An argument I have come up against recently, in this apocalyptic book by James Rickards, is that free trade, as classically defended by David Ricardo with his famous Law of Comparative Advantage, only works in theory because the freedom to move capital and factors of production around means the “playing field” of the market is never “fair”, hence tariffs/other controls are just to re-set the game. Straight off, this sounds bunk to me, not least because free movement of capital is part of what capitalism (clue is in the word) is all about. Capital, both in its physical and human form, goes to places where it can earn the highest rate of return. This is how, to summarise massively, we got from the caves to the skyscraper. If a businessman cannot use his capital where it works most effectively, it would render much investment pointless.
And if it is wrong for capital to move around because it somehow undermines some sort of “fair” trade, then this applies not just to between nations, but inside them, too. Ah, but I hear the Trumpistas cry, what about those evil currency manipulators gaming the system in their favour? The answer is that if the Chinese or others want to send us cheap stuff, made even more dastardly cheaper by currency manipulation, it means consumers don’t have to earn so much to buy imports. True, in the short-term it means that some jobs will be lost because of the cheap imports, but then again the pay packages of millions of consumers stretch a bit further. The pain of the affected industries is easy to see and makes for great TV and campaign spots for a Donald Trump or Bernie Sanders (whose views on trade are identical); the costs to consumers from protectionism is not easy to visualise. Also, if China, for example, sells or “dumps” cheap steel on the world market, manufacturers in the West who use steel will see their costs fall. It is worth nothing that when in the early Noughties George W. Bush slapped tariffs on steel, it “saved” some US steelmaker jobs, but cost many jobs in sectors where steel is a factor of production.
Finally, here are more thoughts on the idea that free capital movement somehow dents the case for trade trade, via Gene Callahan over a decade ago:
An honest advocate of free trade must admit that there will often be people who are made worse off, at least in the short run, by the freedom to trade internationally. But the same is true of trade within the borders of a country: If you open a restaurant near to and better than mine, my business will suffer.
It might be pleasant to live in a world of unlimited resources, where everyone who wanted to run a restaurant could do so without having to compete for customers’ scarce dollars. But since we don’t, the fact that my situation might worsen because of your business activities is an unavoidable consequence of the freedom to buy from and sell to whomever one wishes. If we try to prevent all such unpleasant outcomes, we will eliminate the market economy and regress to a hand-to-mouth existence.
Free trade is still beneficial because it creates larger markets. That applies even if capital is internationally mobile.
In practice even today, international capital flows are not particularly large compared to native ones.
This is a “greater good” argument. Some people might be worse off, but on the whole, the entire populace is made better. When it is applied inside countries, there are controls on how it is done, to try to assure that no producer “takes unfair advantage” of the consumers. We try to do something similar in international trade, but the situation is difficult because of differences in culture, labor inequalities, and uneven distribution of all types of resources.
What the progressives want is some sort of world-wide government to plan and manage it all, to make sure that everything is done fairly and efficiently. They don’t worry about the losers, either, because you have to break a few eggs to make an omelet. I think that this is why they are wailing so much about Brexit and Trump’s plans to change the trade systems. Both the internal and the international controls on trade help them to establish a global system of control that is widely accepted They just have to finesse the Russians and the Chinese and the muslims, who control lots of labor and important natural resources, until they are sufficiently corrupted to accept the progressive vision.
The fundamental issue is “fairness”. What does it mean, and who gets to determine it?
“An honest advocate of free trade must admit that there will often be people who are made worse off…”
Who?
If the answer is producers then we free trade advocates admit we ‘honestly’ don’t care.
The primary concern, the ONLY concern, is the consumer and if lots of consumers are better off, this trumps (sorry!) the few producers who are worse off.
The alternative to not caring about producers is a fossilised economy in which no producer must be worse off by competition, new technology or innovation… because if we are to be concerned over the jobs or fortunes of some producers then why not all?
So nobody loses their job… no economic progress… back to the pre-industrial age.
It makes me wonder, all this effort to make things fair.
If we accept that there will be losers under either system, why go to all the bother of making sure it’s those pesky kulaks that lose, rather than some steelworkers?
Does Jim Rickards do any fact checking?
I remember picking up his book “New Case for Gold” in a book shop and the first page I turned to told me “Switzerland has had 500 years of peace” – no it has not, for example the Civil War of 1847 and the invasion and French Occupation of the Napoleonic Wars. The book went back on the shelf.
As for freedom of capital flows – that happened in the 19th century also.
Indeed before 1914 someone could take money from Britain and invest anywhere in the world.
Does this undermine the case for Free Trade? No it does not.
Yes we now have a horrible Credit Bubble financial system – but that has nothing to do with Free Trade.
And yes (yes, yes, yes,) both Britain and the United States have vast borrowing to finance the import of consumption goods and that is unsustainable. Yes it is unsustainable.
But that is not the fault of Free Trade – it is the fault of a Credit Bubble financial system.
A system that Mr Rickards has been much too close to in the past.
After all he is the man who got the “Long Term Capital Management” bailout – with his “you have got to bail us out or the world will burn” (and other nonsense).
These days (indeed for many months) he has been behind the “British Pound is going to end on the 31st of March” thing that is about all over the internet.
He is trying to do a George Soros – get a British collapse and profit from it.
We all know what he is trying to do – and as I am financially a “straw man” I can say it (no point in him suing me).
You are a wrecker James Rickard – you are deliberately trying to get an international economic collapse via a Trade War.
You WANT a Trade War (Protectionism) – because you have positioned yourself (and your friends) to profit from a world wide economic collapse.
You are a VULTURE Jim Rickards.
“Fair” is a concept that doesn’t exist in nature. What can exist instead is “free” and/or “just. Fair is a condition to strive for to make zero-sum games interesting to play and/or watch, but wealth creation isn’t zero sum, ergo “fair” isn’t even applicable. Ask yourself, what is your “fair share” of Apple’s iPads?
That’s like arguing that your son is worse off if he has to compete against competent players. Sorry, but everyone does not deserve a participation trophy simply because you’ve, presumably, tried your best. What these “greater good” advocates miss is that EVERY COMPETITION IS AGAINST YOURSELF. You either improve your game or you shuffle off to do something you have more talent for.
Achievement is to DO SOMETHING DIFFICULT and win at it. That involves self improvement and thinking and planning and study and training and practice. Then you start all over again.
People today seem to think that everything is supposed to come easy, and that every waking moment is supposed to be entertaining.
Damned Whippersnappers!
What the enemies of freedom so often misunderstand (or simply don’t know) is that free (or free-ish) competition and the dreaded profit motive is responsible for ***ALL*** the scientific and technological and medical innovations we see all around us. It’s responsible for modernity itself. Why? Because a products profitable success today lays the groundwork for tomorrow’s lack of profit. Quite frankly, the market for today’s hot Samsung smartphone will saturate and there will be less demand for it. Less demand means a lower sales price, which means the sales price and the manufacturing price (“cost”) come closer together, = less profit. So if a company wishes to remain popular, profitable and attractive to investors, it must constantly innovate. And not only phone improvements are the result, but better and cheaper manufacturing techniques.
What are some unintended consequences of the latter? Well, refrigerators, stoves/ovens, microwave ovens, toasters, even ball point pens were luxury items when first invented. Today, I dare say every poor household has all these items and then some. So capitalism not only helps the consumer of today’s luxuries, but also today’s poor, which is why America’s poor (lowest 20% income earners) are richer than 2/3 of everyone else on earth. (And that’s a conservative estimate).
Heh, and the national government… the government… is going to make sober wise insightful determinations on who gets screwed over to ensure “the entire population is made better”? Oh yes, what could possibly go wrong with that? In fact maybe they should just manage the entire economy, given how perspicacious and incorrectable our magnificent politicians and their wise mandarins are. 😆
Well said, Johnathan.
“…given how perspicacious…our magnificent politicians and their wise mandarins are.”
Hey, don’t talk bad about my oranges.
😛
When politcians or mandarins make decisions, it’s safe to satsuma the worst.
Has anyone ever figured out how to measure the pros and cons of completely free trade?
300 million Chinese made T shirts at 10.00 per shirt less than an American made T shirt is at least close to easily measurable.
How can we measure the deleterious impact both on the unemployed shirt manufacturing people, at all levels, and national economy in general? I never get further than concluding that the national economy is actually in better shape because there is an extra 10 bucks a shirt to spend on other stuff, maybe even stuff made in Murca.
Even so, we all seem to feel somewhat sorry for the displaced people, and would like to help, if it wouldn’t simply wreck much of the benefit of the free trade.
Any ideas? A small tariff? Though we’d argue for centuries about what is small and what to do with the money. A big tariff for a short time? With more arguments about what ‘big’ and ‘short’ mean. Is there a middle ground between ‘protect the worker’ and ‘tough luck, you lose this one, I want my cheap T-shirts’?
It baffles me that Trump looks to be mercantilist in his future trade policies. I live in hope that this was just a populist pitch to get elected. But from what I’ve seen, Bannon appears to believe in this stuff too. Which is even more baffling as he seems sound on the other economic stuff. Perhaps it’s some kind of nationalist or protestant work thing. Yes, it makes economic sense for me to trade with you, but I need my own x industry equally as good to show how strong I am. I need a hypothesis to explain all this.
Measuring things at an aggregate level creates the illusion of central planning control. So best to avoid it. Impossible anyway.
Fred, it’s difficult to get people to evaluate this honestly. For example, people can buy cheap t-shirts from china, a pack of 6 for $6 or so, AND one can also guy “nice” t-shirts of higher quality for a higher price that are american made. Eliminating the former won’t necessarily significantlly increase the demand for the latter. What it WILL do is price some of the poor out of the t-shirt market.
Also, it should be noted that Trump must be aware that he’s bullshitting us to some extent. He has a BS degree in economics from Wharton, an ivy league school, and yet he’s pretending that a tariff on Mexican goods will be paid by Mexico rather than by consumers.
Why would you need to get further than that? It is not like everyone who loses their job making t-shirts in the USA spends the rest of their life unemployed because T-shirt making is the only job they could every possibly do.
Of course any day now the nanobots (and 3D printing and……) are going to make the whole discussion moot – we are going to be able to make anything we want with a handful of dust – and energy will be basically free as well.
Odd the above has been predicted for so many years – but never actually comes to pass. Till it does we are just stuck with Adam’s Curse (work) and Free Trade does NOT negate that. Contrary to British and American practice one must export in order to import – one can not just borrow endlessly in order to “pay for” imports.
Now someone is going to reply “well Paul I have just come up with zero point energy – and if you want space ship I will give you one for free”.
Fair enough technology is an empirical question, and if someone does come up with such things – I am refuted.
To be fair a pair of shoes cost 20 Pounds when I was a boy (many decades ago) and still do – and the only difference I can see is that now the soles are synthetic. So technology does make a difference – a big difference.
For people who do not understand my point.
Forty years of monetary inflation should have increased the price of shoes from 15 Pounds (a decent pair of black brogues in Tesco’s cost me 15 Pounds a couple of days) 20 Pounds to a 100 Pounds or more (which is what Loakes now cost).
So I have a choice – I can spend a 100 Pounds (or more) for a pair of shoes, or 15 Pounds for a pair of shoes that look the same (at least to my inexpert eye). The expensive shoes have a leather soil and heal – which means they will have to be repaired every few weeks (lots of expense) whereas the cheap shoes have synthetic soils and heals and will last much longer before I throw them away.
My question is why are the shoes made in China and not in Kettering?
I do not believe the stories that the Chinese use slave labour – I think they use machines, that human Chinese use the machines (no whips – no slave masters).
Why can we not use machines? Why do we keep borrowing money to pay the Chinese to use machines?
When I watch Chinese English language news (yes I am nerd) they sometimes sneer (politely sneer – but still sneer) that tariffs in the West will not matter as Westerners are not capable of making things any more – even with machines.
Is that really true of British and American people? Is all we can do play with credit bubbles – till they blow up in our faces and we starve to death? We can not just keep borrowing money for ever.
There are fewer and fewer factories in Kettering (the typical British town – indeed the most typical British town) and more-and-more people (lots of housing estates replacing the grass and trees with building materials. This is not going to work – this endless borrowing and spending is not going to work.
Thailover (February 2, 2017 at 9:24 pm) “… he’s pretending that a tariff on Mexican goods will be paid by Mexico rather than by consumers.”
I offer a couple of vague conjectures FWIW.
1) Is it possible Trump believes the US has a degree of monopsony in relation to Mexican trade?
2) Will the taxation of money transfers to Mexico by illegals in the US be seen as (relatively) a great relief when he adopts it instead of more alarming measures?
Vox Day will have a periscope (think Youtube on twitter) tonight on free trade. In a recent blog post he quotes Ian Fletcher, the author of Free Trade Doesn’t Work, who says, “[David Ricardo] says things like well, I have this theory, and one of the provisos to this theory is that if you have international mobility of capital, then my theory that free trade is always your best move ceases to be true.”
http://voxday.blogspot.com/2017/02/darkstream-free-trade-part-1.html
It should be interesting.
2000 figures. (Figures do not include maquiladora totals. Maquiladoras are NAFTA-created foreign-owned factories in Mexico which export all products to that foreign (i.e., U.S.A.) country. Meaning, the USA numbers below are too low.)
COUNTRY EXPORTS IMPORTS BALANCE
United States 147,186 139,558 7,628
Canada 3,301 4,146 -845
Spain 1,527 1,656 -129
Germany 1,460 6,116 -4,656
Japan 938 7,541 -6,603
United Kingdom 860 1,176 -316
Paul, sorry, but you are wrong! If all the forecasters had been right, we’d already be working at home, or in a paperless office, and we’d already be growing our own replacement organs from stem cells and home doctor kits! Don’t believe the hype- everything always takes longer than they claim!
Theoreticians keep forgetting that there are two types of free movement of capital: domestic and international. Domestic capital controls take the form of higher taxes and expanding regulations.
The international free movement of capital came at the expense of domestic free movement. Cheap imports are a nice beginning argument but there is nothing beyond that.
The British and American voters basically said “Our leaders gave us international free trade and all I got was cheaper goods, higher taxes, and an expanding welfare state.” In other words, the cheaper imports came with increased domestic capital controls.
The only way international freedom of capital movement can continue and expand is if domestic freedom of capital movement is not restricted. The Law of Comparative Advantage is mistakenly being applied when the actual force is my Law Of Relative Bureaucratic Disadvantage.
James G said,
Theory: Paleoconservatives aren’t that bright? 😳
Perhaps. That doesn’t really affect the fact that it’s consumers that pay tariffs rather than exporting countries though. I have no doubt that Mexico may and probably will find more foreign trading partners, but no one will take up the slack should America cease to trade. We’re the rich neighbors with deep pockets and a penchant for impulse buying.
What more alarming measures, and as seen by who(m)? The professionally alarmed will be alarmed simply because they’re instructed to be alarmed and annoying by their statist masters. The warlocks (professional liars and propagandists) are working overtime at the moment.
When it benefits someone else, it’s cronyism. When it benefits me, it’s “Jobs”. LOL.
Paul Marks
Of course any day now the nanobots (and 3D printing and……) are going to make the whole discussion moot – we are going to be able to make anything we want with a handful of dust – and energy will be basically free as well.
Sadly, nanotechnology hadn’t delivered even 1/1000 of wonders that were promised by Drexler and Co.
Nano-nonsense: 25 years of charlatanry
( article from 2010, now it will be over 30years) 😛
Does it make a difference that Trump isn’t talking about taxing trade, but instead taxing simple gift transfers across the border?
Bobby, Trump’s been talking about tariffs for months, hence all the comments about protectionism.
James G, here’s an hypothesis from someone who seems to have been reading Trump pretty well from early on. He uses the topic of immigration as an example, but it could just as well apply to any other area of the President’s purview. I for one find it persuasive, YMMV.
Thailover, I understand that, but I’ve seen comments regarding his proposed remittance tax that also cites the same antiprotection factors, and I can’t see how they would apply.
The problem with free trade isn’t the differential effect (consumers have lower prices in the short term) but the integrative effect (ownership of consumers’ country in the long term). Blabbering ad infinitum about the differential effect by commentators doesn’t change the ultimate outcome. You need to consider both in order to determine the utility of trade barriers.
Quite curiously and coincidentally, I happened to be writing a post about this very topic and was half done when I stumbled over this post here. Mine is now finished. https://wordpress.com/post/uneducatedeconomics.wordpress.com/121
As I understand it, availability of capital is only one of the bases (factor endowments) that contributes to comparative advantage. The other obvious ones are labour and land.
Labour is affected, particularly in the modern world, by level of education – and historical background in particular technologies. Land is affected by mining opportunities and by suitability for agriculture etc.
In addition, there are other factor endowments. Here I am thinking particularly of the legal system and associated infrastructure; there is also internal transport infrastructure and the location of ports for international trade (which are affected by geography).
Thus, it seems to me that freedom of movement of capital alone is nowhere near a sufficient removal of factor endowment differences to prevent competitive advantage having its effect.
Best regards
I am going to take quite a lot of convincing on that score. If I cannot trade with someone because the government is getting in the way, my ownership of my bit of that country is pretty much an illusion.
I see – so people can not read a comment, and think I was defending a theory (the nanobots and so) that I was actually attacking. “Sorry Paul but you are wrong” – rather than “Yes Paul – you are right”, and then Darin’s little bit of editing out-of-context.
And no one at all in this thread has understood the point that I have made about a dozen times, that we can not just keep borrowing money to import consumption goods.
I have been wasting my time – fair enough.
We’ve had essentially this same discussion quite recently, during which I quoted Bastiat (probably at greater length than anyone here really appreciated), something which I won’t repeat. But I will note that any type of innovation (which, at its heart, is all that free trade really is, and the free movement of capital is merely a subset of free trade) always results in greater benefits than detriments. Yes, there are short-term dislocations to some, but so what? That’s the very nature of progress (see Schumpeter’s “creative destruction”). If it affects you, deal with it and move on, and stop whining. There are no guarantees in life.
The link in StanFL’s post requires a login which I lack, so I’m going to take a stab at it and guess that by “integrative effect” he means the eventual repatriation of all those dollars through capital investment by foreigners in US businesses and other assets (such as land). (If that assumption is incorrect I trust that he will set me straight.) At least that’s a second-order issue and a more sophisticated argument. But I don’t buy it. It doesn’t matter to anyone who owns the company: not its former shareholders (who got their capital out to reinvest); not consumers (they still get the products); not the employees (who still have their jobs; why buy a company just to shut it down?); and certainly not the government (it still gets its taxes). And the land isn’t going anywhere. I remember all the doom-sayers in the ’70’s who said that the Japanese were going to own Manhattan. Uh huh, right; how did that turn out?
A trade deficit is a mere statistical construct, and an irrelevant one. Its only function is to frighten the ignorant. Unfortunately, scaring the natives is what populists and demagogues do best.
@Perry deH: I would concur that ownership is pretty much of an illusion. What matters is who benefits from the use of something (your bit of the country), not whose name is on a deed or title or whatever. As for trade, if you have to pay an import duty, which serves to balance trade, have you lost all the benefits of your bit of the country?
@Laird: short-term benefits, yes, that happens with trade, no dispute. But the long-term effects are not second-order in the sense of being negligible compared to first-order effects; they simply occur at a different time. As for a trade deficit being a mere statistical construct, I don’t know what to say. This sounds like a condemnation of economics itself.
My apologies for my incompetence with URLs; here’s another try: https://uneducatedeconomics.wordpress.com/2017/02/03/balancing-trade/
It seems to me that for free trade to produce it’s benefits you need also free movement of capital, AND free movement of people, i.e. labor.
Good luck with advocating free move of people between, say, Mexico and the US. By the way: Mexico has much stricter immigration limits that the US, there is absolutely no way a foreigner can get Mexican citizenship.
Free movement of people is impossible for reasons that are unrelated to economics. Economics isn’t the only force that moves people (contrary to Marx’s materialism). Call the factors limiting immigration “cultural” or “tribal” or whatever – free movement of people isn’t going to happen.
So, the possibility of having real free trade is non-existent.
About “competitive advantage” – it is a little idealistic and un-realistic concept. It’s not like the classical example: let the Swiss produce watches and Italians pasta, and the Swiss import Italian pasta, and the Italians import Swiss watches. That is NOT what happens in the real world.
The differences between countries are systemic. For example: the US has a high living standard, high wages, high taxes, strict regulations – costly environmental and labor regulations, etc. etc. Mexico has everything in reverse: cheap labor, lower taxes, lower regulations. Manufacturers in the US have much higher costs, and there is no way they can compete. So, all manufacturing of goods that can be transported is done elsewhere (Mexico, China, Vietnam). Perry would say – so what – let US people do “something else”. But “something else” is subject to the same disadvantage. The question is if you can have an economy, and a country – based entirely on the service sector (which cannot be exported) with no manufacturing sector? I don’t know, I doubt it. As Paul points out: the imports are financed by money (dollars) printing. That isn’t a sustainable economic “solution”.
Take the US auto industry. If free trade principles were adhered to – there would be no auto industry in the US. The auto industry exists thanks to import limits that the “free trade” champion President and idol Ronald Reagan imposed in the 1980s, decreeing that all autos sold in the US must be assembled in the US, and contain a minimum of components made in the US. (Same is true for the EU).
Take tariffs. Who pays the tariff (import duty)? The Mexican exporter or the US consumer? US consumers who buy US products pay a lot of taxes – the taxes (and regulations) that were imposed on US producers and are part of the (expensive) price of US made goods. Why should the consumer of foreign made goods be exempt? Is that fair? He does enjoy the services provided (in theory) by the US Govmnt, and paid (in part) by taxes on US producers.
The issue is complicated, citing “David Ricardo with his famous Law of Comparative Advantage” isn’t a comprehensive elaboration of the theme of free trade.
Yes and no. The more ownership and control are decoupled, the more unreal & politically distorted the economy inevitably becomes, not to mention the moral & social issues that spring from state interference with the mean of production.
I might not necessarily lose all benefit but I sure as hell lose some, and such state interventions inevitably serve a politically well connected sectional interest, so lets not pretend import duties are imposed by wise disinterested philosopher-kings, they are the product of lobbying by someone seeking to impose costs on someone else (consumers) to prop up their business model.
Paul Marks
My apology to you if my post was unclear, I meant to support your point that “nanotech” is no salvation, for the reason alone that all “nano-science” seems to be big pile of woo and BS that produced nothing of predicted wonders in the last decades.
As for your main point – US gets cheap plastic junk from China in exchange for pieces of green paper, who is cheating whom in this exchange?
Sorry, Paul, I did not know you had a sense of humour. You should have warned us!