One of the most consistently rewarding (non-IPE) blogs I read is the excellent Overcoming Bias. As you might guess from the title of the blog, they regularly suggest ideas and strategies for critical self-examination, as well as other philosphical musings. A recent post recommended trying to write a hypothetical apostasy: take a complex debate over some topic or "ism" about which you've already made up your mind and have defended vigorously, and argue the opposite. Also: the fate of the world depends upon how convincing your arguments are to a jury that's already skeptical about your motivations.
So let's try this out with one topic that we've been hammering on about for quite some time: the value of free trade over protectionism. Here is a set of arguments on why a faith-based defense of free trade is problematic.
Bang for Buck - Paul Krugman has pointed out that, if you lack a set of internationally coordinated stimulus measures (like now), then the problem with injecting money into your economy is that some of it will be spent on the products of other economies (imports). And yet, the entire debt burden of additional spending falls upon the shoulders of the government that actually spends the stimulus money. The result is less-than-sufficient fiscal stimulus and a global economy that recovers very slowly.
If, however, every country shut down its economic borders and focuses on stimulating the local economy, then in theory, "protectionism can make the world as a whole better off." It's a second-best solution, but perhaps more politically feasible than international coordination.
Defense - What good is creating a wealthy society that cannot defend itself from aggressors? Some aspects of economic activity are crucial to defending the livelihood of society, and should thus be protected from foreign competition. Even Adam Smith, the prophet of free-marketeers, recognized the importance of Britain's navy to its overall wellbeing: "As defence, however, is of much more importance than opulence, the [monopolistic] act of nagivation is, perhaps, the wisest of all the commercial regulations of England." We've moved from sail-powered to nuclear-powered ships, but the principle is the same.
Monopoly - If a country possesses a monopoly over the production and sale of a particular good or service, there may very well be a higher marginal rate of return if prices are artificially raised by a tariff or something similar. With freer trade, those monopoly rents would disappear.
Development - The Ricardian model of comparative advantage that is taught in ECON1000 courses to explain why free trade works is oversimplified. Among other things, it assumes frictionless trade between economies. The reality of international trade is very different (see Dani Rodrik). Despite the progress achieved through the WTO, there remain high transaction costs for international trade. Moreover, labour mobility is still heavily restricted, which disadvantages poorer, labour-rich economies.
So let's try this out with one topic that we've been hammering on about for quite some time: the value of free trade over protectionism. Here is a set of arguments on why a faith-based defense of free trade is problematic.
Bang for Buck - Paul Krugman has pointed out that, if you lack a set of internationally coordinated stimulus measures (like now), then the problem with injecting money into your economy is that some of it will be spent on the products of other economies (imports). And yet, the entire debt burden of additional spending falls upon the shoulders of the government that actually spends the stimulus money. The result is less-than-sufficient fiscal stimulus and a global economy that recovers very slowly.
If, however, every country shut down its economic borders and focuses on stimulating the local economy, then in theory, "protectionism can make the world as a whole better off." It's a second-best solution, but perhaps more politically feasible than international coordination.
Defense - What good is creating a wealthy society that cannot defend itself from aggressors? Some aspects of economic activity are crucial to defending the livelihood of society, and should thus be protected from foreign competition. Even Adam Smith, the prophet of free-marketeers, recognized the importance of Britain's navy to its overall wellbeing: "As defence, however, is of much more importance than opulence, the [monopolistic] act of nagivation is, perhaps, the wisest of all the commercial regulations of England." We've moved from sail-powered to nuclear-powered ships, but the principle is the same.
Monopoly - If a country possesses a monopoly over the production and sale of a particular good or service, there may very well be a higher marginal rate of return if prices are artificially raised by a tariff or something similar. With freer trade, those monopoly rents would disappear.
Development - The Ricardian model of comparative advantage that is taught in ECON1000 courses to explain why free trade works is oversimplified. Among other things, it assumes frictionless trade between economies. The reality of international trade is very different (see Dani Rodrik). Despite the progress achieved through the WTO, there remain high transaction costs for international trade. Moreover, labour mobility is still heavily restricted, which disadvantages poorer, labour-rich economies.
In this non-idealized world, trade is concentrated between OECD countries and capital is actually going from developing to developed parts of the world. Put another way, the gains from trade are skewed towards the already-rich countries. Yes, it's true that emerging markets like Japan, South Korea, Taiwan and now China and India have achieved remarkable growth in recent years, but each of these deviated from the ideal free trade model. Japan had state-supported export industries and lived under an American security shield during its period of boom. Ditto with South Korea and Taiwan, although with some variation. China kept very tight control over its economic direction during its coming out decade of the 1990s and only now, once it established itself as an economic power, has it begun it loosen some of the protectionist barriers.
Go further back in history and you see how the Dutch, then the British, then the Americans all used monopolistic and protectionist approaches to economic policy - this was part of the package that helped them grow to the industrial powers of their day. In short, protectionism is part of any smart development strategy.
Protectionism-as-threat - It can be used to threaten other nations to back off from beggar-thy-neighbour policies. Protectionism can also be a tool to pry open foreign markets.
Protectionism-as-threat - It can be used to threaten other nations to back off from beggar-thy-neighbour policies. Protectionism can also be a tool to pry open foreign markets.
Equality - Free trade rests upon the principle of comparative advantage, and comparative advantage means specializing in what you produce most efficiently. If your economy is best at jobs requiring highly-skilled and highly-educated workers, then further specialization will disadvantage the less-skilled, less-educated workers and vice versa. "Retraining programs" are of limited value, especially for older workers. And if a factory-town loses its factory because of international competition, there are serious limitations to how easily former factory workers can learn to become software engineers or whatever. These are the real, human costs.
Ardent free traders insist that these costs are offset by economy-wide gains "a rising tide raises all boats." Let's leave aside for the moment the argument that the gains from more affordable toys for you kids is more than offset by the loss of your job - that's obvious. But there is evidence suggesting that the gains from trade are not all they're cracked up to be.
Ardent free traders insist that these costs are offset by economy-wide gains "a rising tide raises all boats." Let's leave aside for the moment the argument that the gains from more affordable toys for you kids is more than offset by the loss of your job - that's obvious. But there is evidence suggesting that the gains from trade are not all they're cracked up to be.
Take Mexico. Since the implementation of NAFTA, Mexico's GDP growth has not really been all that impressive. Yes, the export industry has grown and, yes, FDI has gone up. But economic growth has not been sufficient to address unemployment concerns in the country, and free trade has altered the structure of the economy. Have a glance at the concluding remarks of a 2005 UN-sponsored study on the post-NAFTA Mexican economy:
...the elimination of most fiscal and financial subsidies put a strain on the manufacturing sector’s relative rate of return. And although financial liberalization led to a serious restructuring of Mexico’s banking sector, domestic credit for productive activities and for investment has been severely rationed for the last ten years....
Thus a dual structure has been taking shape in Mexico's manufacturing sector. On the one hand, there are a few very large firms whose links with transnational corporations (TNCs) and access to foreign capital have helped them to become important players in export markets; on theother hand, vast numbers of medium and small firms struggle to survive the intensified pressure from their external competitors.
Meanwhile, the gini-coefficient, has shot through the roof - just as it has in China.
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Note that few of these arguments dispute the underlying logic of free trade theory, strictly speaking; these are instead exceptions to the theory or political economy realities which fall outside of the theory's scope. But these exceptions to the theory are ubiquitous in the real world of economic affairs, which means they need to be addressed. If NAFTA isn't doing for Mexico what it said on the box, simply re-iterating Ricardo's arguments or shouting "Heretic!" at all those who point out this inconvenient fact is not helping.
We need to tackle the tough questions, and that means tempering our dogmatic oversimplification that free trade = good, protectionism = bad. Economic history shows that things are messier than that, and that in many cases, the gains from free trade have been oversold.
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