Free Trade: Theory vs. Practice

3/26/2016 | Me

[snarkpup]

Free Trade: Theory vs. Practice

Economics textbooks by authors of various political persuasions all seem to agree that "free trade" is mostly a win-win no-brainer. And yet, in practice, it seems like free trade may be wiping out the middle class. What is going wrong here?

The textbooks explain that when a country engages in free trade, several things happen:

1. There are winners and losers. The losers need to retrain and/or lower their expectations.

2. What the winners win is more than what the losers lose.

3. What people lose when their wages are depressed by globalizing the labor market is more than made up for by the lower prices they pay for goods and services.

In the textbook examples of free trade, the losers are isolated occupations (say, shoemakers) who then have to retrain for some other occupation (say, cabinetmakers) in which their country has a comparative advantage.

But it seems like what's happening nowadays is that

1. The losers are no longer isolated occupations like shoemakers, but broad groups—like all workers (menial, agricultural, blue-collar, white-collar, tradesmen, STEM, professional).

2. The winners are no longer occupations like cabinetmakers for which one can easily retrain, but occupations where entry is difficult (CEOs, entrepreneurs, investors who can live off dividends).

3. Goods and services being cheaper is little comfort to 1) those cannot find an occupation that isn't being clobbered by globalization and 2) those who need to pay off a mortgage based on pre-globalization income and home values.

This new situation produces two problems:

1. It is not feasible to convert 100,000,000 workers (menial, agricultural, blue-collar, white-collar, tradesmen, STEM, professional) whose jobs disappeared into 100,000,000 CEOs, entrepreneurs and investors who can live off dividends.

2. The globalization losers are becoming more numerous than the globalization winners. The former is becoming a voting block that threatens the latter. (This is one reason the Trump Coalition has been able to emerge as a credible challenge to the Establishment, and why traditional liberal vs. conservative ideology is becoming less relevant.)

No one seems to have a solution to this problem; but a couple of things seem to be clear:

• Free trade between wildly dissimilar cultures is problematic. E.g., free people vs. slave labor, safe vs. unsafe working and living conditions. Fixing this by convincing Third World countries to clean up their act is only part of the solution. Our willingness to, for example, sell off our land to pay for imported goods is an American cultural flaw that puts us at a disadvantage against countries like China who are thinking centuries into the future.

• Goods flowing across borders are less problematic than workers flowing across borders. Importing goods affects manufacturing jobs and those service jobs where, for example, telecommuting to Bangalore is feasible. Importing workers affects the remaining occupations. And if the imported workers' culture is violently incompatible (literally) with the local culture, then things get even more exciting.

[snarkpup]

It's only noon and so far today there have been several threads where I could have posted the material presented above as a comment. Instead, I have posted it here in one place.

[Let's Roll]

Thanks for posting.

[Regulator]

Fixing this by convincing Third World countries to clean up their act is only part of the solution

And that ain't gonna happen. Those countries are ruled by violent, vicious gang overlord thugs who have only their own interests and could care less what happens to the workers, who are nothing but cattle to be used by them.

People in the U.S. interpret the world as being Just Like Us.

But it isn't. The rest of the non-European world is a regressive, violent thug show, run by corrupt thugs with room temperature IQ's, with no restraint on violence: the Communists, which is just gangster government with a thin veneer of nonsense theory behind it.

[Agnes Heep]

Winners and losers. The winners get real goods that serve useful purposes. The losers get pieces of green paper with pictures of dead white men on them.

[snarkpup]

And that ain't gonna happen.

Probably true. And convincing Americans to adopt a long-term perspective (as opposed to trading their land for appliances) may be equally difficult.

[GraceG]

We free trade ALL the TIME already, that is BETWEEN the STATES!

We can Free Trade with places like CANADA because they are pretty much on the same level culturally, economically, and with similar regulatory levels.

But we cannot “free trade” with countries that have slave labor, no burdensome regulation, and who are culturally alien to us. They can use their “advantages” to undercut us EVERY STINKING TIME.

[Eric Pode of Croydon]

A little web research will show you things like this:

America produced five times the amount of coal in 2000 as in 1900, with one-fourth the number of miners.

America produced 40% more automobiles in 2014 as in 1960, with 60% the number of workers.

You want to bring jobs back? The wily Chinee isn't your major problem. Your problem is Robby the Robot.

[Amendment10]

As Donalid Trump has pointed out “free trade” does not mean that bad deals are not being made.

[oldbrowser]

The laws of economics are immutable. We cannot legislate or negotiate them away. We need to recognize them and plan accordingly.
Mass communications and mass transportation have changed the playing field. Unless we want to become a closed society like north Korea or myramar.

[snarkpup]

The laws of economics are immutable. We cannot legislate or negotiate them away. We need to recognize them and plan accordingly.

A larger and larger portion of the American public is finding it difficult to "plan accordingly" when occupations are being off-shored and out-sourced as fast as people can retrain for them.

As you point out, the laws of economics are immutable, and for this reason the problem is not necessarily solvable. But things like the Establishment's attempt to open the borders and replace the American work force with those who accept Third World salaries and working conditions is throwing gasoline on the fire.

[nathanbedford]

No one seems to have a solution to this problem

And that includes Donald Trump.

Globalization is not simply a problem of trade negotiators being "stupid" as Donald Trump insists, the problem is generated by a technology revolution and it is compounded by a breakdown of our political system.

When the candidate perceived to be the most hawkish on trade deals goes to the voters of Iowa and tells them that he will not only protect their subsidies to grow corn and force people to burn it up in their cars but he will increase those subsidies, we have the root of the problem. The root of the problem is that some politically powerful interest groups prevail in trade negotiations to the disadvantage of less politically connected sectors of the economy.

So Donald Trump wants to maintain corn subsidies but he might or might not want to trim the tariffs which keep a few families in Florida immensely wealthy growing sugarcane.

Donald Trump has not even touched on the complexities in trade generated by the digital revolution. The doctor who reads your next x-ray might well be in India. He will do so in real time at a real discount. The temptation to trim soaring medical costs by outsourcing radiology to India is obviously very appealing. IBM has literally more than 100,000 people sitting before computer monitors in India around the clock doing IT work for numerous American and European concerns. The number increases daily and it is not limited to IBM.

The problem with permitting government to decide which industries shall be protected and which shall be sacrificed is one that goes back to the Articles of Confederation. Sectional tariff disputes must be recognized as one, if not a leading, cause of our Civil War. It should be recognized as one of the principal causes of the war of 1812.

The libertarian in me suggests that it is better for the market rather than for socialists like Barack, Hillary, Bernie or Elizabeth to decide which industries shall be favored. Can you imagine President Hillary doing so without corruption? Supplicants will be lined up out the door of the Clinton Foundation.

And the realist in me believes that Donald Trump is certainly among the worst individuals we could possibly select to loose upon the delicate balance that makes up trade negotiations. He is ham-handed, he is a vulgarian, he is despised by every European I have ever met and, one cannot doubt, by the rest of the world, he is mistrusted as revealed by his colossal negatives by a majority of the Americans whose lives he would profoundly affect in these deals. In short, he might become president of the United States but he would not have legitimacy so necessary to make decisions making some rich and some poor.

Yet, the realist in me also believes that we cannot go on as we have been going on with these trade deals. My experience here in Germany suggests to me that a more mercantilist approach is warranted but, as the initial headline of this reply suggests:

No one seems to have a solution to this problem.

To try to shape global trade is to turn to politics to solve an economic problem. It is to invite corruption into the whole of the world's economy. It is certainly to favor the elites over the left behind. It can only be done by a president with the entire support of the people. Even then, the odds are that the deals will be corrupt and, even when well-intentioned, misguided. Anyone who knows the story of the pencil knows that elites, even Harvard educated elites, are not smart enough to run a $14 trillion economy or a world economy.

I fear of that even a well-intentioned adjustment of trade policy will fail because our education establishment is failing us, our immigration policy is destroying our culture and making the job of the educational establishment impossible. Our culture is further deteriorating because it is more secularized every day. Finally, we do not know whether it is trade policy or tax policy, trade policy or environmental policy, trade policy or burdensome regulations that are hollowing out our economy. We do not know these things because we have not the data. So the temptation is to lurch toward easy solutions in our ignorance.

[jdege]

A true free trade agreement would be public, and less than one page long. That the trans-pacific deal is thousands of pages and mostly secret is a clear sign that it’s not a free trade agreement, it’s a grand exercise in rent-seeking.

[central_va]

The laws of economics are immutable.

BS. Economics is not a science and it is intertwined with politics and the two inseparable.

[MaxistheBest]

“What the winners win is more than what the losers lose.”

Problem is there is one winner for every 10 losers

[snarkpup]

The libertarian in me suggests that it is better for the market rather than for socialists like Barack, Hillary, Bernie or Elizabeth to decide which industries shall be favored.

I agree. But this still leaves the problem of what happens when the industries the market decides to sacrifice employ more than 50% of the voters.

[Amendment10]

"That the trans-pacific deal is thousands of pages and mostly secret is a clear sign that it’s not a free trade agreement, it’s a grand exercise in rent-seeking."

I suspect that the trans-pacific deal unconstitutionally expands the fed’s constitutionally limited powers too.

[arrogantsob]

Good idea to post it as a separate thread. This is a very serious question which requires a lot of thought.

I have a Masters in Economics with a concentration on International Economics so I can vouch for what you said with regard to the universal agreement on Free Trade theory.

Like all theory it is based upon reasoning from a certain set of assumptions. Primarily those are: A -seamless transition of factors of production from one form of work to another and
B - an international currency system which is based on FIXED exchange rates (fixed in terms of specie movements between surplus countries and deficit countries. Thus, gold is credited or debited to settle trade imbalances.

When Trump started talking about trade (and he is only one with any ideas in the whole damn Republican Party apparently), I cringed at the thought of going after the sacred Theory and could not understand how anyone with a degree in Economics from Wharton could say such things.

Then, I started thinking about the assumptions of Free Trade and Trump’s concentration on government manipulation of exchange rates. Under the old regime governments were prevented from that by limited supplies of the gold necessary to intervene in any major way.

However, when Nixon took us off the Gold Standard and FIXED exchange rates in the early 70s (because of the pressure financing the Vietnam War put on the exchange rate) we left the Old Era behind and entered into the New World of FLOATING exchange rates.

Since the financial media seems to be oblivious to this change, the way we think needs a fundamental alteration.
The question is not “is there a comparative advantage?” or “is there a more efficient allocation of resources (foreign and domestic) due to FT” but -

“How must we modify the cost/benefit ratio of FT since we have gone into FLOATING exchange rates determined by ‘market conditions’ in the international monetary markets”? Another point to consider is “How much power does a government hold over the international monetary markets?”

The other assumption noted has been addressed through governmental programs to retrain workers whose jobs are lost to imports. While governments don’t do this well, at least the problem is recognized and attempts made to address it.

[arrogantsob]

Trade between the states uses the same MONEY that between different nations different monies.

[central_va]

A 20% across the board import tariff would balance the budget tomorrow. President Washington would approve.

[MaxistheBest]

“he is despised by every European I have ever met”

That is reason enough to vote for Trump