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Tuesday, August 02, 2016

Free Trade - or no free Trade - either ways it ain't free!

Econgirl commented about the latest free-trade issue.  It is a must read - continue down to the comments too! Then David Henderson commented about it on his blog and the comments where @econgirl responded to his question. All must read in the overall dialogue about free trade.

There are a few things that need consideration:

  1. The losers of free-trade - how adaptable they remain after they lose: In many cases, these people are lost - this is a political price we are paying. Thus, a $10 gain per-consumer v/s say a total job loss of 10,000 people (hypothetical primary loss) usually it remains concentrated (think Detroit) and second and third order economic losses. Now in monetary terms, the gain-loss may be whatever, but when a group of people loses their livelihood without any margin or buffer to create new opportunities for themselves, then it makes for a difficult choice.
  2. The initial condition is responsible for the losers being as many as they currently are: If the trade was always free, the adjustment would have taken place a long time ago, giving the population enough margin to adjust. However, the governments by their initial protectionist intervention create a bigger adjustment problem in the future. When a competency develops in a country, the government rallies behind the firms with the very policies which later accumulate into a bigger problem. The adjustment to new potential trade-based threat can be innovation or it can be defeat. The auto-industry failed to innovate - something Tesla did, Ford and GM should have done years ago. But those are victims of their own success. At present, China is funding auto-tech companies to bring out a competitor to Tesla. 
  3. Free trade - v/s Fair trade: Indeed some countries do "dump" products on to other markets. At the same time, some countries do use "non-tariff barriers" for the protection of domestic industry. When is the "fire-sale" not dumping and when "non-tariff barriers" are not protectionist can only be answered on a case-by-case basis. This ambiguity is used to target Free-trade unfairly. 
  4. Economic V/s moral - politics enters through morality: Can we allow some trade partner using slave labour to create losses in our country? Economics says why not, morality says no. Blood diamonds are an example. That is where politics comes in. So while overall benefits of free trade may be high - the morality over why the government should not choose one set over other is a strong political motive against change of status quo. Of course people selectively forget that it was government intervention that helped the problem to get bigger.

So in an ideal case:
  • Free Trade is the default. Government has no business interfering in that unless some moral issue arises. The scope of these issues are pretty narrow - slavery etc.
  • Countries should progressively move all policy towards sector neutrality - including trade policy. Thus, a government would be right to have 50% markup over all goods/services entering the country/sold in the country without discrimination.
  • Then let this state continue and let governments step away from the issue altogether. (more on this in another post).

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