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Free Trade Has No Such Prerequisites

Here’s a letter to Aeon:

Dani Rodrik, expressing his famous skepticism of free trade, writes that “A truly global economy, in which economic activity is unmoored from its national base, would necessitate transnational rule-making institutions that match the global scale and scope of markets” (“Why nation-states are good,” Oct. 2).

Not so – at least, not so if what is meant by “transnational rule-making institutions” are transnational bodies with legislative and administrative powers.

A truly global economy is simply what happens when governments do not obstruct their citizens’ decisions to trade with foreigners. Each of these countless decisions will be made in light of each buyer’s and each seller’s assessment of the benefits and costs of trading with foreigners as compared to trading with fellow citizens. If, for example, an American retailer believes that the benefits to it of buying inventories from foreign factories are higher than the costs (including the risks) of doing so, it will buy from foreign factories. Competition at the retail level then ensures that these lower costs are passed on to domestic consumers in the form of lower prices or higher product quality (or both). If this retailer discovers that its initial assessment is mistaken, it will stop buying from those foreign factories or it and the foreign factories will re-arrange the details of their contracts. In either case there is no call for government to artificially restrict the retailer’s – or any other of its citizens’ – freedom to engage in commerce with foreigners.

Each individual is best placed – and has the most appropriate incentives – to decide if the risks and other costs of foreign commerce are worth the benefits for him or her. It is an error to suggest that individuals should not be free to make such assessments unless and until transnational legislatures and bureaucracies are superintending each individual’s choices.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030