Free Trade, Unilateral

Seekingexports offers, on this post, the following comment:

Mr. Boudreaux, Amost all of the companies on the Shanghai index are government controlled. The mercantilist policies of China along with stimulus funds going to government cronies and officials make a poweful defense of China’s industries. The effectiveness of China’s trade policies with the U.S. result in China’s share of U.S. imports of 16% but its share of of the trade deficit at 58%. Your defense of classic mercantilism helps perpetuate the myth of the benefits of trade that result in the huge losses of value-added jobs. Please help the U.S. break down barriers to U.S. Goods and Services.

This is the first time I’ve been accused of defending mercantilism (classic or otherwise)!

Of course, I defend no such thing. The whole world would be made better off – but the Chinese people especially – if Beijing took a more hands-off approach to trade (and every other economic) policy. But Americans would be made worse off if, under the pretext of ‘responding’ to Beijing’s misguided trade policy, Uncle Sam ramped up his own mercantilist policies.

I defend free trade. As a practical matter, Uncle Sam should concern himself with correcting his own mistakes rather than using the mistakes of other governments to justify even further mistakes and predations that he’s forever lured to commit — lured by greedy interest groups and widespread economic ignorance.

It’s true that Americans would be better off if Beijing pursued laissez-faire economic policies. But, practically, that’s none of our business. Understand that it’s also true that you’d be better off if your next-door neighbor saved more, for each addition to the capital stock increases worker productivity and total output. Surely, though, you would not reduce your own savings rate simply because you determine that your neighbor is saving too little. Would you?

…..

By the way, the 16% and 58% figures that Seekingexports offers are meaningless. “So what?” is all I can ask.

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Seekingexports

Mr. Boudreaux does not want any government interference in trade apparently. Fine, then why do we even have trade agreements? Trade agreements are supposed to deal with countervailing tariffs, exchange of currencies, non-tariff barriers such as certification standards and import fees, piracy of intellectual property, etc. Let's drop the charade that trade with China is going to abide with the intent of an agreement and let individuals negociate personally to buy their anvils and car parts. I don't think that will work and that we need a basic framework where governments negociate marketplace underpinnings for the ready exchange of goods, services, raw materials, intellectual property, investment securities and agricultual products. This framework is one-sided at the present and receding and thus the impeutus for my remarks.

I thank you very much for hosting this forum and allowing for a civil exchange of ideas and arguments.

DonBoudreaux

I endorse unilateral free trade. But governments are greedy creatures, attuned much more to helping domestic special-interest groups than to helping the public. So governments naturally tend to respond to producer interests (because producers are, generally speaking, much more concentrated and politically well-organized than are consumers).

So as a practical matter, trade agreements are a means lowering tariffs. The typical stated reason a government gives for signing a trade agreement - that the agreement will increase exports -- is both true and wrong. True, because exports likely WILL increase the freer is trade; wrong because exports are a COST of trade, not a benefit.

DonBoudreaux

Seekingexports doesn't want Americans to "blindly trade with any country."

I emphatically oppose blindly trading with anyone. Each American should trade as he or she judges best for himself, herself, and his or her family or firm. And to do that, each American who trade -- be it with a non-American or with another American -- would be wise to keep his or her eyes open.

But I do oppose any and all restrictions imposed by government on trade.

Ray Gardner

Seekingexports:
That paragraph was meaningless.

All uproar and no substance.

You seem to imply that we are to somehow force China's hand on their own internal policies but then you give lipservice to free market principles?

And to call Don Boudreaux a mercantilist?

Seekingexports

Mr. Gardner, your comment was sketchy at best. We cannot uphold free market principles when one party so flagrantly turns them to a multi-trillion dollar advantage. Why not trade where each country's comparitive advantage is upheld and currency flows freely? I hope you are not advocating that we blindly trade with any economy. Do you question why the world's third largest economy does not have a major currency? Stop pretending and fill in the dots of free trade that gives an honest picture of trade relations.

gregworrel

"We cannot uphold free market principles when one party so flagrantly turns them to a multi-trillion dollar advantage."

You clearly do not understand the benefits of free trade if you believe that China can use protectionism and mercantilism to gain "a multi-trillion dollar advantage." As I understand it the benefits of free trade flow to those who are free.

Since many of our exports use inputs from imports, any attempt to right the wrongs committed by a country like China may benefit specific local industries but the ratcheting of tariffs will only hurt consumers and other exporters. It is a losing game, not one that can result in a real "advantage."

Also, see Don's next post on the costs to China of attempting to manipulate the market.

I prescribe a little more reading here in the archives of Cafe Hayek.

johndewey

seekingexports: "I hope you are not advocating that we blindly trade with any economy."

I would advocate that Americans and American companies be allowed to purchase goods from wherever they wish. What right do you or anyone else have to deny me goods produced in China or Mexico or Alabama or anywhere?

Mr. Econotarian

There appears to be a belief that if we promise not to shoot ourselves in the head, our neighbors will also agree not to shoot themselves as well.

I'd love to see a study about whether "trade deals" do provide better long-term reduction in trade barriers than not doing trade deals.

vikingvista

A policy of unilateral free trade by the US would do the trick. As other countries are playing whack-a-mole trying to support each industry that they've previously hurt with prior supports for other industries, they will soon realize that protectionism is getting them nowhere fast.

Additionally, the US is more agile in reconfiguring for different industries, thanks to lower costs of employment. This would be more the case if the US Feds would stop encouraging employer-based benefits, and get rid of the employment prohibition on low wage workers.

Seekingexports

Mr. Boudreaux, thank you for the response. The 16% and 58% do not have any meaning for you but to many they do. They show quite dramatically that the U.S. has the most unbalanced trade relationship of any nation with China. U.S. dollars are sterilized for investgment purposes by the government of China. Let us admit that the huge market in China for U.S. Goods and Services (high value-added) is not going to happen without an uproar from those who have advocated for trade with China. The uproar that trade is not open to our best products (comparitive advantage). The uproar that U.S. companies have to resort to joint ventures with local party officials to be able to have some market in China and even then it has to be based on local content. The uproar that China's consumers are not free to choose and we, who have advocated for free trade, are not seeing results in China and thus we must seek other market relationships. I am not a protectionist but I am not going corrupt free trade principles by accepting the present situation --even though you provide this informative forum but with an increasingly wobbly foundation.

Note to Readers: Adam Smith's books are easily accessible on-line for re-reading without trying to find your old copy and zero cost.

brotio

They show quite dramatically that the U.S. has the most unbalanced trade relationship of any nation with China.

One of the best replies ever to trade deficits was Sam Grove's asking, "who's disadvantaged?"

So, who's disadvantaged, the US consumer who has material goods in hand, or the Chinese corporation (or government) that has pieces of paper which are only as valuable as the Fed says they are? My Chinese-made anvil will still be useful for hammering steel twenty years from now. Dollars might have the value of Weimar marks in twenty years, and be more useful as fire-starter than as money.

Juan Carlos Vera

Estimado Seekingexports: Le envío una respuesta en español con el justo propósito que Usted haga exactamente el mismo esfuerzo que con todo gusto hice, como español parlante, al tratar de entender su postura. Me parece que Usted debe leer con cuidado lo que el Profesor Boudreaux escribió. Especialmente lea atentamente el párrafo que dice: ...”I defend free trade. As a practical matter, Uncle Sam should concern himself with correcting his own mistakes rather than using the mistakes of other governments to justify even further mistakes and predations that he’s forever lured to commit — lured by greedy interest groups and widespread economic ignorance”... Observe el último enunciado de este párrafo. Creo que tendrá que batallar duro para vencer a ese monstruo que se llama “ignorancia económica”.

mppeer

The uproar that trade is not open to our best products (comparitive advantage).

Given that the US is dollar-for-dollar and hour-for-hour the most productive nation on earth, is it not possible that the greatest comparative advantage the US has is in productivity itself?

How does one buy productivity itself? One makes investments. Would that not help explain the large investment surplus the US maintains with the rest of the world including China?

MikeP

In case it isn't obvious, the investment surplus is another name for the trade deficit.

And, yes, a fair amount of that investment surplus is in the financial vehicles that are small and green and have presidents faces in the middle of them. China sends the US actual goods that US consumers actually want and actually use. The US sends China little green pieces of paper.

Thinking that its the little green pieces of paper are the goal is pretty much the definition of mercantilism. But those pieces of paper are useless until they are used to (a) buy something from the US, (b) invest in the US, or (c) trade with someone who will do (a) or (b).

William

Seekingexports' reference to the Shanghai stock market is also meaningless, if it's even correct. First, government-owned is not the same as "controlled by the government on a day-to-day basis"--some Chinese state-owned companies receive relatively little guidance from the national, provincial or local government that owns them. Second, the Shanghai stock market is not the only place where Chinese companies are listed--there's also Hong Kong and Shenzhen. Third, it would be foolish to overlook the Chinese companies involved in international trade that are not publicly traded.

Stewart Ulm

Don, you and your letters are awesome.

vikingvista

I second that.

johndewey

My favorite quote about reacting to tariffs and mercantilist policies can be found on page 135 of Professor Boudreaux's Globalization:

"As the noted British economist Joan Robinson is often reported to have said, 'if your trading partner throws rocks into his harbor, that is no reason to throw rocks into your own'"

Bill

Don, maybe this is an appropriate opportunity to re-tell your colleague Walter Williams' "shoot another hole in the boat" story?

Ray Gardner

They seem to not understand what mercantilism is, or they haven't actually read Don's material to know his stance.

Since our known history of various economic theories is so robust, I'm always somewhat baffled by those who still want to cling to failed ideas. Protectionism, collectivism in all of it's forms.

Of course what they do is put a new twist to an old idea and say that the last, failed, practitioners just didn't have it quite right, . . . but this time. . . it's different.