The so-called Summit of the Americas is being held in Quebec City later this month to discuss the issue of free trade among the nations of the Western Hemisphere.
I am somewhat ashamed to admit that I really don’t understand much about free trade and its ramifications.
What would a free trade proponent argue are the direct and indirect benefits of free trade? What would they claim are the consequences of not embracing free trade?
Conversely, what would a person who is generally opposed to free trade say are the benefits of not having free trade? What would they claim are the consequences of implementing more widespread free trade?
[sub]If this question is better placed in GD or IMHO, so be it.[/sub]
The workings are better understood if you don’t listen directly to the different sides, but ask why they want the change, what’s in it for them. You get clearer answers when you assume they are not impartial observers.
The chief proponents of free trade are importing businessmen who want to import cheap goods without protections evening up the price. Also the international labor organizations, who assume that exports from poor countries increase jobs there.
Opponents are those manufacturing domestically or representing national labor.
Specific industries will line up depending on their ratio of imported components, which change over time.
Automakers that were once against it may now be for it.
Generally, there are always some politicians who like trade restrictions because they represent a “hidden” or “optional” tax, one that is free from widespread voter reaction.
You left off for me what is the largest argument in favor of free trade (I’m basically a libertarian). Why should the government forbid me from buying something from wherever I want? Barriers to free trade just force me to buy what I consider to be an inferior product. I resent the government telling me what I can and can’t do, when it’s not harming anyone.
I don’t want this to turn into a Great Debates thread, I’m just poiting out a significant argument that hasn’t been mentioned.
No, you’re right. But it’s a pretty recent phenomenon, especially among Americans.
I’m a free trader who hopes this doesn’t end up in GD. In service of that, I’ll start with a few reasons why a person might oppose free trade. If it stays here, I’ll pop back in later with some more reasons to oppose it and some reasons one might be in favor of it.
I’d do it all now, but you know – that pesky job thing. Boss thinks I’m actually supposed to produce something for the company in exchange for my wages. What about the fight against ignorance? Isn’t that producing? But I digress.
Why would someone oppose free trade? Well, the tariffs are a “hidden” tax, but the actual take to a government is trivial in most cases. One might oppose free trade for any number of reasons.
To protect a favored industry or one perceived to be important to a country. Steel, for example. The simple fact is that most countries will never be low-cost producers of steel because they do not have cheap access to iron or other input costs (The U.S. does have cheap input costs, but is not a low-cost producer because of labor costs – we shall address that shortly). But most countries feel it is important to have a domestic steel industry for strategic reasons (You’re not a real country until you have a steel mill, an airline and a national beer). So one might slap a big tariff on imported steel to raise the costs of importers, giving domestic steel an edge.
To protect wages: This is mostly a developed world thing, of course. But labor tends to oppose free trade because it allows goods from low labor-cost countries to compete on a level (or near-level) playing field with goods from high labor-cost countries. This matters only a little bit for products where labor input is low or where labor input is high and productivity is highly levered (finely-machined parts, manufacture to tight tolerances, etc.), but can be a very large difference where there is high labor input but fairly little return to productivity (manufacture of clothing, assembly of automobiles). Again, a tariff helps brings the cost of imported goods up to a level where domestic goods become competitive.
To fight real or perceived subsidies by other countries: Imagine a country where the government owned all the natural gas, and which sold that gas to domestic industries not at the world market price but at some arbitrary (lower) cost. Now imagine that you are a polyethylene producer in that country. You’re a pretty happy guy, no? Now imagine that you are a polyethylene producer in another country, watching rail-car after rail-car of those low-cost poly pellets pass your plant on the way to your former customers. This is an issue in the lumber market right now between the U.S. and Canada. Both countries make lumber on federal lands available to lumber companies at a very low cost, but a) the United States recently reduced the amount they make available, and b) a much higher percentage of Canadian lumber is from federal lands as opposed to private lands and c) the Canadian government is pretty overt about the fact that they price things to keep the domestic sawmills going. The effect, if you believe U.S. lumber producers, is that the Canadian government is effectively subsidizing their lumber industry. A tariff would be designed here to bring the cost of Canadian lumber up to make U.S. lumber appear more competitive.
May I start a little way back in the argument, somewhat removed from the question of free trade areas?
The case for free trade starts with this proposition (it gets a lot more complicated and in my view ends up more as an argument that trade restrictions tend to be bad rather than free trade is good):
Starting from positions of autarky (no international trade), if two countries engage in international trade it is possible in principle to make some of the residents of both countries better off and no-one worse off if relative prices differ between the two countries*. (Relative prices = the price of wheat in terms of cloth, so whether wheat sells for $100/unit and cloth $50/unit or $10 and $5 the relative price of wheat in terms of cloth is 2.)
This is so regardless of whether the difference in relative prices is due to tastes, technology, factor endowments (how much land, labour or capital a country happens to have), scale economies or whatever and regardless of whether one country is rich and one poor or even if one country is absolutely better at producing everything than the other country.
Put crudely, more stuff that people like must be available with trade than without and there are therefore potential gains from trade.
If people want I can put together a numerical example of this.
In practice some people will be worse off after trade if there is no compensation, and that’s where the trouble starts.
*[sub]and there are no externalities – costs or benefits unaccounted for by the market at the margin.[/sub]
The US-Canada lumber dispute (if you believe the Canadian lumber producers) is a case where US is breaking free trade agreements. Canada has repeatedly won (now named) NAFTA descisions and is willing to take their case to the WTO. The position here is that we simply have a natural advantage in that area and if the stumpage fees the goverment charges for cutting were auctioned off instead of set by the government, they would actually be cheaper. The US is applying illegal tariffs.
There are many Canadians steamed that they bowed to US pressure over the last decade and allowed tariffs to be imposed anyway because the forestry industry was rather weak at the time. The industry is stronger now and willing to endure a sustained fight.
A couple more reasons to oppose free trade. I’ll get to the reasons to support it tomorrow (Although picmr has already covered the big, macro-economic argument for it: more trade is good, whether it is between neighbors, neighboring states or neighboring countries.) Sorry for the delay. Can anyone arrange for the NASDAQ to move less than 2% in any direction sometime this week?
Oppose western hegemony: OK, you’ve heard this one as a slogan, but what does it mean? Free trade of goods is almost always accompanied by free (or freer) trade in capital. Huge waves of western capital descending on a tiny economy can distort equity and debt prices, edge out local capital for growth opportunities and create a high western influence on an economy before there exists enough of a local economic infrastructure to fend for itself. One result? Western control of the country’s means of production. Another possible (and not infrequent) result is that the western capital has a propensity to change its mind and try to leave all at once, wrecking entire economies because a few traders in New York and London got nervous. An economy need not be tiny like Malaysia for this to happen. Brazil, Korea and other large countries have been run essentially broke because of too-fast flows of too much western capital. Hell, someone once nearly sent Great Britain broke!
Protect local products from competition. We addressed this above when talking about costs, but it’s important to realize that not all competition is only price-based. Let’s face it, even after all those high labor costs and the cost of shipping, a Deere is still a better tractor than whatever the local thing is in most countries. Often, it will be sufficiently better to justify a much higher price because of the productivity gains it delivers to the buyer. On the other hand, a Honda is still a better car than a Ford, even at the same price point. A tariff to raise the cost of the imported product above the gain seen in buying it effectively eliminates the competitive advantage.
Protection against weaker laws (or enforcement) elsewhere: As ** Balduran** mentions, laws on everything from labor safety standards to the environment vary from country to country. If country A passes a law requiring, for example, copper mines and smelters to spend gazillions of dollars on pollution prevention, mitigation and remediation, industry can hardly be blamed if it wants that same country to impose punitive tariffs on copper from country B, where you can just dump the tailings out the back door and release the acid into the atmosphere.
Former Canadian prime minister Brian Mulroney, our signatory for NAFTA dreamed that one day there would be a free trade of the Americas that would be similar to the EU. Does anyone think this is realistic? Do any EuroDopers have any stories like the MMT one I relayed above? How are things like environmental and labour standards dealt with in the EU?
The argument in favor of free trade is simple. Free trade means that the sale of foreign products is unrestricted and compete equitably against domestic products. This almost always leads to lower prices so consumers benefit from a lower cost of living.
The arguments against free trade are that there are other beneficial goals that outweigh the value of lower prices. Here’s a few of them:
1 - Restricting trade can be a source of government income. Either directly by taxing imports or indirectly by supporting domestic industries that are then taxed. It can be argued that the government services thus paid for are worth more than the cost of the higher prices.
2 - Certain industries are important to national security. It might be possible, for example, to buy froeign aircraft cheaper than domestic ones. But if you buy all your aircraft from a foreign nation, that nation has the ability to deny you aircraft. If you go to war against this nation, you now face a huge disadvantage. So some nations enact restricted trade to enable certain important industries to exist.
3 - Free trade means competing against countires with different economic standards. Suppose, to give an extreme example, one country allows businesses to use slave labor. Because of the almost non-existent labor costs, products in that country are cheaper than those in another country where slavery is prohibited. The free labor country cannot compete with the slave labor country unless laws are passed which fine products produced by slave labor. In more controversial cases, similar arguments can be made about standards like minimum wages, child labor laws, unionization rights, enviromental standards, etc.
4 - Probably the most commonly invoked argument is that restricted trade protects jobs. In the free trade argument I presented above, consumers benefitted from the lower cost of buying foreign products. But many of those same consumers are employed by the manufacturers of domestic products. If those domestic manufacturers cannot sell their products, their business collapses and their employees lose their jobs. The consumers who were happy with lower prices now have no income to buy any products.
Add to that, restricted trade may protect “culture”, which can also cross over into national security and/or environmental issues. With cheap, subsidized Federal land leases, we ensure that ranching continues. Five years ago, there was some debate pitting “the vanishing cowboy” vrs. environmental damage and wasted tax dollars. Western politicians decried the weaselly vegetarian enviro Californicators for trying to endanger that American icon. Perhaps today, you might factor in a disease free supply of meat as a rationale.
Japan, similarly, tries to protect some of its traditional farming activities. Many Asian countries even find a strategic necessity in protecting their food industries, such as rice production, with tariffs. On the other end of the spectrum, a somewhat comical incident involves Greece’s accession to the EU, wherupon they learned that “feta” was patented to the Dutch, and Greek feta sold in Europe would be called “white cheese”.
Now, who gains and loses from trade? Using wheat and cloth and Taiwan and Australia as countries, it is likely before trade that the price of wheat in terms of cloth is different between the two countries, probably because the costs of producing them are different. The country which produces cloth relatively cheaply is said to ghave a comparative advantage in cloth and a comparative disadvantage in wheat. To repeat what I said earlier it doesn’t matter if one country is worse at producing both goods the story is the same: both gain.
If these countries now trade, they will export their comparative advantage good and import their comparative disadvantage good. Imports will partly or even completely replace the domestic comparative disadvantage industry. Both countries will gain in the sense that more goods are available. Relative prices in the two countries will move towards each other.
In the Taiwan/ Australia wheat/ cloth example, you would expect Australia to export wheat and import cloth. Why - because in Australia labour is relatively scarce and land relatively abundant, so it’s likely that Australia will be able to produce wheat relatively cheaper than cloth, and Taiwan (which has more people and less land) will be able to produce cloth relatively cheaper than wheat.
Now – without introducing any compensation or any handwaving about long-term dynamic gains from trade – some people will be worse off after trade. Generally speaking, this will come from one of two effects - the price of consumption goods and more importantly the prices of factors of production. The price paid by Australian consumers for wheat will rise. So if you happen to have a really strong preference for wheat, you may lose.
The more important thing is what happens to factor prices. This gets to the question of whether workers or capitalists gain from trade. In my example, (ignoring for the moment any transitional costs) resources in Australia will move from the cloth sector to the wheat sector , and factor prices (wages, returns to capital, rental rates for land) will move with them. The abundant factor (land in Australia, labour Taiwan) will gain and the scarce factor will lose (this is the Stopler-Samuleson result BTW). In other words, Australian workers would face lower wages.
This is a really important result for a number of reasons:[ul][li]first, obviously, this is going to piss off the scarce factor and they and the industries that they mostly work in are going to be obvious candidates for opposing free trade;[]At least as far as this argument goes it is NOT TRUE that capital gains from trade and labour loses. In countries with abundant labour and scarce capital (i.e the third world) labour stands to gain from free trade. Trade raises wages in low wage countries. To the extent that you are worried about pauper labour in the third world, buying their stuff is a good place to start if you want to see better living standards.[]Recognising that there are transitional problems, unemployment in the scarce-factor-intensive industry is going to be a problem when moving towards freer trade. The extent to which governments can ease this transition will be important both in determining the strength of opposition to freer trade and the actual benefits that accrue to a country.[/ul][/li]
As to some of the objections various people have posted:[ul][li]the defence industry/ strategic self-sufficiency argument: standard theory says that subsidies are superior to tariffs in dealing with these problems.[]Unfair practices by other countries (dumping, them having high tariffs etc): the first thing to remember about dumping is that we’re complaining about foreigners selling us stuff too cheaply. An odd complaint in some ways. It can be a problem, and undoubtedly is annoying for the domestic industry, but anti-dumping measures probably address a non-problem with a handout to a harmed industry funded by exporters and consumer of the product. In the case of “they’ve got high tariffs, so we should too”, unless this is a short-term measure which actually frightens the other country into reducing their tariffs, this tends to turn into a situation of cutting off your nose to spite your face.[]The race to the bottom (or undue uniformity) in regulation, culture, labour and environmental standards. This is a difficult issue, and one where the interests of capital do seem to trump other interests, particularly when we’re talking big multinationals standing over the governments of small countries. It is not clear to me that Western governments and/or middle-class political movements are justified in imposing choices on impoverished countries, nor is it clear that trade restrictions will necessarily improve the situation from such perspectives. But, yeah, this is a doozy of an issue.[/ul][/li]If there is interest, I’ll fill out the standard arguments about why tariffs (and other forms of trade restrictions) are generally inferior to other sorts of polices.