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Tag Archives: advantage

A new story focuses on Argentina’s restrictions on trade, forcing importers to export goods of equal value.

Complaints have been made to the World Trade Organization from the US, the E.U., Japan and 10 other countries.

Argentina’s motivation is to preserve domestic jobs, ignoring the true advantages of real free trade, which accrue to consumers through lower prices and greater demand for both domestic and foreign-made goods.

The irony in all this is that the countries making the complaints are guilty of similar tactics. The most familiar is the US demands that China increase the value of its currency, afraid that it will cost the US more jobs.

After 200 years, people–including politicians–should better understand David Ricardo’s explanation of comparative advantage, where free trade encourages countries to specialize in the production of goods and services that they produce relatively best.

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Uwe E. Reinhardt has published a story entitled The Debate on Free Trade Continues. As usual, the debate contrasts the economic view of free trade with the political difficulties that stem from lost jobs and income.

…there are more things in heaven and earth, economist, than are dreamt of in your philosophy.

There certainly is something to that perspective. What often makes an economist’s analysis so sharp and crisp is precisely that it tends to be simplistic and politically naïve…I acknowledge that our case for free trade should never be the end word in a conversation on the subject, but rather a springboard for more discussion.

While I agree that more discussion is never bad, to concede that free trade is sometimes best to avoid seems only an admission that we are wrong about free trade to begin with.

In a nutshell, in that branch of inquiry, economists view the world as a giant cattle farm to be managed in ways that maximize the collective weight of the cattle, totally in abstraction from the welfare of any individual animal. We call the collective weight of the cattle social welfare.

The cattle-farm model then allows us to say, with a straight face, that if a public policy bestows a gain of $2,000 on George but makes Martha $1,000 poorer, social welfare has been increased.

This dictum underlies the economist’s case for free trade. The cattle farm is global. Free-trade analysis pays little attention to the love people have for their own nation, which makes them assign more weight to the welfare of fellow citizens than to that of citizens of other countries.

In fact, free-trade economics shows that both domestic and foreign citizens gain from free trade. What has always made it difficult politically is that we can never be sure what domestic citizens benefit. For example, sacrificing jobs making tires in the US–that brings more jobs to Asia, but it also brings more spending power to Americans–spending that will create new jobs in the US in some industry where we have an advantage over foreign abilities.

But along with my Princeton colleague Alan S. Blinder, I do worry about what the dynamic impact of completely free trade would do to America, especially when some enterprises exhibit strong economies of scale and require longer-term investments, and other nations snub their noses are the rules of free trade.

This is only another concession to politics. If other countries ignore the rewards of truly free trade, of course the US must resist, but never to the level of rejecting free trade as a worthy goal. We already have the World Trade Organization in place to regulate those disputes.

I am actually disappointed that some of my economics colleagues accept concession on the point of free trade. Politics aside, the gains of free trade have made much of the world much better off over the last 50 years, and it can continue if we can manage to stick with good analysis on the topic.