What's so hot about free trade?
July 12, 2010 5:22 AM   Subscribe

I must have not been paying attention in high school economics class. (Or else I probably fell asleep after watching too many episodes of Economics USA.) Why is free trade a good thing?

Every time I see a news story about manufacturing jobs moving out of the country I wonder why free trade is considered such a good thing. The free trade trend, over the past few decades, seems to have coincided with the hollowing out of much of the US economy. Frankly I'm a bit surprised that somebody hasn't campaigned on a platform of adding tariffs to help maintain US jobs. Could I get a basic economics lesson, simple enough for an engineer to understand?
posted by LastOfHisKind to Law & Government (33 answers total) 11 users marked this as a favorite
 
The idea of comparative advantage argues for free trade. There are some objections, though, as you can see at the bottom of the wikipedia page.
posted by Durin's Bane at 5:28 AM on July 12, 2010 [2 favorites]


Also, everyone tried the "tariffs to protect jobs/our economy thing" during the Great Depression, and it sucked.
posted by Aizkolari at 5:40 AM on July 12, 2010 [1 favorite]


Also, if you're just looking at "lost" jobs, you're falling for the Broken Windows Fallacy. Basically, particular job loses are very visible and sympathetic, but the larger gains from trade are dispersed and invisible.

It should also be noted that there's no real difference between jobs that are "lost" to foreign trade, and jobs that are "lost" through inter-state trade, or, for that matter, "lost" due to technological change.

There's also a very nice podcast/lecture at EconTalk that discusses trade, specialization, etc., beyond the standard Ricardian comparative advantage framework, which is probably more relevant to how trade and specialization works in the real world. It's about an hour long, and I think it's well worth a listen.
posted by chengjih at 5:43 AM on July 12, 2010 [5 favorites]


Free trade lowers prices for end consumers, who can then use their money for other things, such as making their lives better.

Tariffs may help maintain U.S. jobs by artificially ensuring that U.S.-based manufacturers keep their profit margins, but from the end user's perspective, all it does is keep prices high.

Which means you can't buy as many things ...

... which doesn't always mean you don't get to buy a second TV. Sometimes it means you can't buy college tuition for your kids.
posted by Cool Papa Bell at 5:46 AM on July 12, 2010


Because free trade improves human rights.

I won't get into the "why"s and "how"s, but look around the world at our free trade partners (China, Russia) verses the ones that we have sanctioned (Cuba, North Korea). When we have free trade, it is like we are also sending an ad for America and our freedoms, and those societies advance in their treatment of people. When we have sanctions, it puts those societies in an adversarial mode against America and they shun our way of life, including our freedoms.
posted by I am the Walrus at 5:46 AM on July 12, 2010


The Wikipedia link is a good explanation, but a super quick briefing on comparative advantage goes like this:

I need to do my taxes, and I need to install some windows. I'm an accountant. It'll take me about half an hour to do my taxes, and four hours to install the windows.

You need to do your taxes, and you need to install some doors. You're an engineer. It'll take you half an hour to install your doors, but about four hours to do your taxes..

I'm more efficient at accounting-related things, and you're more efficient at engineering-related things. If we join forces and trade our labour so that the person who's most efficient at doing something actually does it, then we increase our productivity. E.g. I do both our taxes, and it takes me an hour in total. You install my windows and your doors, and it takes you an hour total. Now both of us suddenly have three and a half more hours time that we didn't expect to have, which we can then use to post to MetaFilter to increase our quality of life. (Or something.)

Now imagine you and I are different countries. Every level of tariff you add to the products would be like time spent negotiating the trade and whether or not we're both getting a fair deal, which is time we then don't have to use to post to MeFi.

In practice, of course, it's not that simple. For example, maybe it takes me four hours to do taxes, and four hours to install doors. In that case, it would still be more beneficial for me to contract out the installation to you. Even though I'm spending the same amount of time on the work I'm doing (taxes for both of us), you would only need an hour to do the installation for both of us. The free time you get represents increased productivity for you. Taken as an aggregate of the world (you and I) this free trade has still increased the productivity of the world, even though I personally don't see any benefit of it. That's because I'm better at doing taxes, compared to how my resources would otherwise be used, even though we take the same amount of time absolutely. I might be able to say that I will do your taxes if you install my windows AND fix my garage. This way I get an extra level of labour out of it, and you still come off with free time that you wouldn't have had otherwise. Most trade agreements come down to negotiating the terms of what is exchanged for what, one tax return for one set of windows, or one tax return for windows and a garage.

What it comes down to: Free trade looks at the big picture. Protectionism might seem like the patriotic thing to do, but it'll result in a crippling of your country's development in the long run. If all other countries are taking advantage of each other's comparative advantages, and you're trying to develop your own technology without the productive efficiencies already found in the world, you're going to be left behind.
posted by Phire at 5:46 AM on July 12, 2010 [7 favorites]




I like this blog article, which asks the question: "If a country's comparative advantage is in dirt farming, how can it still industrialize under unrestricted free trade?" (actually this question is asked in one of the comments, but it's a good summing-up).
posted by A Thousand Baited Hooks at 5:51 AM on July 12, 2010


Adding tariffs is a great strategy, assuming that all your trading partners don't do exactly the same thing. What happens then is you can't afford to import stuff from overseas, and no one can afford to buy your stuff. So the industries that specialize in these goods that used to be exported then suffer. Ditto those industries overseas. That's what you do when you want to turn a Halfway Decent Depression into a Great Depression.

We still have quotas and tariffs on some surprising products: cane sugar, for instance. Why? It's not like we have a huge cane sugar industry that's being threatened by cheap imports. Ah, of course-- because we have all the HFCS we need (and plenty we don't) that could be affected by cane sugar imports. What would removing those tariffs/quotas do? Well, for starters, the countries who can economically produce cane sugar tend to be the poorest shitholes on the planet. Free up trade barriers, and you'd give their economies a hell of a boost. Introduce some competition into the sweeteners market in the US and you'd go a hell of a long way to reducing the monstrous industry that is commodity corn and the deluge of HFCS seeping into everything we eat. Anyway, that's why I like free trade.
posted by holterbarbour at 5:52 AM on July 12, 2010 [1 favorite]


I think an important point is that free trade favours the cheaper producer, in the cheaper country, with the cheaper costs because that country is ignoring environmental rules which are widespread everywhere else, or social safety nets that are widespread almost everywhere else.

Yes, this information is available to the consumer, but consumers are busy. So I think a perfect system would make this more visible.
posted by devnull at 5:54 AM on July 12, 2010 [3 favorites]


Also, yes, to speak to the political aspect of your question, you are right to identify a major tension in US politics between an ideological commitment to free trade and horror at its consequences, once those consequences come to affect US workers. This is just hypocrisy; there isn't an explanation anyone could provide that would render it coherent.
posted by game warden to the events rhino at 5:58 AM on July 12, 2010 [5 favorites]


I won't get into the "why"s and "how"s, but look around the world at our free trade partners (China, Russia) verses the ones that we have sanctioned (Cuba, North Korea). When we have free trade, it is like we are also sending an ad for America and our freedoms, and those societies advance in their treatment of people. When we have sanctions, it puts those societies in an adversarial mode against America and they shun our way of life, including our freedoms.

I don't know, there's a lot going on in each of these countries that doesn't actually have a lot to do with you.

Also, it's not clear how well global free trade will be able to cope as economies around the world start to come up against really hard barriers to continued growth, like peak oil etc. So far it's only been tested in a long period of economic expansion and may be practically impossible to maintain in a time of global contraction.
posted by A Thousand Baited Hooks at 6:00 AM on July 12, 2010 [1 favorite]


One point of note, the economists who originally presented the idea of free trade, Adam Smith and Robert Picardo, they used food and labor as basic elements of free trade.

Today, in the World Trade Org, certain things are exempted from free trade because of (so called) security concerns. The biggest examples are food and labor. It is supposedly a security problem for wealthier nations is tons of cheap laborers show up to work there. It is also a security problem if a countries becomes dependent on trade for its food, and stops having the ability to feed itself on its own.

However, for many of the poorest countries in the world, food and labor are precisely the items that they have to offer, which they could use in a free trade model to become richer. But, they are prevented from trading those goods.

Haiti is a good example. It's workers are dying to come to Florida and the US to work, but can't. The one decent product that Haiti produces is guavas, but American guava growers get gov't subsidies (as does most of the American agricultural industry), so the Haitian guava growers can not compete.

If labor and food were included in the WTO, then free trade would really help all nations. But, many people consider the so-called "security exemptions" to be an effort to rig the game in favor of the rich.
posted by Flood at 6:03 AM on July 12, 2010 [5 favorites]


Comparative advantage. Also, trade barriers usually take the form of price floors or ceilings (for example, through tariffs and subsidies) - these are inefficient (they f*ck around with supply and demand, creating artificial shortages and surpluses - like butter mountains), prop up dodgy performers (this isn't sustainable without incurring massive costs) and leave value on the table.
posted by obiwanwasabi at 6:05 AM on July 12, 2010


Odinsdream notes an article by Noam Chomsky, part of what Chomsky is what I was trying to relate above about the free trade system of the WTO is rigged.

Chomsky is in favor of a pure free trade system, like that envisioned originally by Smith and Picardo. However, the set-up today rigs things in favor of the rich countries.
posted by Flood at 6:07 AM on July 12, 2010


(But on the other hand, maybe nasty externalities - pollution, labour exploitation, supporting oppressive regimes etc. YMMV.)
posted by obiwanwasabi at 6:08 AM on July 12, 2010


The famous Al Gore/Ross Perot NAFTA debate might be worth watching.
posted by starman at 6:12 AM on July 12, 2010 [1 favorite]


Libertarian think-tank the Cato Institute stated, in the paper Steel Trap: How Subsidies and Protectionism Weaken the U.S. Steel Industry, that "[Protectionist tariffs] for steel producers could invite WTO-legal retaliation against other U.S. export sectors, [...] and saddle downstream steel-using industries with price hikes and supply shortages that will handicap them vis-à-vis their international competitors. Protection will only prolong crippling overcapacity in the domestic steel market."

In other words: let's say car companies are the main buyers of steel.

1. If you tax imported steel, American car companies have to pay more for their steel than do their European and Asian competitors. That makes American-made cars more expensive, which means higher costs for American buyers, and fewer exports.

2. If you tax steel, steel-producing countries may introduce tariffs on American import goods in retaliation. For example, they might put a 20% tax on American cars - meaning, again, fewer exports.

3. If you force American car companies to subsidise otherwise-uneconomic steel suppliers, it only serves to delay economic problems and shift them around. The steel industry's inefficiency problems will still exist, just now they'll also be the car industry's problems.
posted by Mike1024 at 6:14 AM on July 12, 2010


The PBS series Commanding Heights is a really good starting point.
posted by The Straightener at 6:29 AM on July 12, 2010


The cool thing about comparative advantage (to hijack Phire's example) is it still makes sense to trade even if you can install a window in four hours and the window person installs it in six. Take a look at the Wikipedia example: Southland is better at both things than Northland and it still makes sense to trade. This is basically the argument for NAFTA even though the U.S. can produce almost everything more efficiently than Mexico.
posted by MarkAnd at 6:34 AM on July 12, 2010


There's a neat way to put this:

You, as a consumer, benefit from free trade by opening up the market to competitive products, the comparative advantage and a wider range of options when you go to purchase a product.

You, as an employer, benefit from free trade by having the option to farm work out to countries with lower labor and capital costs, as well as importing primary goods at lower prices.

You, as an employee, rarely benefit, due to pressure on your employer to do the above. As countries with lower labor and capital costs emerge in an industry, there are pressures from without and within to ditch domestic, high-cost production in favor of lower cost options.

This is of course, a benefit to people in emerging economies, who go from nothing to a little more than nothing, although the fairness of the price paid is certainly to be contested.

So you benefit if you buy or you employ, but rarely do you benefit if you are employed, unless it's in an emerging economy.
posted by Hiker at 6:35 AM on July 12, 2010 [1 favorite]


The other benefit of free trade is (or at least so the theory goes) that the more interconnected your economy is with that of someone else's, the more you have a vested interest in their continued well-being and more incentive to think twice about starting a war with them. Imagine if Halliburton had a significant presence in Iraq BEFORE the invasion-- there might not have been an invasion. Similarly, it's in the best interests of both the US and China to ensure that the economy of the other continues to grow.
posted by holterbarbour at 6:51 AM on July 12, 2010 [1 favorite]


It's been a while since I read it, but a big chunk of Paul Krugman's 1995 book Peddling Prosperity is devoted to making the case for free trade.
posted by escabeche at 7:02 AM on July 12, 2010


Every time I see a news story about manufacturing jobs moving out of the country I wonder why free trade is considered such a good thing. The free trade trend, over the past few decades, seems to have coincided with the hollowing out of much of the US economy.

These are not the same thing. The manufacturing sector of the US economy was, up to the recent crash, doing great. It was just doing great with fewer workers and more automation. This trend would not disappear if the rest of the world disappeared.

Frankly I'm a bit surprised that somebody hasn't campaigned on a platform of adding tariffs to help maintain US jobs. Could I get a basic economics lesson, simple enough for an engineer to understand?

Short answer:

We tried that in the 1920s and 1930s, along with the rest of the world. The results can be summarized as "A global economic apocalypse so intense that it almost killed democracy on the planet and helped catalyze a spasm of violence that killed somewhere north of fifty million people."

Shorter answer: Based on real-world experience, explicit and wide-ranging protectionism is on the list of policies filed under "NEVAR AGAIN."
posted by ROU_Xenophobe at 7:09 AM on July 12, 2010 [2 favorites]


Free trade, tariffs and all the rest aside, no region or country has a permanent lock on domination in any manufacuring or production sector. If, for example, it is cheaper to make cars in China and ship them to Detroit than it is to make cars in Detroit, people trying to sell cars in Detroit will make them in China. Tariffs and other controls can artifically and temporarily increase the cost of those Chinese cars. In the long term, this almost always works to everyone's disadvantaged because the nations targetted by the tariffs decide they have no option but to impose tariffs on products made in Detroit and shipped in.

However, tariffs and similar trade barriers can't really impact fundamental economic changes. E.g., Chinese labor costs are increasing, so many of the produts we import from China today will, tomorrow, be manufactured someplace else. If it's cheaper to make widgets in Bangladesh than in Guangzhou, then people who want to ramp up new widget factories are gonna build in Bangladesh.
posted by justcorbly at 7:10 AM on July 12, 2010


Free trade is not such a good thing when it comes to national sovereignty issues like long term food security. When cheap foreign foods can flood a market, it makes the local arable land more valuable for other purposes like low density housing development. That land is removed from production permanently, wether or not the price of food rises in the future. Free trade also argues against the continuance of market management boards like the Canadian Wheat Board or the Ontario Milk Marketing Board.

Also, everyone tried the "tariffs to protect jobs/our economy thing" during the Great Depression, and it sucked.

The old Reagan era, "big government bad" philosophy is starting to wear thin on me. The Wheat Board was set up so that farmers could compete on a larger scale (rather than just with each other) and couldn't be held hostage by transportation costs. Things like government subsidized energy, water or waste and transportation infrastructures can all lower the selling price of a commodity and could be considered unfair government manipulation. Even Canadian healthcare has been called an unfair trading subsidy.
posted by bonobothegreat at 7:28 AM on July 12, 2010


Free trade is favored largely because the alternative of centralized control has been shown to be terribly inefficient. Nations without free trade are poverty stricken and oppressive. The Index of Economic Freedom is a great way to see the relationship between free trade and human rights. While centralizing power is very easy, coordinating the information necessary to organize an entire economy is, as a matter of practicality, impossible.

A point that is often hard to swallow when discussing free trade is that business failure plays a very important part in a thriving economy. When profits for a particular business decrease or disappear, it is because they are no longer providing a useful service, or because someone else has innovated and delivered a comparable good for a better price. The loss of profit incentivizes innovation and improves the goods produced by the first company, or it fails to innovate and is replaced by a better company. The economy on the whole is better off because the same good is produced more efficiently, and the closure of the inefficient business frees up the labor and capital for other uses. This minimizes the number of goods produced for which there is no demand.

To use a tired example, imagine a horse carriage factory. With the advent of the automobile, a comparable good reduced demand for the horse carriage. Wise innovators could turn their factory into a luxury goods product (as there remains even today a market for horse carriages as novelties) or retooling their factories to produce other goods (sleds, boats, whatever). The economy on the whole would not benefit from the continued manufacture of horse carriages, as there would be a vastly reduced demand for the product. While the factory may stay open a few years after automobiles are widespread, the labor employed there is essentially being wasted. When the factory ultimately closes, the labor is freed up for more productive uses.

This often looks like a personal tragedy for people losing their jobs even though the economy on the whole is better off for it. Because it can take significant investment to train unskilled laborers into productivity, there is a case to be made for providing education, job training, and job-hunting assistance to people. An alternative argument, of course, is that the knowledge that one's skills could one day become obsolete incentivizes people to educate themselves and constantly seek skills that can be employed in versatile ways without the need for a public program.

Free trade proponents scorn subsidies for exactly this reason. A subsidy, a government payment to support an ailing business, forces the economy to endure the persistence of a wasteful business. We can imagine an auto maker in Detroit that produces shoddy products at very high prices: while we could keep the employees at those factories employed via subsidies, this would simply make their industry dependent upon government subsidy, and reduce their incentive to innovate since they can expect greater subsidy.

Free trade does require attention to the human details. While government intervention in some areas of the economy (education, especially) drives down efficiency, a certain degree of efficiency can reasonably be sacrificed for safety. The degree is a matter of raucous debate, of course.

Free trade is not such a good thing when it comes to national sovereignty issues like long term food security. When cheap foreign foods can flood a market, it makes the local arable land more valuable for other purposes like low density housing development. That land is removed from production permanently, wether or not the price of food rises in the future.

The free trade interpretation of this situation is that the capital currently employed for food production is now made available for real estate use for greater profit, pricing the previous use out of profitability and enabling a (comparatively) more productive use of capital. That land is not permanently removed from production, as it can later be reclaimed for a particular cost. That land will not be priced into agricultural use without significant turmoil, and that cost will not threaten homeowners until it becomes attractively priced for them to sell their property for agricultural use.

Since free trade between nations makes them significantly less likely to engage in hostile conflict, this influx of cheap foreign foods is a win-win for everyone involved: foreign farmers have a market to sell their products, local landowners have a more productive use for their capital, and both can pursue their economic relationship safely and securely because their respective sovereigns will be less likely to risk their trade relations with armed conflict.

The Wheat Board was set up so that farmers could compete on a larger scale (rather than just with each other) and couldn't be held hostage by transportation costs. Things like government subsidized energy, water or waste and transportation infrastructures can all lower the selling price of a commodity and could be considered unfair government manipulation. Even Canadian healthcare has been called an unfair trading subsidy.

You do raise an excellent point. Public investment in infrastructure can improve the efficiency of the total economy, and investment toward improving the competitive options of your national industries can provide a boost unavailable to any individual private entity. And infrastructure is a rare exception wherein public efficiency of management actually can exceed private efficiency. I've ranted enough to start a debate about healthcare, though... I'll leave that discussion for when someone asks about the free market debate about healthcare.
posted by Lifeson at 8:41 AM on July 12, 2010


So you benefit if you buy or you employ, but rarely do you benefit if you are employed

Well, one benefit is that, taken as a whole, prices will generally fall on all sorts of consumer goods and services, while quality will go up.

Televisions used to be luxury items, then they were commonplace, then there was one in every room of the house, then there were flat screens, then there were flat screens in every room, and now television is on your phone.
posted by Cool Papa Bell at 8:47 AM on July 12, 2010 [1 favorite]


To me, free trade is good because it is ethical. No one should have the authority (through violence or threat of it) to tell you what economic decisions to make. That said, I don't think any politician advocating for free trade takes the meaning of the term seriously.
posted by symbollocks at 9:29 AM on July 12, 2010


Factoid: US politicians generally support reciprocal free trade. We make a deal with XYZistan that they can sell their stuff to us, as long as we get to sell our stuff to them. This is "fair" in that we lose some jobs, they lose some jobs, but we both get cheap stuff.

Economists (starting with Smith and Ricardo) support unilateral free trade. If XYZistan wants to sell us stuff...let them, no matter what! The social gain to us of having cheaper stuff will outweigh our loss of jobs.

Economists also see no problem with other countries subsidizing their goods. If the government of XYXistan wants to spend $1 billion reducing the price of their goods in our markets...that's great! The government of XYZistan has just given our people $1 billion! Sure, some jobs will be lost, but the total cost of this loss is smaller than $1 billion.

There are all kinds of pathological cases that get much more complicated, but that's the basic gist when economists are talking about simple markets.
posted by miyabo at 9:48 AM on July 12, 2010


Short answer:

We tried that in the 1920s and 1930s, along with the rest of the world. The results can be summarized as "A global economic apocalypse so intense that it almost killed democracy on the planet and helped catalyze a spasm of violence that killed somewhere north of fifty million people."

Shorter answer: Based on real-world experience, explicit and wide-ranging protectionism is on the list of policies filed under "NEVAR AGAIN."


Not all economists agree that protectionism was a cause of the Great Depression. Krugman, for example, disagrees, claiming that protectionism was a result of the economic tailspin, not a cause.
posted by dd42 at 11:31 AM on July 12, 2010


Krugman, for example, disagrees, claiming that protectionism was a result of the economic tailspin, not a cause.

Ferris Bueller's history teacher agrees with you.

"In 1930, the Republican-controlled House of Representives, in an effort to alleviate the effects of ... the ... anyone? Anyone?"
posted by Cool Papa Bell at 11:39 AM on July 12, 2010


I only want to say that the free trade mantra (that it's in an of itself, a positive force) needn't be accepted as empirical fact. I don't feel that free trade is so essential to prosperity that it can trump national sovereignty or hobble a government's responsibility to make long term plans for it's citizens.

During and immediately after the war, the economies of all the major powers were very centrally managed and I vaguely remember that Canada had plenty of taxes and import duties back in the 60s and things seemed to be humming along very nicely until around the time of the oil crisis.

Korea was an emerging powerhouse back in 89-91 (when was living there) and they had tariffs out the wazoo. Everything imported cost a fortune. Bananas cost a freakin dollar each and even though Korea is sandwiched between China and Japan, it was impossible to find a foreign made toaster. The local factories were going like gangbusters, producing fugly versions of every consumer gizmo imaginable because the market was protected.

Korea's economy didn't take off because they did anything about lowering tariffs. Large corporations owned the place and were protecting/nurturing themselves at the expense of the local labour force and consumer. Likewise, China may not have a lot of official tariffs but I would bet that overly competitive imports are stymied in many unofficial ways. China seems to be getting more robust all the time. I don't mean to say I want to live in a grey, socialist monoculture and I admit that protectionist Canadian content legislation is probably directly responsible for lame and evil bands like Nickleback.

It's just that there are too many forces at work in the global economy for me to feel like anything more than a sap if I think I'm going to secure my prosperity by giving up things like local control over labour or health standards.
posted by bonobothegreat at 7:36 PM on July 12, 2010


« Older Healthy places on the web?   |   SF/F books that feature lesbians as main... Newer »
This thread is closed to new comments.