> Free trade is great when applied evenly.
Free trade is great even when applied unevenly.
Free trade is great even when applied unevenly.
The argument for free trade is an efficiency argument (comparative advantage, Ricardo, Hecksher-Ohlin yada yada) that it's unambiguously better, but it's predicated on redistribution: The reason that free trade is unambiguously better is that you can compensate all the "losers" of free trade so that they're as well off as before, and you still have extra income left (to distribute, in theory, as desired politically).
Economics mostly shies away from inter-personal utility comparisons (they're hard to grapple with) and prefers the notion of "pareto improvements" (where at least someone is better off without anyone being worse of). Trade theory uses this device of redistribution to show that a free trade is a pareto improvement.
But then, in the real world, many advocates of free trade suddenly forget about this part of the argument, and when some sectors of society profit handsomely and many (often workers) end up on the street, they suddenly remember their free-market credentials and argue that no, one cannot redistribute, the free market is optimal and fair and pays everyone their marginal product and yada yada yada.
Funny, that amnesia in the middle.
Similarly, hard working immigrants travel from poor countries to rich countries to do menial work that rich people can't be bothered with. They often send some money back home.
If the US can sell their excess maize in poor countries, it lowers the cost of food for the poor people in those countries. (Especially true when the local harvest is poor)
To understand why comparative advantage is an advantage, you must consider the alternative: Economic protectionism. It results in inefficient allocation of labor, because everyone's job is protected. Everyone pays more for everyone else's labor, everyone is less productive. This affects the poor the most, because they spent the biggest share of their income on basic goods and services.
Of course there are economic winners and losers, but by attempting to fully protect everyone, everyone becomes a loser, as evidenced by the countless failed attempts at socialism.
I'm not sure why people fail to see the benefits of free trade and specialization in their own lives. Just imagine working all day long, out in field, just to put food on your own table! Why would it be a good idea for certain size groups and not others?
Now the remarkable thing about free trade/specialisation is that we can help those people and still be better off overall. And I'm arguing that in some case we should actually do that.
I'm really not sure what's so complicated about the argument: Economic analysis shows that with free trade a country as a whole can afford more than without (which is insufficient to state that everyone is better off, thus insufficient to state that the country is better off), and using the device of redistribution/compensation you can show that everyone in that country can be made better off.
Then explain the current resurgence of protectionism right now. This redistribution argument has very little to do with trade, and actually undermines it. You don't have to go very far to see the impact automation has had and will have on certain segments of the population, so why are we muddying the waters with the downside of free trade here?
Now I agree with you that those affected by trade (and technological advances), or who are vulnerable should be helped. Since there's always some other threat out there to our collective prosperity, there's really no reason why we can't talk about tax policy, UBI, education at the same time. But we can't kill these geese laying the golden eggs.
Sorry, I meant nobody is denying the benefits of free trade in this discussion here.
> This redistribution argument has very little to do with trade
But it does. Trade only makes everything better if you do redistribute. That's the whole point. Without redistribution, it's expected and even legitimate that some sectors object to, and reject free trade.
But it has.
Comparative advantage shows you that the country as a whole can afford more with free trade than before.
But one of the theoretical consequences of the Heckscher-Ohlin trade model [1] is factor price equalisation, ie in once country wages might fall while returns to capital increase. Inevitably, there are winners and losers.
Now, since economics rightfully shies away from inter-personal utility comparison, that does not tell you whether the country as a whole is better off; unless you invoke redistribution, such that everyone has at least as much as before (now you can say that everyone is (weakly) better off, and some strongly, and thus the country).
This is well understood (see eg [2] for some more on this issue, quoting James Kwak, & I'm pretty sure Krugman has articulated the same). (This, btw, is not an argument from authority, but an answer to "I don't know where you got the idea")
> Of course there are economic winners and losers, but by attempting to fully protect everyone, everyone becomes a loser
How about comparing to northern Europe, and not some dystopia nobody is arguing for anymore?
My point was that the case for free trade is good and valid, and it rests on (and should go along with) redistribution/compensation.
[1] https://en.wikipedia.org/wiki/Heckscher–Ohlin_model
[2] http://www.samefacts.com/2015/05/everything-else/free-trade-...
An individual worker, whose livelihood is destroyed and who is unable to perform any other form of work (unlikely, but conceivable) will of course have less than before. I don't see anybody making the argument that every single individual will be better off (that's obviously wrong), but the purchasing power of every individual income will increase.
You can make an argument that such inequalities should be mitigated by some income-redistributing measure or another, but that's orthogonal to comparative advantage itself.
Free trade allows exchanges that make both involved parties better off, but possibly harms others (higher cost producers). This can be done without redistribution.
It is interesting that you suggest that existing producers deserve compensation. Why? Do they have some innate right to their previous business model or profession?
Sugar producers in the US have been protected for decades by trade policy that increases the costs for all sugar consumers in the US. I don't know that they deserve that protection but it would be cheaper to just compensate them at a decreasing rate to get them out of the business, rather than perpetually enforcing higher sugar prices.
Oops, make that centuries - the US sugar industry developed in part because of tariffs https://scholarworks.montana.edu/xmlui/bitstream/handle/1/25... page 18 "Ballinger (1975) asserts that when the United States acquired the Louisiana Territory in 1803, the fledgling sugar industry there immediately benefited from tariff protection, hence spurring its development." Do they still deserve compensation if harmed by free trade? They've already been compensated by unfree trade...
As Friedman used to point out, if Japan wants to subsidize its steel at the cost of their own taxpayers, just take the cheap steel and be thankful for it.
There are complex consequences, and the rebound when opportunities re-emerge isn't anywhere as rapid as the fall.
Africa is an interesting case in point - I don't know very much about the average case, but I remember Zimbabwe gutted themselves, going from the Bread Basket of Africa to famine in a very short period of time with no particular effort from outside forces. There is a strong case the Africa's economic problems are more attributable to their struggles to organise politically rather than charity and dumping from external economies (which probably hasn't helped or hindered in the big picture). Maybe we can peg the organisational issues on foreign countries; but it is going to be more complicated than that.
Take China. Their protectionist policies probably have an impact, but most of their advantage is they are organised, politically stable, willing to work more for less pay and have a culture that believes in investment and education. Without government handicaps like Maoist Communism, that is a very formidable set of attributes in a competitor.
So your price ends up at fair market price... when averaged over many decades, maybe, but likely not for long at any particular point in time. And in the meantime workers get screwed over as industries and skillsets lose economic value.
Secondly, you're only looking at the negative consequences for some workers. You're not looking at the benefit to all workers, who pay lower prices as result of cheaper labor from abroad.
Suppose workers had been guaranteed their jobs for life because of protectionist policies. This is called mercantilism. Everybody pays more for everyone else's labor and nobody can benefit from comparative advantage. As a result, everyone is poorer. This has been known for centuries and it has been accepted by economists across the political spectrum. Yet politically, protectionism never ceases to lose appeal.
You don't have shops to buy parts anymore, you don't have assembly lines anymore, you don't have people trained in this anymore.
If China decided tomorrow to increase the costs of the electronics they export, you'd have to accept that.
Apple tried their best to move even some assembly back to the US, and couldn't even get the simplest custom screws made in the amounts they need. Only a single small company still had the tech to make them, and they couldn't produce enough, fast enough.
It's not just a single monopoly, the problem is that entire industries are gone, and it'd take decades to train workers and regain the institutional knowledge.
And this is just one example.
And your argument has one more flaw: free trade reduces costs of products, and wages. But it won't affect cost of housing (except over a timespan of decades due to cheaper labor and materials, but it still won't solve cost of land). Nor will it affect cost of utilities.
In our household, we're now spending 71% of our budget on rent and utilities. Under more protectionist policies, I might pay 20% more for products, but I'd also be making 20% more wages — and as result, I'd be better off (in fact, my disposable income after rent, utilities and food would almost triple)
Of course not, U.S. labor is far too expensive to do the kind of menial work required to assemble electronics, unless maybe it's a repair shop for certain products.
> You don't have shops to buy parts anymore, you don't have assembly lines anymore, you don't have people trained in this anymore.
You don't need "local shops" to purchase parts for assembly lines. Ask Elon Musk if the biggest challenge in building an assembly line is procuring the parts, he will say: No. You have a worldwide integrated economy where you can buy basically anything. The number one challenge is labor cost.
In any event, training people for electronics assembly is trivial. If you can take apart an iPhone and put it back together, you're good.
> If China decided tomorrow to increase the costs of the electronics they export, you'd have to accept that.
"China" doesn't decide the costs of electronics, individual businesses do. But even if China was dumb enough to slap tariffs on their own exports, there are plenty of alternatives. There is no monopoly. In fact, China is doing the exact opposite: They are artificially lowering the value of their currency to stay competitive.
You should also really look into how electronics are actually produced, there are numerous countries involved in it, each specialized into particular parts:
http://www.worldstopexports.com/electronic-circuit-component...
> It's not just a single monopoly, the problem is that entire industries are gone, and it'd take decades to train workers and regain the institutional knowledge.
Actually, a lot of institutional knowledge remains with the companies that just use labor abroad. However, it also leaks into the domestic industry, that's why you have a lot of companies complaining about "IP theft" from China.
The broader point remains: There is no monopoly. There is plenty of competition. Even if for a "relatively" short period of time (decades) there where to exist a monopoly, it could only sustain its higher prices for so long as it stays unprofitable to rebuild that infrastructure. At that point the "monopoly pricing" becomes "fair pricing".
> In our household, we're now spending 71% of our budget on rent and utilities.
You should probably look into what building regulation (artificial scarcity) does to the price of rent. You can't blame free trade for that.
> Under more protectionist policies, I might pay 20% more for products, but I'd also be making 20% more wages — and as result, I'd be better off (in fact, my disposable income after rent, utilities and food would almost triple)
First of all, why do you assume that rent and utilities would not rise in tandem with the cost of goods? Why do you believe rent in Silicon Valley is so high? It's the scarcity combined with the high wages of the tech workers.
Secondly, you are losing your competitive advantage. You are worse off.
Not entirely of course, but the ratio of labor to productivity is really large, they don't engage a lot of workers to begin with. Look at how much larger the electricity costs are than labor:
If there is a constant threat of the prices being lowered again, it will be pointless to reinvest in restarting competition - the monopolist at any time can lower the prices back down.
Also, in some fields the monopolistic position gives network effects to the producer that cannot be replicated by an upstart, making a competition unlikely.
They seem to be taking a pretty big loss. Surely Friedman didn't expect them to just "take one for the team." I don't know. Maybe he did? Not sure.
Protecting the local steel industry might be good for the steel workers, but it raises prices for everyone else in the economy who consumes steel. Now certainly every time someone's job is disrupted by competition it is personally tragic, but why do the interests of one particular interest group weigh in larger than the well-being of everyone else?
then, if I interpret this correctly, Friedman's idea truly was that laid-off steelworkers "take one for the team"
What about all the people that lost their jobs as a result of technological progress? What of those poor ice pickers, who lost their livelihood to the invention of the refrigerator?
so, what regulatory or governmental policies and programs did Friedman think could actually help people once they arrive in that state? what can an economist say about policy for workers whose livelihood disappeared?
That must be why economies such as China, Japan, and South Korea stayed economic basket cases in the late 20th century. Because of their protectionism.
This worked quite well for countries building up their own industries (Brazil, Korea, Japan, possible China).
"As Friedman used to point out, if Japan wants to subsidize its steel at the cost of their own taxpayers, just take the cheap steel and be thankful for it."
It becomes a problem if a country like China with state capitalism uses this to systematically destroy other industries.
Is it?
Lets assume a real FTA with the EU and Mercosul. Result? EU agriculture will nearly collapse, and Brasilian industry will nearly collapse. Sure, prices of electronics, cars and consumer goods will be lower in Brazil and food prices will be lower in the EU.
Trade barriers helped countries like Brazil, Korea, Japan and likely China to build up their own industries before agreeing to FTA. I am in favor of FTA but I am not sure that they are a solution to every problem.