Arguments for Free Trade

[ag]

Are NAFTA/CAFTA ideal examples of free trade?  Is the ideal free trade just having no laws on the books regarding foreign goods?

They are not ideal, obviously. For one, regional trade blocks are, in themselves, distortionary: it's not at all clear that US should be importing more expensive widgets from Mexico, when they could be had cheaper from China. Unfortunately, the WTO negotiations don't seem to be progressing much.

[ag]

1. The basic argument for free trade in the "ideal" economy is straightforward: barriers to trade (and that includes subsidies to domestic producers) distort incentives, force countries to waste resources on producing things they have a (comparative) disadavantage in producing. Very quickly, the argument runs as follows: if the US needs the same ammount of resources to produce  a 500 lbs of tomatoes and 2000 lbs of corn, while in Mexico producing 500 lbs of tomatoes takes up the resources that could be used to produce 1000 lbs of corn, the US should specialize in corn, Mexico should specialize in tomatoes, they should trade and, as a result, the same ammount of resources would be used to produce more of both corn and tomatoes - and, in the end of it, citizens of both countries would be consuming more of both; restricting trade would result in life being harder for citizens of both countries.

2. Of course, the world is not ideal and there are, indeed, circumstances where the basic argument is not necessarily working. In particular, the markets are not always perfect, and we do live in the world with zillions of various market distortions and frictions (many of them, though not, by any means all, actually caused by the governments). Now, in the world of existing distortions, additional distortions do not necessarily make things worse - sometimes, they actually make things better, more frequently they make things worse for some and better for others. Thus, in principle, one can imagine circumstances where particular arguments for particular trade-distorting policies could be made.

3. Now, unfortunately, 99% of the time these turn out to be either outright balooney, or highly self-serving crap designed to serve interests of narrow interest groups (to the detriment of most of those around).

The reason for it is not necessarily that trade restrictions are always bad (the world, as I said, is not quite ideal), but that the incentives that prompt people to go out campaigning for trade restrictions normally involve redistributing wealth in their favor - and there is no reason at all for this redistribution to be only at the expense of the foreigners . Of course, putting the arguments in nationalist terms is useful to hide the smell of the crap under the patriotic perfume. However, normally the restrictions that get through are the ones that will have a few people gaining a lot (hence, the willingness to push for them) and many people loosing a little (just not enough so that they'd campaign). Thus, it is a useful rule of thumb: if you don't see very clearly how a particular trade restriction is going to benefit you personally, chances are you - yes, you - are going to be the one to pay for it. And, though you might be willing to pay a little to make somebody else happy, remember: trade restrictions are many, and though you loose a bit from every single one, your total losses will be big.

4. Additionally, trade policy is, by nature, multilateral. Even if a trade-restriction policy can be found that on its own would make most citizens of a certain country better off - at the expense of the foreigners, of course, but let's assume that we are xenophobic/racist enough not to care - one should keep in mind that the foreigners can - and will - retaliate. Trade wars are often as destructive as real wars, so I tend to treat trade war-mongers exactly as I treat real war-mongers: with highest suspicion.

5. The argument that trade just serves the "multinationals" and "monopolists" is one giant pile of crap. In fact, trade, actually, encourages competition: when foreign firms enter a market, domestic monopolists loose some of their power.  Trade usually leads to more goods, more choice, lower prices and lower margins for the "fat cats".  As a rule, trade restrictions result, effectively, in massive transfers to the rich. Of course, domestic monopolists would prefer to have access to foreign markets without letting anyone to theirs, and might be even willing to sacrifice the former for the latter, but a) do you really feel that you owe much to domestic fat cats and b) see p. 4

6. Still, any policy change, whenever it happens, is likely to have some people suffering. If you are an American tomato producer or a Mexican corn producer, you, probably, would, in the short run, loose more from trade opening than you'd gain. Naturally, you aren't going to be comfortable w/ the argument that "in the long run", once you shift from one industry to another you'd be eating more of everything: on that, at least, Keynes had some sense: in the real long run we all are dead. Getting to the "long-run" will involve non-trivial costs for you personally, so, in general, you may have a reason to argue that you deserve some compensation. Ask (i.e., campaign) for help retraining, for buying new equipment, etc., ask for compensatory payments - trade makes the pie bigger and you should get your share. Just don't ask to restrict trade.

7. Now, there are, sometimes, valid arguments for very specific trade restrictions (as I said, there are some - rare - cases, where, given the distorted world we live in, additional distortions might make things better). These could - and should - be considered on a case by case basis (ideally, in the context of trade negotiations). However, overwhelmingly, these have nothing to do with actual trade restrictions people like to be talking about. Remember: most of the time it will be you who is going to be paying for trade distortions. Yes, you.