Free Trade
From Free Talk Live
Free trade is defined as voluntary commerce between individuals in different nations unimpeded by tarriffs, quotas, or other restrictions intended to protect domestic producers. Libertarians believe that because all trade involves a voluntary exchange between two individuals, there is no basis for prohibiting or impeding it.
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Argument for Free Trade
Trade between nations is beneficial for the same reason that trade between individuals is beneficial. It allows specialization, meaning that one nation's population can specialize in the activities in which it is most productive, trading its excess production for those things in which other countries specialize. This increase in production means both countries are able to consume more by trading than they otherwise would.
The argument for free trade deals with the economy as a whole. Under any economic arrangement, certain industries will prosper and others will falter. The goal of any trade policy should be to maximize prosperity for the entire population, not benefit special interests.
The way in which the unintended consequences of trade barriers can benefit certain groups, while adversely affecting the economy as a whole, is illustrated by the steel tarriffs imposed by the Bush administration in 2001. Although the tarriffs benefited the domestic steel industry, they raised the price of steel and hurt the overall economy. Hundreds of thousands of jobs in steel-using industries were lost as a result of an increased price and corresponding decreased demand for steal-based products. Fortunately, the U.S. was forced to remove the tarriffs the following year due to a ruling by the WTO.
Criticisms of Free Trade
The doctrine of free trade has recently come under fire as a result of a surge in outsourcing, although it should be pointed out that America still "insources" more jobs than it outsources, according to the Bureau of Labor Statistics. Thus, an end to free trade would probably result in less job opportunities, not more. It should also be pointed out that the Democrats, who have recently become the main opponents of trade liberalization, were (to their credit) its main proponents throughout the 1990s. Both the North America Free Trade Agreement (NAFTA) and the World Trade Organization (WTO) were approved by the Clinton Administration, although negotiations had taken during the previous administration as well. Protectionists such as Ross Perot predicted that NAFTA would lead to the "giant sucking sound" of jobs leaving the American economy; instead, it led to the longest economic expansion in United States history.
One common objection to free trade is that third world workers can do the "same job" as first world workers for a fraction of the cost. Studies have found, however, that seventy percent of the variation in wages across nations can be explained by differences in productivity. Developing nations often lack the education, capital accumulation, and infrastructure that makes first world countries productive. There are, after all, reasons why poor countries are poor. Low wages are a result of an underdeveloped economy, not the other way around.
A similar, but distinct, objection is the notion that third world countries can make everything, or almost everything, cheaper than first world countries, meaning that first world countries will be left with no jobs or third world wages. For an answer to this objection, see the section on "comparative advantage" below.
Some people believe that first world countries shouldn't be allowed to trade with third world countries because third world countries lack environmental protections, anti-child labor laws, and workplace safety standards. However, statistical studies have found that all of these things are directly correlated with economic development. If we are really concerned about child laborers and the environment, then the best thing to do is to help these countries develop by trading with them. Furthermore, regulations intended to protect workers in third world industries can often have unintended consequences. Paul Krugman, for instance, writes in the New York Times:
[C]ould anything be worse than having children work in sweatshops? Alas, yes. In 1993, child workers in Bangladesh were found to be producing clothing for Wal-Mart, and Senator Tom Harkin proposed legislation banning imports from countries employing underage workers. The direct result was that Bangladeshi textile factories stopped employing children. But did the children go back to school? Did they return to happy homes? Not according to Oxfam, which found that the displaced child workers ended up in even worse jobs, or on the streets - and that a significant number were forced into prostitution.
In any discussion on free trade, the idea of a trade "deficit" always comes up. This terminology, which has its roots in the now-discredited English mercantile system (see below), means that a nation imports more than it exports. However, economists are not convinced that this is automatically a bad thing. In order to finance imports, a country has to accept loans from foreigners. This can be good or bad depending on what is being financed - if it is investment in capital, then it will easily pay for itself. If, on the other hand, it is used merely to finance pernicious consumption, then people will be left with large debts to pay off in the future. This is all on an individual basis; the trade deficit does not represent a collective liability in the same way that a budget deficit does.
Free Trade Agreements and Reciprocity
Libertarians are in favor of free trade, but they tend to be skeptical of so-called "free trade agreements." The problem with free trade "agreements" is that they foster the notion that free trade can only "work" if both countries involved repeal their trade barriers. However, even if one side unilaterally repeals its trade barriers, it still benefits both countries. The side repealing its barriers benefits through lower prices and the other side benefits through a larger market for its goods. International trade is not like a war, where one side gains at another side's expense. A truly libertarian society would simply repeal its trade barriers and expect other countries to do the same, since it is in their best interest to do so.
In practice, these agreements such as CAFTA are little more than a way for domestic producers to gain protection while purporting to support free tade. As Ian frequently points out on the show, one doesn't need pages upon pages of regulations to have free trade.
"Fair Trade" vs. Free Trade
Many people talk about "fair trade" as opposed to free trade, but very few can define what this means. In theory, fair trade ensures that, via either legislation or consumer activism, producers in foreign countries are paid a "decent" wage for their product, and domestic producers likewise do not face "unfair" competition. In practice, fair trade simply means raising the price of an imported good until it is the same as its domestically produced counterpart, which would seem to defeat the purpose of trade altogether. In any case, fair trade proponents tend to completely ignore the law of demand, which implies that you cannot forcibly raise the wages of labor without causing unemployment as a side effect.
History of Free Trade
Smith and Mercantilism
The modern notion of free trade can be traced back to a book written by the Scottish Adam Smith entitled An Inquiry Into the Nature and Causes of the Wealth and Poverty of Nations. Published in 1776, The Wealth of Nations is often credited as founding modern economics, though Rothbard and the Austrian School would strongly disagree. In any case, its profound influence cannot be doubted.
Smith criticized the mercantile system that prevailed in Great Britain at the time. Mercantilism was the belief that a country's standard of living depended on the amount of precious metals in circulation within its borders. Thus, the mercantilists believed that exports were more important than imports, because precious metals could be acquired as payment for exports. Smith pointed out that a nation cannot consume the goods that it exports, and thus its standard of living decreases when it is a net exporter. More gold does not produce more goods; it only raises the price in gold of existing goods.
Although most people today know that mercantilism is bad, very few know what it actually is. Most believe that it has something to do with heavy industrial regulation and colonialism, but in fact these are just its logical outcomes. Protectionists such as Pat Buchanan still believe that a country's well being depends on its being a net exporter, and mercantilist terminology, such as an "unfavorable" balance of trade and a trade "deficit" to mean net imports, is still with us to this day.
At the time Smith wrote, trade was generally viewed as a zero-sum gain. That is, one party could gain only at the expense of another. Whoever ended up with the most gold was thought to have gotten the better side of the deal. Smith, after demolishing the idea that gold is the source of wealth, went on the suggest that because all trade is voluntary, it must necessarily be beneficial to all parties involved. For if one did not believe he would benefit from an exchange, he would engage in it.
Ricardo and Comparative Advantage
The overthrow of the mercantile system culminated with the repeal of the English Corn Laws at the urging of David Ricardo. The Corn Laws restricted imports of agriculture products. Ricardo was a young stockbroker who gotten hold of Adam Smith's book. While in the parliament, he argued for the repeal of the Corn Laws and the beginning of an English policy of free trade. Ricardo is generally credited with developing the theory of comparative advantage, as opposed to Smith's absolute advantage.
Most people who think of free trade still think in terms of absolute advantage. According to absolute advantage, a country can profit in trade only by producing something cheaper than another country. But what happens if country A can make everything cheaper than country B (as some people would seem to believe when it comes to the China and the United States)? Can country B still "afford" to trade with country A? According to the theory of absolute advantage, country B cannot, because it has nothing that country A wants to buy.
Comparative advantage, on the other hand, posits that even if country B cannot make anything cheaper than country A, it still makes sense to trade. The reason? Even country A has some things that it can make cheaper in comparison to other things. Therefore, it will pay country A to concentrate most of its time on those things they make best, while leaving production of other products to country B.
A classic example of comparative advantage involves a professional athlete and a teenage boy. Although the professional athlete can in all likelyhood mow his lawn faster, better, and cheaper than the boy, he is better off spending his time making money in his sport and paying the boy to mow for him. Thus, the athlete gives up the opportunity to mow his own lawn for the opportunity to make more money in athletics. Economists refer to what one has to give up to obtain something else the "opportunity cost" (as opposed to the nominal or monetary cost).
Bastiat's Influence
Probably the most passionate free trader of all time was Frederic Bastiat. Bastiat, a member of the French parliament in the mid-19th century, wrote in his classic libertarian treatise The Law:
Is there any need to offer proof that this odious perversion of the law is a perpetual source of hatred and discord; that it tends to destroy society itself? If such proof is needed, look at the United States [in 1850]. There is no country in the world where the law is kept more within its proper domain: the protection of every person's liberty and property. As a consequence of this, there appears to be no country in the world where the social order rests on a firmer foundation. But even in the United States, there are two issues -- and only two -- that have always endangered the public peace. What are these two issues? They are slavery and tariffs. These are the only two issues where, contrary to the general spirit of the republic of the United States, law has assumed the character of plunder. Slavery is a violation, by law, of liberty. The protective tariff is a violation, by law, of property.
In his so-called "Petition of the Candelstick Makers," Bastiat satirized the protectionists by assuming the identity of a chandler's union and calling for the legislature to block out the sun in order to boost sales of candlesticks. The petition is part of an anthology entitled Economic Sophisms.
Trade and the United States
American society was built on trade. Although the colonies were originally founded for mercantilist reasons, America's founders were staunch supporters of free and open trade. The one exception was Alexander Hamilton, whose Report on Manufactures argued that the United States should engage in protection in order to allow its industries time to develop.
Due to America's vast abundance of arable land, it has a very high comparative advantage when it comes to agriculture. Indeed, during the early years of the Republic, around 80% of the American economy was agriculture, whose products were traded in exchange for manufactured goods. All the while the federal government was on a tarriff-based revenue system. Disputes over how high the tarriff should be, and whether it should be used for protection purposes, often erupted between the North and the South. The North, whose economy consisted mainly of manufacturing, wanted a high tarriff to protect its industries; but the South wanted a low tarriff, since so much of its economy depended on trade. Abraham Lincoln's first act in office was to sign into law a bill doubling the tarriff, effectively a tax on the South, and this was one of primary causes of the War Between the States.
The tarriff rate continued to escalate after the War Between the States, especially during the Great Depression when countries tried to revive their economies using trade barriers. After the World War II, a worldwide effort to decrease tarriffs went underway, leading to the General Agreement on Trade and Tarriffs (GATT), the predecessor to the World Trade Organization (WTO). Other controversial turning points in the history of American trade include Nixon's opening of trade with China and the North American Free Trade Agreement (NAFTA). Today the average U.S. tarriff is less than two percent. The most recent trade agreement to come into the spotlight of controversy is the Central American Free Trade Agreement (CAFTA).
Conservatives often make a big deal over the fact that Bill Clinton granted China so-called Most Favored Nation (MFN) status in trade, but despite the name it bestowed no special favors on China. The only thing MFN status says is that whatever trade advantages we afford to other nations we must also afford to China.
