Free trade – economics, politics, and academics

Posted by Marc Hodak on May 7, 2007 under Collectivist instinct | Comments are off for this article

Last week, Harvard professor Dani Rodrick pointedly rebutted what he considered a misconception about the universal benefits of free trade–what one might call the libertarian fallacy:

So here is a straightforward economics question: under what conditions will trade liberalization enhance economic performance? If you answered “under any and all,” you flunk. Here is the correct answer:

* The liberalization must be complete or else the reduction in import restrictions must take into account the potentially quite complicated structure of substitutability and complementarity across restricted commodities.
* There must be no externalities or microeconomic market imperfections other than the trade restrictions in question, or if there are some, the second-best interactions that are entailed must not be adverse.
* There must not be any increasing returns to scale, or else activities with scale economies must expand “on average.”
* The home economy must be ���small��� in world markets, or else the liberalization must not put the economy on the wrong side of the ���optimum tariff.���
* The economy must be in reasonably full employment, or if not, the monetary and fiscal authorities must have effective tools of demand management at their disposal.
* The income-redistributive effects of the liberalization should not be judged undesirable by society at large, or if they are, there must be compensatory tax-transfer schemes with low enough excess burden.
* There must be no adverse effects on the fiscal balance, or if there are, there must be alternative and expedient ways of making up for the lost fiscal revenues.
* The economy must not have a trade deficit that is already “too large,” or else nominal wages or the exchange rate must adjust to compensate.
* The liberalization must be politically sustainable and hence credible so that economic agents do not fear or anticipate a reversal.

I could expand the list, but you get the point. And all of this is needed just to ensure static benefits. If you want dynamic (growth) benefits, we would have to add an even larger number of other prerequisites.

Each of these items is debated in the higher reaches of academia, but it is not my intent to join that debate here. My concern is much more practical.

It turns out that the same day Rodrick posted this list, President Bush appointed a new “manufacturing czar.” I don’t know what the United States needs with a “manufacturing czar,” but one would hope that he would account for at least some of Rodrick’s points in recommending trade policy.

So, which points do you think a “manufacturing czar” would consider from Rodrick’s menu? I say only this one:

* Will this policy result in more votes or fewer votes for our party’s candidates in the next election?

You say that wasn’t one of Rodrick’s points? I would say that all of Rodrick’s considerations would be (and have been) ultimately bent around this one point.

Consider what happened last time Bush tried to appoint a manufacturing czar who at least somewhat reflected a healthy view of competition in our manufacturing sector:

Democrats questioned why the Bush administration chose Raimondo to guide government efforts to stop the hemorrhage of U.S. manufacturing jobs, while he had laid off 75 of his workers in 2002 after announcing he was building a $3 million plant in China.

Raimondo defended his company’s operations in China, saying the Chinese plant didn’t mean lost jobs for his four U.S. plants but rather was an effort to sell into the Chinese market. Behlen manufactures steel buildings and farm equipment.

Sending jobs offshore is a touchy issue for the Bush administration in an election year.

The beauty of polarized politics is that you get to the point where politicians don’t even pretend to disguise their true motivations. In the moments that those motivations coincide with economic reasoning, it can be considered a happy accident. To believe otherwise could be called an anti-libertarian fallacy.