Sunday, June 5, 2016

Recommended reading: Ikenson on trade

Cato's Dan Ikenson has written an excellent summary of trade issues, "Trade on Trial, Again." It's timely, considering the Trump's total confusion on the subject. Hint: running a trade deficit does not mean we are "losing." Here's a short version that hits what I think are the high points, but do read the whole thing:

Not long ago, a group of Cato scholars entertained the question of whether the intellectual debate for free trade had been won.
There was near consensus that it had — in 1776 with publication of The Wealth of Nations. In the 240 years to follow, efforts to poke substantive holes and refute Adam Smith’s treatise failed and, today, nearly all economists agree that free trade, by expanding the size of the market to enable greater specialization and economies of scale, generates more wealth than any system that restricts cross-border exchange. 
[But] ... how much does it really matter whether the intellectual debate has been won when, in practice, free trade remains stubbornly elusive, and the process of U.S. trade policy formulation is distinctly anti-intellectual? 
If the free trade consensus were truly meaningful, trade negotiations would be unnecessary. If free trade were the rule, trade policy would have a purely domestic orientation and U.S. barriers would be removed without need for negotiation because they would be recognized for what they are: taxes on consumers and businesses that impede the global division of labor and the creation of wealth.

[Unfortunately] ... The case for free trade is not obvious. The benefits of trade are dispersed and accrue over time, while the adjustment costs tend to be concentrated and immediate. To synthesize Schumpeter and Bastiat, the “destruction” caused by trade is “seen,” while the “creation” of its benefits goes “unseen.” We note and lament the effects of the clothing factory that shutters because it couldn’t compete with lower-priced imports. The lost factory jobs, the nearby businesses on Main Street that fail, and the blighted landscape are all obvious. What is not so easily noticed is the increased spending power of the divorced mother who has to feed and clothe her three children. Not only can she buy cheaper clothing, but she has more resources to save or spend on other goods and services, which undergirds growth elsewhere in the economy. 
Consider Apple. By availing itself of lowskilled, low-wage labor in China to produce small plastic components and to assemble its products, Apple may have deprived U.S. workers of the opportunity to perform that low-end function in the supply chain. But at the same time, that decision enabled iPods and then iPhones and then iPads to be priced within the budgets of a large swath of consumers. Had all of the components been produced and all of the assembly performed in the United States — as President Obama once requested of Steve Jobs — the higher prices would have prevented those devices from becoming quite so ubiquitous, and the incentives for the emergence of spin-off industries, such as apps, accessories, Uber, and AirBnb, would have been muted or absent. 
But these kinds of examples don’t lend themselves to the political stump, especially when the campaigns put a premium on simple messages. This is the burden of free traders: Making the unseen seen. It is this asymmetry that explains much of the popular skepticism about trade, as well as the persistence of often repeated fallacies. 
The benefits of trade come from imports, which deliver more competition, greater variety, lower prices, better quality, and new incentives for innovation. Arguably, opening foreign markets should be an aim of trade policy because larger markets allow for greater specialization and economies of scale, but real free trade requires liberalization at home. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports — our purchasing power or the so-called terms of trade. Trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports. 
Protectionism benefits producers over consumers; it favors big business over small business because the cost of protectionism is relatively small to a bigger company; and, it hurts lower-income more than higher-income Americans because the former spend a higher proportion of their resources on imported goods. 
[Fortunately] ... Even if there were a President Trump or President Sanders, rest assured that the Congress still has authority over the nuts and bolts of trade policy. The scope for presidential mischief, such as unilaterally raising tariffs, or suspending or amending the terms of trade agreements, is limited. But it would be more reassuring still if the intellectual consensus for free trade were also the popular consensus.

As for the TPP Treaty, we don't need it, because we should not be imposing any barriers  or conditions on our trade with Pacific nations. Or any nations, for that matter.


Benjamin Cole said...

Forgotten today is that the Cato Institute called President Ronald Reagan the greatest protectionist since Herbert Hoover.

Reagan slapped 100% tariffs on Japanese electronics and 50% tariffs on Japanese motorcycles and placed a numerical ceiling on Japanese auto imports. Reagan makes Trump look like a little boy in short pants.

To top it off, at the Plaza Accords, Reagan engineered a devaluation of the dollar against the yen and other currencies.

But America flourished under Reagan.

Interesting topic.

steve said...

Complete agreement. I often wonder how much a company like Walmart has affected the inflation rate byt buying and selling "cheap" foreign goods to people who can't afford the luxury of more expensive. People who argue for "equality" with trade partners are the epitome of elitism either having no clue of basic economics or more likely just not caring. For every job you "save" in the US how many do you lose by producing a more expensive product that fewer people will buy?

Hans said...

You can read all of Ben Jamin's comments
on his website! Well, done old bean.

Hans said...

Yes, how correct Mr Grannis is regarding "open" trade!!

Remove all barriers between traders. This action, however,
should not be confused with perpetual trading deficits.

Or you can have the following as happened in 1982 and the
620 page bill, Miscellaneous Tariff and Trade Bills. You will
have to pass it to find out what is in it.

Hear are some of the things, Ben Jamin, has referred to
regarding Raygun and his conduct regarding open trade.

The more I read about him, the less I regard him as a
staunch Conservative. Give me Calvin Coolidge (1/4 of all
federal debt was retired) and or Barry Auwater.

I sure thank Raygun so much for taxing Social Insecurity.

Benjamin Cole said...

Barry Goldwater! I still like Ike.

Benjamin Cole said...

Finally the GOP does something positive!

Get rid of Dodd-Frank, in exchange for higher capital requirements.

Nice to see. Makes sense to me.

Johnny Bee Dawg said...

Has there been an actual "free trade" deal made by the USA in the past several decades??
All these folks bashing Trump while supporting TPP, are hypocrites, imo.

Trump essentially said he prefers free trade, but we don't have he at least wants to negotiate better deals where the US wins more than the other country. I think he will find that is easier said than done, but much of the Trump criticism is misplaced. I hear people on TV who know better claim that Trump is against "trade". He clearly is not. He just wants better trade deals.

That said, I think Trump is confused and uneducated on the subtitles of trade dynamics, but I contend the people running things are NO BETTER. In fact, they are worse, because they don't put America's interests first. Giving away sovereignty to world government councils is unconscionable and disgusting. Id rather have flawed Trump thinking, than elites giving away US sovereignty and taking away Congressional oversight. This is quite a distinction, and is lost on most people who feel superior in bashing Trump's trade rhetoric. He isnt going to get a massive tariff passed anyway.

Give me Trump instead of TPP. Lesser of 2 evils. Trump may actually get the other side to move closer to free trade than TPP EVER will.

AUGUST said...

Trump is a successful business man. No one in the economic circle of Obama is or was. So let's stop bashing Trump when his opponent is a person who has committed espionage. Free trade has been debunked. Adam Smith was a purist and failed to take into consideration that other poorer countries would manipulate their currencies. We have opened our trade to so many countries and the policy wiped out our middle class. It has the effect of freezing wages in a consumer driven economy and making us a country of hamburger flippers.

Benjamin Cole said...

One aspect of free trade politely never discussed: If a nation runs chronic trade deficits, it must either sell assets or issue mounting IOUs.

Australia has run chronic trade deficits with Asia.

Now see this:

“Last week Westpac Bank decided to ban loans to non-residents, becoming the third major bank to do so after ANZ and Commonwealth. In an explanatory email to mortgage brokers it said its core objective was to help Australians realize their dreams of owning a home.

Foreign property buyers received another blow late last month when Victoria raised a tax on foreign property purchases from 3% to 7% in its state budget. It also tripled the surcharge on ‘absentee landholders’ to 1.5 per cent from 0.5 per cent.”


Aussies say they are being priced out of housing markets by foreigners.

Free trade is a powerful theory, and in a One World Nirvana free trade is ideal.

But people think nationally. Grow up in neighborhoods, surrounded by other people of the same nationality. We are taught to be patriotic. Defend our nation. Love our traditions, customs.

And sell our nation to foreigners?

Grechster said...

Benjamin: I have struggled with the issue you raise. There are powerful arguments on both sides. Where do you come out?

Benjamin Cole said...


My gut is with my fellow Americans, and yes, my fellow ordinary Americans. What is patriotism if it is not caring about the next guy in line at the supermarket?

There is a reason Don Trump is popular in some circles, and I think it is cheap shot to say, "Oh, it's all racism and xenophobia and nativism."

I wish Trump would not make remarks that can be taken as ethnocentric.

But on economics? Is globalism really working for Mr and Mrs America?

In Coatesville, PA, a steelworker in the 1950s and 1960s could raise a family in a solid house, have a car, four weeks off a year, stay-at-home wife. It seems like Live It To Beaver utopia now, but it was commonplace back then. I am talking about a real-life family in Coatesville.

I wonder. Yes, I understand free trade intellectually.

In real life?

Is the guy in line at the supermarket doing better?

Scott Grannis said...

Nations don't choose to run chronic trade deficits that must be financed by selling assets or borrowing money. Trade deficits are the result of many millions of transactions and decisions on the part of individuals and corporations. In any event, a trade deficit is always accompanied by a capital surplus, and the two are roughly equal in size. Trade deficits are often a symptom of a strong economy, as they are the result of lots of foreign investment.

If we didn't insist on keeping track of international transactions and categorizing them as transactions that involve goods and services and transactions that involve just money the world would be better served. At the end of the day, there is always a trade balance.

Attempts to limit the "damage" that results from cheap imports are equivalent to banning competition. It makes no sense, even though competition is always painful for those who can't compete.

Global living standards have surged to an unprecedented degree thanks to increased trade. Trade is unquestionably one of the best things that have ever happened to the human race.

steve said...

"Is the guy in line at the supermarket doing better?"

He'd be doing a helluva lot WORSE without free trade because the goods he'd be buying would be artificially and unnecessarily more expensive. This argument is so wrong as to be completely fatuous. Hard to believe anyone with an ounce of common sense could make it.

Benjamin Cole said...

Scott and Steve---

In theory you are correct.

The facts on the ground, in a world of large institutional imperfections and structural impediments, may be different.

No one says free trade benefits each and every geographic region or city of the United States. Could it be that free trade does not benefit each and every geographic region of the globe?

Scott Grannis said...

Don Boudreaux has written extensively and compellingly about why free trade is unquestionably beneficial. The logic behind free trade is indisputable, as is the evidence.

An excerpt from one of his posts ( on the subject:

"The economic case for a policy of free trade is that, even in the short run, the total economic losses for those who must adjust to changing trade patterns are less than are the total economic gains to those whose voluntary actions create the need for those economic adjustments.

This outcome, by the way, would be sufficient to make a very strong case in favor of a policy of unilateral free trade. But in fact the case for free trade is even stronger, for theory (and history) reveal that in the long run nearly everyone is made better off by trade. By this claim I do not mean that there are never individuals who spend the rest of their lives worse off because of changes in trade patterns than they would have been had those trade patterns never changed. Instead, I mean that nearly every member of future generations will be made materially better off as a result of a policy of free trade followed today and into the future.

There is likely no American alive today whose life is not materially superior to what it would have been had trade in the past ..."

Benjamin Cole said...


Still, can a nation--and we live in a world of nations, not the One World libertarian ideal of no nations--import and borrow its way to long-term prosperity, through chronic and rising trade deficits?

There are only two ways to finance a national trade deficit: by issuing IOUs, or selling assets. The US has been financing mounting trade deficits but issuing huge amount of IOUs to China, in the trillions of dollars.

What you have called a "capital flow" is also, in large part, the issuing of IOUs to finance the buying of imports.

Now I realize a nation is not a household. In a household, sooner or later they come and reclaim the car or house. You can trade, but you cannot consume more than you produce forever.

Don Boudreaux is a talented observer. But he never answers the question: Can a nation borrow its way to prosperity?

PS, as an aside, I just wish Don Boudreaux felt as animated about property zoning as he does the minimum wage and free trade.

McKibbinUSA said...

Negative trade deficits are bad because of the tertiary effects (e.g., deficit spending, distorted trade agreements, encroachments on sovereignty by foreign powers) -- watch and learn.

Kenneth said...

What do you think will be the result if the UK leaves the EU? Some are saying it will lead to the collapse of the EU and be an economic disaster. Would appreciate any thoughts you have on this subject.

Scott Grannis said...

Kenneth: I don't see why the UK can't leave the EU without creating a disaster. They would be well-advised to not worry about negotiating trade agreements in the wake of a Brexit. Simply open the country to trade. The UK would be the big winner. The country that limits free trade is always the loser.

Tom Nugent said...

You must remember that Britain is a socialist country dominated by unions. My guess is that the combination of nationalism and equality might challenge the benefits of free trade.