Friday, February 04, 2011

Politicians Opposing Free Trade: It's All About Politics, NOT Economics, Benefits and Jobs

From a great editorial in yesterday's Houston Chronicle by Christopher Sabatini titled "Economic Logic Supports Free Trade Agreements," here are some key points:

"It's been two years in a row now that President Barack Obama has mentioned the pending U.S.-Panama and U.S.-Colombia free trade agreements in his annual State of the Union address. Will 2011 be the year that they are finally presented to Congress and approved? 

Economic logic would certainly support it. But as we all know, when it comes to matters of policy — especially trade policy - political logic (or illogic) often enters, twisting the facts and the debate. But the facts in this case are pretty straightforward: In markets opened up by previous free trade agreements (FTAs), the overwhelming majority of states have seen the exports grow - in some cases exponentially.

Based on research conducted by the Americas Society, even the states whose representatives have voted against nine of the recent trade pacts that have come before Congress have - by a large margin - seen their exports increase. 

Just look at some of the examples of the FTAs signed with partners south of our border.

While a majority of Alabama's congressional representatives voted against the North American Free Trade (NAFTA) agreement in 1993, the state's exports to NAFTA markets have grown by more than 250 percent since then. Nevada and West Virginia's representatives all voted against the expanded North American market and yet saw their exports boom, by 535 percent and 294 percent respectively.

To take the case of our FTA with Chile, Alaska, despite its solid opposition to the agreement in 2003, has enjoyed a near 700 percent increase in its exports to the South American country, and Vermont, which also opposed it, has seen its exports shoot up by more than 1,000 percent. This is more than Ben and Jerry's ice cream and maple syrup. These are high-end goods and jobs."

MP: In other words, when it comes to opposing free trade, it's all about politics, and not about proven and certain economic benefits (more jobs) of free trade agreements.  Due to political blindness and pandering to well-organized special-interest groups, politicians apparently don't even know what's good for them and their states.  

37 Comments:

At 2/04/2011 12:47 PM, Blogger morganovich said...

the political calculus is simple:

one business benefits from tariffs, so if they gain $1mn they are happy to donate some to their congressman.

all the individuals who are harmed (well in excess of $1 million) each suffer a small individual loss and are not prepared to donate to mitigate it (if they are even aware of it at all)

in this way, negative sum policy is consistently pushed.

each restriction is a net loss for the society, but a net gain for the congressman.

 
At 2/04/2011 2:40 PM, Blogger James said...

morganovich,

Abraham Lincoln once responded to your argument this way:

"If we purchase a ton of steel rails from England for twenty dollars, then we have the rails and England the money. But if we buy a ton of steel rails from America for twenty-five dollars, then America has the rails and the money both."

I challenge anybody to find a country that went from poor to rich without trade protection.

 
At 2/04/2011 2:51 PM, Blogger James said...

If you can do it, it ain't bragging

You free traders are doing a lot of bragging!

We have more free trade now than we have ever had. If free trade leads to prosperity then how did this unfortunate economic situation ever happen in the first place?

I tuned in to CNBC’s The Call this morning just in time to hear Larry Kudlow’s guest, Alan Valdes, vice president of DME Securities, say that since the start of the recession we have lost close to 9,000,000 jobs and American Industry has created only 900,000 jobs in the United States last year while creating 1,900,000 (may have said 1,400,000 not sure) jobs in China and India. He noted that what is good for American Business is not always good for the American economy. Kudlow and Company, as usual when confronted with something bad about free trade, did not take the bait.

http://www.cnbc.com/id/15840232?video=1780892538&play=1

 
At 2/04/2011 3:23 PM, Blogger Che is dead said...

I challenge anybody to find a country that went from poor to rich without trade protection.


Kuwait.

 
At 2/04/2011 3:31 PM, Blogger Che is dead said...

How about one that went from rich to poor after imposing trade restrictions?

Cuba.

Any other questions?

Of course, the biggest killer of national wealth is unionization.

 
At 2/04/2011 3:44 PM, Blogger Ron H. said...

James -

"I challenge anybody to find a country that went from poor to rich without trade protection."

Ok, I like this game, but instead let me challenge YOU. I challenge you to name any instance of a business being helped by a tariff that didn't result in many others being harmed as morganovich explains. Your example must result in a positive sum, so everyone affected is better off.

Please don't paste your standard factless reference to early 19th century tariffs and prosperity. Be specific.

By the way, it should be obvious from your Lincoln quote, that he wasn't much of an economist. I believe he was better known for other things.

 
At 2/04/2011 4:36 PM, Blogger morganovich said...

james-

that's a flawed argument.

it is too limited in scope and therefore hides more than it demonstrates (apart from demonstrating that Lincoln was economically illiterate)

the rails bought from the US mean that the railroad pays more. this means that rail transport will cost more. further, the rials bough in the US take up US labor to produce something we could have bought more cheaply. that misallocated labor could have been used elsewhere.

finally, that $20 sent to england is GREAT news for the US. it will either come back to us in the form of a purchase order, or it will be invested in something here be it money markets, bonds, equities, or what have you.

it's not like that money disappears. but if it does, well great! would you complain about buying a car for a check that was never cashed?

your argument about nations getting rich without trade restrictions is a straw man.

there have been few countries ever to have no trade restrictions, so it's not possible to point to one, especially in the west which got rich a long time ago.

what you can say is that countries with fewer trade restrictions have performed better than those with many and any country would perform better if it freed trade. can you swamp bad policy though other things, of course, you can keep your house warm even with the doors open if you run the furnace hard enough, but that doesn't mean it wouldn't be warmer if you closed them.

every tariff, even a retaliatory one, does more harm than good. they are unavoidably zero sum.

if we import 2/3 of our oil, and decide to impose a tariff on imports to make them equal in price to domestic, the price paid on ALL our oil goes up to the US marginal level. this full cost is faced by our consumers. but, as some oil is still imported, not all the benefit goes to US companies. thus, we have a negative sum issue, even if we gain share as a result of the tariff even before we take into account the reduction in worldwide production possibility frontier from our circumventing comparative advantage.

the real challenge is this:

show me one tariff that ever benefited a country as a whole.

 
At 2/04/2011 4:46 PM, OpenID Sprewell said...

James, pointing at the current recession is such a silly argument, let me show you why. Here's the real US household net worth after taxes over the last 50 years. Note that it has tripled over that time, yet here you are complaining because it has fallen a couple percentage points again. There's a reason why that rise happened in the US and not in Cuba or protectionist Europe and free trade is a big part of it.

 
At 2/04/2011 5:19 PM, Blogger morganovich said...

sorry, that should read "unavoidably negative sum".

think of it this way:

US sugar tariffs keep US sugar prices at about twice those of the rest of the world.

let's say sugar in the US costs $6/lb as a result.

we still do not produce all our own sugar, so some is imported.

if we eliminate the tariff, then the price drops to $3.

this benefits US consumers by $3 X N where N = sugar consumed.

it harms US sugar producers by $3 X (N - I) where I is the amount we were importing.

so long as I > 0 (and it must be else why have a tariff) then dropping the tariff has a net positive effect.

that extra 3N can be spent on other goods here and more than covers the harm to sugar growers.

this same calculation works in reverse where reimposing it causes net harm.

there is no such thing as a tariff that provides real net benefit to the imposer.

 
At 2/04/2011 6:24 PM, Blogger Michael Hoff said...

I don't have an economics degree or any background in economics beyond balancing a checkbook. So this is just a "thank you" to you commenters who do. I learn as much from you all as I do from Mark's posts.

This interweb thing is awesome. It would have cost me a fortune to get all this at an institution of higher learning.

 
At 2/04/2011 6:30 PM, Blogger hswalj said...

Lucky for our banks that they were not subject to import restrictions by other countries.

Look how our banks exported all over the world sub-prime mortgage packages rated AAA by rating agencies in cohoots with the Countrywide et al.

Will we seek any "perp-walking" by the bums?

 
At 2/04/2011 7:03 PM, Blogger Ron H. said...

"Look how our banks exported all over the world sub-prime mortgage packages rated AAA by rating agencies in cohoots with the Countrywide et al."

That AAA rating isn't so far wrong, after all those packages are guaranteed by US taxpayers. How much safer could they be?

 
At 2/04/2011 7:10 PM, Blogger Ron H. said...

James,

Something about the Lincoln quote that hasn't been mentioned, is that the $20 spent in England helps English workers make a living. What do you find wrong with that?

 
At 2/04/2011 8:36 PM, Blogger aorod said...

Protectionism is a never ending political posture designed to attract votes regardless of whether it has any economic value. In general, the less restrictive trade policy is, the greater the income, employment and productivity of all parties. This is the lesson of history.

 
At 2/04/2011 9:04 PM, Blogger PeakTrader said...

James, poor countries don't trade much.

Is a society better off when people buy a $20 or $25 good at $1 or at $100?

Also, does it really matter if you buy the good from a Frenchman in America, a Russian in England, an American in Singapore, etc.?

The ultimate goal should be to raise living standards at the fastest sustainable rate, rather than work inefficiently, preserve worth less or unnecessary jobs, or slow improvements in living standards.

There are hundreds of major forces pushing and pulling a large economy.

Free trade has been a positive force. Excess government spending has been a negative force.

Similarly, there are inflationary and disinflationary forces, which result in a net effect.

 
At 2/05/2011 7:42 AM, Blogger Dr William J McKibbin said...

You said, "politicians opposing free trade: it's all about politics, NOT economics, benefits and jobs." Well said! Given the state of the US economy today, opposition to free trade is unconscionable. Anyone standing in the way of free trade in America has worn his or her welcome out at this point -- it's time for the US to enjoin free trade and not look back, if only to save nation from economic ruin at the hands of other countries who are leading the surge in world trade. Yes, very well said...

 
At 2/05/2011 12:53 PM, Blogger Ron H. said...

"...if only to save nation from economic ruin at the hands of other countries who are leading the surge in world trade."

I think economic ruin can only come at our own hands. Others prospering does us no harm.

 
At 2/05/2011 1:33 PM, Blogger James said...

Che,

Kuwait went from poor to rich without trade protection?

Really! That does not even qualify as a nice try.

Ever heard of OPEC - Organization of the Petroleum Exporting Countries?

If you can not do better than that man up and concede the point.

 
At 2/05/2011 2:38 PM, Blogger Ron H. said...

James,

You are avoiding the real issues here. Please debunk morganovich's formula regarding the effect of tariffs.

You CAN claim that certain businesses or industries can be promoted through government interference in an economy, but in that case, you are advocating for crony capitalism and mercantilism over free markets and free choice. The overall effect is negative.

 
At 2/05/2011 3:00 PM, Blogger Dr William J McKibbin said...

Hi RonH, I disagree -- free trade is fundamental to economic prosperity -- conversely, the absence of free trade leads to macroeconomic ruin -- no economy on Earth has ever prospered without access to external markets and the free flow of capital, goods, and services...

 
At 2/05/2011 3:35 PM, Blogger Ron H. said...

James,

You often credit tariffs imposed in the US in the first half of the 19th century, with being responsible for unprecedented prosperity. Your past comments indicate that you have an excellent knowledge of US history, so you must also be aware that these tariffs also caused a great divide to develop between Northern states, where manufacturers benefited, and Southern states whose reliance on imports, were harmed by the tariffs.

This, along with other issues including slavery, and the right to self government, ultimately led 11 states to secede from the Union to form a separate politically entity.

That Lincoln fellow you admire as an economist then used military force to invade and subjugate the new Confederacy, resulting in a great deal of bloodshed and misery. The victors then imposed terrible conditions on the vanquished during a period of "reconstruction".

Would this terrible conflict have happened without the tariffs? Probably, but they certainly were a contributing factor. Were they ultimately a net positive? Almost certainly not.

 
At 2/05/2011 3:53 PM, Blogger morganovich said...

james-

how is membership in opec trade protection?

oligopolistic behavior is not the same as protectionism.

since when did opec impose tariffs on imports? politicians who oppose free trade want to block imports, not limit exports as opec does.

your response seems long on taunt and short on substance.

you're not going to get anywhere around here like that.

name one tariff that benefited a country as a whole.

you can't because there has never been one.

http://en.wikipedia.org/wiki/File:EffectOfTariff.svg

this graph makes it indisputably clear why that is so.

until you can tell us why that graph is wrong, you have no case at all.

 
At 2/05/2011 3:55 PM, Blogger Ron H. said...

"Hi RonH, I disagree -- free trade is fundamental to economic prosperity -- conversely, the absence of free trade leads to macroeconomic ruin -- no economy on Earth has ever prospered without access to external markets and the free flow of capital, goods, and services..."

Dr. WJMcK, we are in total agreement here. Maybe I wasn't clear. My comment was meant to indicate that our fate is mostly in our own hands. We can only harm ourselves by, for instance, restricting free trade for ourselves. The policies we impose on ourselves can determine our prosperity or ruin. Others don't prosper at our expense.

 
At 2/05/2011 5:05 PM, Blogger Dr William J McKibbin said...

Hi RonH, well said, yes, I agree with your last comment...

 
At 2/05/2011 8:21 PM, Blogger James said...

the rails bought from the US mean that the railroad pays more. this means that rail transport will cost more. further, the rials bough in the US take up US labor to produce something we could have bought more cheaply. that misallocated labor could have been used elsewhere.

How can there be misallocation of labor with u6 unemployment near 20 percent? Both Adam Smith’s Theory of Absolute Advantage and David Ricardo’s Theory of Comparative Advantage fall apart when the market is unable to absorb full employment production.

show me one tariff that ever benefited a country as a whole.

South Korea. See the prologue to Ha-Joon Chang’s Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism for a description of how South Korea used trade protection.

let's say sugar in the US costs $6/lb as a result. we still do not produce all our own sugar, so some is imported. if we eliminate the tariff, then the price drops to $3. this benefits US consumers by $3 X N where N = sugar consumed.

That would work just fine in a time of balanced trade and full employment where we could redirect sugar workers to an equal or more productive employment. With u6 unemployment near 20 percent all it does is create an additional $3 x N worth of unemployment and increase the deficit.

That Lincoln fellow you admire as an economist then used military force to invade and subjugate the new Confederacy, resulting in a great deal of bloodshed and misery.

Fair point. There are those who credit tariffs as having more influence on the War Between the States than slavery. Here I take no position on that but I note that in Lincoln’s first inaugural address did not threaten to invade the South over slavery but he did over tariffs:

“The power confided to me will be used to hold, occupy, and possess the property and places belonging to the Government and to collect the duties and imposts; but beyond what may be necessary for these objects, there will be no invasion, no using of force against or among the people anywhere.”

how is membership in opec trade protection

It is control of the market. It forces the price up.

finally, that $20 sent to england is GREAT news for the US. it will either come back to us in the form of a purchase order, or it will be invested in something here be it money markets, bonds, equities, or what have you.

Not when we have a trade deficit.

Something about the Lincoln quote that hasn't been mentioned, is that the $20 spent in England helps English workers make a living. What do you find wrong with that?.

I put a higher value on the well being of my fellow countrymen than the English. The 25th president, William McKinley, put it this way in 1892:

”Let England take care of herself; let France look after her interests; let Germany take care of her own people, but in God's name let Americans look after America! Every ton of steel imported diminishes that much of home production. Every blow struck on the other side upon an article which comes here in competition with like articles produced here, makes the demand for one blow less at home. Every day's labor upon the foreign products sent to the United States takes one day's labor from American workingmen. I would give the day's labor to our own, first, last, and all the time, and that policy which fails in this is opposed to American interests.”

I concur.

Free trade has been a positive force.

For Whom? Wall Street to be sure. After about a hundred years of free trade imposed on the by the British as part of the settlement of the Opium Wars China became Communist. The British became socialist. Free trade did not cause the Irish potato famine but it was responsible for the dieing. At the insistence of free trades in far off London Ireland was a net exporter of food throughout the famine.

I am out of space. Who feels left out?

 
At 2/05/2011 9:19 PM, Blogger aorod said...

An example of a successful reduction in trade tariffs is the European Coal and Steel Community of the 1950s.

 
At 2/05/2011 10:45 PM, Blogger Scott said...

Free trade needs to be removed from politics and made universal.

Unfortunately, in many instances, FTA stands for Free Trade for America - the rest of the world's negotiators are often shown up as clowns...

 
At 2/06/2011 12:39 AM, Blogger Ron H. said...

James,

"South Korea. See the prologue to Ha-Joon Chang’s Bad Samaritans:"

The challenge to you included the phrase "as a whole" I have read this book. The South Korean government decided that Korea should be a steel producing nation. That industry was protected by tariffs while it grew to maturity. How much was the standard of living of the population "as a whole" diminished while central planning grew this national steel industry? The people suffered from government policy just as the Chinese people suffer from government policy now.

"It is control of the market. It forces the price up."

That is not trade protection.

"The 25th president, William McKinley, put it this way in 1892:"

Another non-economist; pure political speech, and just look what happened to him. The same thing that happened to that Lincoln fellow. Is there a pattern here?

"That would work just fine in a time of balanced trade and full employment where we could redirect sugar workers to an equal or more productive employment.

This has nothing to do with unemployment. The formula shows that tariffs have a net negative effect in every instance. In fact, if there is high unemployment it seems even more important that people have access to lower priced goods. Do you think we should all make ourselves poorer to help inefficient sugar producers?

In this country "we" do not "redirect" workers to other employment. This isn't Cuba...yet.

"Not when we have a trade deficit."

You do not understand that a trade deficit is only one component of the balance of payments, which must sum to zero.

"At the insistence of free trades in far off London Ireland was a net exporter of food throughout the famine."

How can you believe that being forced to export food is somehow free trade? Free trade is just that: free, voluntary. Something we do for our own benefit.

I would recommend you read this book. It would seriously challenge some of the notions you currently hold.

 
At 2/06/2011 12:41 AM, Blogger Ron H. said...

"Unfortunately, in many instances, FTA stands for Free Trade for America - the rest of the world's negotiators are often shown up as clowns..."

Why is that unfortunate?

 
At 2/06/2011 12:51 AM, Blogger Ron H. said...

James,

"How can there be misallocation of labor with u6 unemployment near 20 percent?"

If you are making something that can be gotten cheaper somewhere else, you are mis-allocating labor.

"Both Adam Smith’s Theory of Absolute Advantage and David Ricardo’s Theory of Comparative Advantage fall apart when the market is unable to absorb full employment production."

No, they do not. Banana farmers in Honduras will always have an absolute advantage over banana farmers in Minnesota. Unemployment has nothing to do with it. The same is true of comparative advantage. Find your own example.

 
At 2/06/2011 1:24 AM, OpenID Sprewell said...

FEE makes Economics in One Lesson available for free on their website.

 
At 2/06/2011 11:09 AM, Blogger morganovich said...

james:

"South Korea. See the prologue to Ha-Joon Chang’s Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism for a description of how South Korea used trade protection."

i call BS. lay out the example yourself. what you are describing is not possible. SK may have helped certain industries with protectionism, but doing so always hurt their citizens more and is always must. it's clear you still do not understand that N > (n-I) where I > 0 as it must be to want a tariff in the first place. this is not arguable math.

"
That would work just fine in a time of balanced trade and full employment where we could redirect sugar workers to an equal or more productive employment. With u6 unemployment near 20 percent all it does is create an additional $3 x N worth of unemployment and increase the deficit. "

that is dead wrong. you are leaving out the effect of the drop in purchasing power of the US consumer by 3N caused by the tariff. if we remove it, then our citizens have an extra 3N to spend on other things. that is a net benefit to jobs and consumer well being over the tariff which can only provide a benefit of 3 (N-I).

3n buys more jobs than 3 (n-I). you are only looking at half the picture which is why you are getting the wrong answer.

look at the graph i linked. the policy you espouse to save jobs actually costs them by resulting in an inevitable dead weight loss to the economy.

every tariff shrinks the overall consumption pie of an economy. you cannot create jobs by shrinking the economy in real terms.

 
At 2/06/2011 11:18 AM, Blogger morganovich said...

"Not when we have a trade deficit."

again, absolutely dead wrong. "trade deficit" is a meaningless term tossed around by uninformed politicos. it means NOTHING nor is it even really possible.

so what happens to that dollar we send to england? do they just burn it? (if so, fine, it's an IOU we need never pay) but assuming they behave rationally and want value for it, it goes into US bonds or stocks or money markets until such time as they choose to exchange it for goods. those things benefit the US.

a difference in the balance of trade in goods and services is always offset by net investment flows.

are you now going to argue that investment harms america?

you will likely have a massive trade deficit with the grocery store for your entire life. does that worry you?

why not? it's structural and will never go away. they don't buy anything at all from you and likely never will.

our "trade deficit" is a few % of GDP. i'll bet your trade deficit with the grocery store is higher in % terms. if it's not driving you into ruin, why would it do so to us?

this argument that trade deficits are somehow "unsustainable" is pure nonsense. is your grocery bill unsustainable?

don't you feel better off for running a grocery deficit?

it seems to me that you have not really thought this issue through at all james.

 
At 2/06/2011 12:00 PM, Blogger morganovich said...

""Unfortunately, in many instances, FTA stands for Free Trade for America - the rest of the world's negotiators are often shown up as clowns..."

Why is that unfortunate?"

well, one could argue that it is unfortunate in that it reduces overall well being (our and theirs) by shrinking the consumption possibility frontier in real terms, but that is certainly no reason for us to emulate their bad policies.

there is no reason to punch yourself in the face just because someone else punches themselves in theirs.

 
At 2/06/2011 1:00 PM, Blogger Ron H. said...

morganovich-

"are you now going to argue that investment harms america?"

I would expect James to respond that this is "foreigners buying up our assets".


"you will likely have a massive trade deficit with the grocery store for your entire life. does that worry you?"

I would expect James to answer: "that's different, because he is a fellow American".

I'm convinced that James' problems with trade have little to do with economics.

 
At 2/06/2011 1:05 PM, Blogger Ron H. said...

morganovich-

"well, one could argue that it is unfortunate in that it reduces overall well being (our and theirs) by shrinking the consumption possibility frontier in real terms, but that is certainly no reason for us to emulate their bad policies."


I agree with you. I was expecting a "free trade as long as it's fair trade" kind of response (not from you, of course).

 
At 2/06/2011 1:53 PM, Blogger morganovich said...

ron-

"I would expect James to answer: "that's different, because he is a fellow American"."

while i agree with you that would be a meaningless answer, we can eliminate it as a possibility by just looking at the pass through trade deficit he gets from buying chilean blueberries in the northern winter etc or cheese and wine from france or coffee from africa or central america.

i think james's real problem is that he cannot see the scope of the issue fully. running a constant trade deficit is not a problem nor a debt. if you make $100k in salary and spend $4k on french wine for your cellar, there is nothing unsustainable about that nor are you in debt to chateau margaux. you still have the $96k left from your salary. you owe the winery nothing. you can do this ever year and still be getting richer. this is incredibly obvious when you look at one individual, yet somehow, when we aggregate a whole nation of such individuals together, something that is not a problem for any of them individually is presumed (by folks like james) to become a problem.

you cannot just look at trade and ignore the domestic economy. it does not exist in a vacuum.

this is where james is falling down. all his errors are stemming from only looking at part of the picture and missing the whole.

 

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