Witless on Trade

by Don Boudreaux on September 15, 2009

in Myths and Fallacies, Trade

Here’s a letter that I sent yesterday to the Financial Times:

Clyde Prestowitz makes his case for higher tariffs by slaying a strawman (“Obama can help free trade with tariffs,” Sept. 10).  According to Mr Prestowitz, the case for free trade relies on the validity of “the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements.”

But with the possible exception of the assumption about economies of scale – an assumption that even its notable champion, Paul Krugman, regards as being academic rather than practical – the case for free trade in no way depends upon any of these assumptions.  For example, although free-trader Adam Smith well understood competition, he never heard of “perfect competition” (as the model wasn’t developed until the 1930s).  And even if he had heard of this model, Smith would have understood that free trade’s benefits are positive even when industries are not (as they never are) ‘perfectly competitive.’  (The supermarket down the street from me doesn’t compete in an industry that’s ‘perfectly competitive,’ yet I gain every time I choose to trade with it – as I frequently do.)

As for Mr Prestowitz’s claim that free trade requires that there be no cross-border investments or technology transfers, he here commits the sophomoric error of mistaking assumptions used to simplify the explanation of the principle of comparative advantage for being conditions necessary for that principle to operate in reality.  While cross-border mobility of capital and technology might – indeed, often do – alter the pattern of comparative advantages, such mobility does nothing to weaken the case for free trade.

Not a thing in Mr Prestowitz’s poorly reasoned, factually inaccurate, and economically uninformed essay justifies Uncle Sam’s efforts to penalize American consumers who wish to purchase imports from China.

Sincerely,
Donald J. Boudreaux

As for foreign governments subsidizing or otherwise protecting certain of their industries from market forces, these state actions, too, might alter the pattern of comparative advantages – although not without imposing often-unseen costs on the people of the economies whose governments intervene in these ways – but these interventions by foreign governments do not detract from the ability of denizens of the domestic economy to gain from freely trading with persons in economies that are saddled with such interventions.

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