my own native West Texas, and you take an honest look at the welfare dependency, the drug and alcohol addiction, the family anarchy — which is to say, the whelping of human children with all the respect and wisdom of a stray dog — you will come to an awful realization. [Ital. mine]
They “deserve to die” says Mr. Williamson, and in this he is supported by David French, the man the Weekly Standard’s Bill Kristol tried to convince to run for the Presidency on a third party ticket. These “millions of Americans aren’t doing their best,” says Mr. French. “Indeed, they’re barely trying.”
It’s precisely this kind of contempt for the working class, a contempt that reduces them to “the Other,” to something less than human, that bothered Donald Trump so much that he was moved to give up his comfortable life as a billionaire entrepreneur, where he was able to enjoy working with his wonderful family every day, and venture out into a political world that was more hostile, heartless, and predatory than even the New York real estate market.
The problem is not only who benefits, but also what counts in the calculation of “benefit.” GDP (gross domestic product) is the gold standard for measuring economic growth. But, while it’s the best we have at the moment, it’s inadequate to measure whether, and to what extent, a country has benefited from free trade.
As the Economist observes, a lot of assumptions and guesswork go into the calculation of GDP: “the size of the paid-sex market in Britain is assumed to expand in line with the male population; charges at lap-dancing clubs are a proxy for prices.” This is a colorful way of saying that it’s harder to value output for services than for physical products.
“GDP was never intended to be — and shouldn’t be — a measure of general prosperity, which depends on many conditions (a few: job stability, income distribution, health),” writes Robert Samuelson in the Washington Post. GDP also doesn’t measure social stability — as when an entire middle class is hollowed out in the United States — or social upheaval — as when rural peasants in India leave their families and traditional cultures on the promise that they will find work in urban centers, only to find themselves reduced to beggary or slave labor once they get there.
The Libertarian will argue that this sort of societal dislocation is “creative destruction.” It paves the way to a better future, as history shows. But this argument doesn’t address the measurement issues and, as your investment counselor will tell you, past performance isn’t indicative of future results.
Then there’s the matter of “comparative advantage.” As Pierre puts it, “Producers across countries specialize in producing the goods and services for which they have comparative advantages — and, thus, can sell at lower prices.” This truism dates back to a time when lower prices were actually attributable to specialization: Scotland would produce scotch, and Portugal would produce port. Saskatchewan had the advantage in producing wheat, Texas had the advantage in producing oil.
That’s no longer the case. Third World countries owe their advantage in producing the widgets sold at Walmart to the exploitation of people, including young children, who are willing to work under unconscionable conditions for what amounts to slave wages. The companies that employ them don’t need to worry about health, safety or environmental issues, and this lowers their cost of production.
Pierre makes an excellent case for the Libertarian argument that these workers are better off in sweatshops than they’d be otherwise. This might strike one as logical at first blush. Still, it niggles at the edges of our collective conscience: would this argument have justified American imports of, say Mercedes Benz products that were produced by those laboring in German concentration camps? If not, what would be the difference?
The Libertarian also argues for “the dynamic benefits” of having to compete with foreign producers. This was certainly true during the Industrial Revolution, when the weaving technology that once gave German manufacturers an advantage in producing textiles was improved upon by the British. Everyone wins when there are real advances in science and technology.
Today, Americans are not competing with superior technologies in the Third World. Relying on slave labor to produce cheap widgets will not produce dynamic benefits to Americans. It didn’t work that way for the Southern gentry in America when they relied on slave labor. They didn’t become better. They grew lazy and degenerate. The slaves did not rise above their degraded condition.
Economists have concluded, after a review of empirical literature, that liberalization of world trade does not bring productivity growth so long as a country’s institutions are corrupt.
There’s something important in this study that may not be immediately obvious to the reader. Economists don’t have to show empirically that their theories actually work. Economics isn’t a science, strictly defined, for its theories are not refutable. The economist doesn’t tell us what would constitute refuting instances.
I recall a conversation I had with the great economist, Douglass C. North. I’d read every book by this brilliant man since college in the 1960s. Now the 1990s had arrived, and he informed me that everything he’d previously written was wrong. The problem was, he hadn’t considered the role of “institutions,” which apparently changed everything. I was crushed.
The alternative to the Libertarian ideal of global free trade isn’t protectionism. Israel has bilateral trade agreements with Canada, Egypt, the E.U., Jordan, and a host of other countries. Bilateral agreements are simpler because there are fewer competing interests. For this reason they are also fairer. And they don’t involve ceding sovereignty to supranational organizations that are not answerable to a country’s voters.
Our current trade regime has resulted in deep social divisions. In a sinking economy, Americans no longer feel that we’re all in the same boat, that we’re all pulling together. Our sense of national identity has been deliberately weakened by the Obama regime, the Democrats, and a Republican establishment that answers only to the U.S. Chamber of Commerce.
Free trade must not be allowed to remain off limits to rational discussion, and those who question aspects of it must no longer be called “isolationists,” “protectionists,” “nativists,” “Nazis” and other vile invective that substitutes for civilized discourse.