Advocates of globalization love to argue that free trade lowers prices, and the argument seems sensible enough. Think of all the cheap goods from China that we can buy at Wal-Mart. But anyone who understands comparative advantage knows that free trade affects relative prices, not the price level (the latter being the province of macro and monetary factors). When a country opens up to trade (or liberalizes its trade), it is the relative price of imports that comes down; by necessity, the relative prices of its exports must go up! Consumers are better off to the extent that their consumption basket is weighted towards importables, but we cannot always rely on this to be the case.
Following Alex, I emphasize that at the core of the case for free trade is the irrelevance of political boundaries. Almost any sort of economic change makes, in the immediate wake of that change, some persons better off and other persons worse off.
But what’s so special about change that involves exchange across political borders? Nothing.
Suppose that Americans currently have no trade with non-Americans. Further suppose that, for years, Americans have bought lots of automobiles made in Detroit as well as lots of oranges grown in Florida. What happens if Americans’ tastes change and the bulk of them shift their spending from oranges to steel houses and steel furniture? Orange growers clearly are worse off as a result of this change. So, too, are those Americans who are especially heavy demanders of automobiles, for the change in consumers’ spending patterns drives up the price of steel and, hence, the price of automobiles.
If we were omniscient we could do a welfare assessment, measuring the gains to the American economy from allowing consumers to change their spending patterns compared to the costs of allowing this change in spending patterns. If the size of the losers’ losses is found to be larger than that of the gainers’ gains, we conclude that this change in consumer spending patterns is regrettable.
Do we further conclude that the case is dubious for allowing consumers to spend their money as they wish? What about the case for allowing entrepreneurs to introduce new products and production processes? Are economists and others who argue in favor of generally allowing consumers to change their spending dogmatic? Doctrinaire? Biased? Blinded by ideology? Does the possibility that consumer-spending patterns can change in ways that generate net harm mean that government should control such spending changes, preventing those changes that are determined ahead of time to be likely harmful?
The logic of Rodrik’s argument, it seems to me, condemns far more than changes in the pattern of trade that crosses political boundaries. It counsels skepticism of nearly all economic changes.
(It’s useful here, by the way, to check out Russ’s outstanding article on comparative advantage .)