Free Trade: what’s government got to do with it?

Someone once told me that he was all for free trade but couldn’t understand why free trade agreements needed thousands of pages. The simple answer is that this is not free trade. All that is required for free trade are willing buyers and sellers agreeing voluntarily to deal peacefully with each other, the eradication of protectionist tariffs, quotas and subsidies, and the presence of important foundations of a free market economy such as secure property rights and sound money. So instead of a massive, detailed agreement between governments (which, to be fair, would make a handy doorstop) that invariably includes a witches brew of subsidies, bailouts, aid programs, bogus regulations, exceptions, bureaucracies, quotas, favours, cartelisation, etc. one would really need a commitment by governments to stay the heck out. And there is a Father Christmas.

Bill Clinton had more than a passing resemblance to Santa, with his hearty laugh, desire to be liked by all, and his showering of gifts on many off the backs of the little people. His commitment to free trade was also the stuff of fiction. Witness NAFTA, with its expansionary bureaucratic structure, the bailout of Mexico, exclusionary deals, subsidies, dubious spending programs; all hardly the stuff of free markets. The bullying of foreign countries like Japan over their automobiles and photographic film, Thailand’s rice, the birth of the WTO, export subsidies, tariffs, production subsidies, and other monstrosities. While free in Clinton’s slictionary may mean what he wishes it to mean, in most other people’s books, free, like say, liar, is pretty clear.

The current leader of the free world President George W. Bush likes to portray the image of a straight shooter. In his election campaign he sounded dedicated to promoting free trade to the world, saying it had not only an economic but also a moral basis. But somewhere along the line he dropped his free trade commitment and replaced his blanks with deadly protectionist cartridges. The signing of the massive farm bill with its subsidies for farmers of $180 billion over ten years (an increase over existing spending programs of $73.5 billion) was a large blow against free trade and free enterprise. As were the likes of the textile, lumber and Catfish industries running for protection. In the meantime, the United States has been negotiating a series of regional and bilateral trade deals around the world, all for various reasons. For example, trade representatives have been in talks with Australia over a “free trade” agreement but not New Zealand, with the former supporting the US over the Iraq war and the latter not. So because governments disagree with each other, its citizens should suffer from possible benefits from reduced tariffs and the like that may arise from “free trade” agreements. Thus reducing barriers to trade is seen as some form of gift or favour to be handed down by benevolent governments. But producers and consumers don’t normally enter into foreign trade because they are feeling generous (as opposed to those in government who spend other people’s money); the quality of the product or its price usually determines whether a trade will be entered into. If they could get a better deal elsewhere they would pursue that opportunity. So not only are the wishes of buyers and sellers being interfered with, but scarce resources are also being directed away from more to less valued lines of production, meaning lower overall wealth. And then there were, of course, the steel tariffs of last year. Some defenders argued that this cave-in was necessary for Bush in order for him to get Trade Promotion Authority (formerly known as “fast-track authority”) whereby he could take a trade agreement to Congress and they could have an up-or-down vote on it (ie. either vote to accept or reject it with no amendments). Clearly, if he needed to compromise on steel, he would have to buckle on other things in his “free trade” deals to retain his fast track authority.

So what of the steel tariffs then? The US International Trade Commission came out recently with its report on their impact. It is a case study in the effects of tariffs. A politically well connected group, the steel industry, gained special protection, ostensibly to give it some breathing space and allow it to restructure even though this industry has pleaded for special protection in the past for the same reason and imports have been decreasing of late. Its share of the US market increased from 79.6 per cent to 81 per cent (although its share of worldwide steel production fell from 12.4 per cent to 10.2 per cent). But even despite the steel tariffs, thirty-one steel companies went bust and employment in the industry has dropped 10 per cent. Prices have gone up and, as expected, those manufacturers who use steel in their products and the consumers of their products have been slugged in the process, with thousands and thousands of job losses in related industries. The Bush administration is now under pressure to drop the tariffs, not only by the WTO who have just ruled the tariffs illegal, and the EU, Japan, China and South Korea who have promised to apply their own tariffs and sanctions on unrelated US exports (the law of increasing protectionist stupidity), but also by opposing forces in the United States representing steel producers and consumers in the run up to Presidential elections in 2004.

The European Union was up in arms over the decision. However, the hypocrisy of European Union politicians stinks like surplus piles of taxpayer-subsidised Common Agricultural Policy cow excrement. European taxpayers have the misfortune to subsidise mostly rich agricultural interests (around half of the spending goes to the largest 17% of farming enterprises) by $41 billion per year and put up protectionist barriers against the imports of those poor countries that try and compete with European agriculture. These subsidies, which make up half of the EU budget, lead to overproduction, crowding out competitors from the Developing World, with deadly effect. The Centre for the New Europe estimates that “[o]ne person dies every 13 seconds somewhere in the world – mainly in Africa – because the European Union does not act on trade as it talks.” Quotas and tariffs on non-agricultural products are also rife. Jacques Chirac, for instance, seems (allegedly) to care for Iraqi war victims, but not much (do they ever?) about taxpayers and (conclusively) not for African trade victims.

It’s no wonder then that many in the Developing World are losing faith in the “Developed” World and their continued proclamations of commitment over the years to free trade. Unfortunately, much of the blame for their lack of development is being placed on “free trade” which is in actual fact a mix of protectionism, mercantilism and managed trade.

So what then are the economic arguments for free trade? Well, just as it makes no sense for a doctor to grow his own potatoes when he can get them cheaper from a farmer, also enabling him to treat patients instead of them treating themselves, and it makes no sense for a farmer to make his own jeans when he can buy them from a clothing manufacturer, nor does it make sense for those in a specific district to be self-sufficient. And just as it makes no sense to create barriers between various districts within a state, or between states within a country, which would interrupt the regional specialisation and division of labour, so does it not make sense to apply barriers to international trade. The theory of comparative advantage, the ultimate economic basis of free trade, demonstrates that even if a country (that is the individuals or groups of individuals within it) can produce certain goods (eg. apples) more efficiently than another country, it might still pay for the former to buy from the latter. This would be so if the value from alternative production (eg. wine) it could have entered into (ie. the opportunity cost) exceeds the value arising from the production of apples. What tariffs, quotas, subsidies and other protectionist measures accomplish is to distort production and trade, interfering with the international division of labour and specialisation, and as a consequence lowering overall wealth. Restrictions by governments on foreign investment in the material means of production, capital, which is the key to the raising of productivity and hence wage rates, will also ensure that the poor stay poor. Unfortunately, as is the case with many beneficial principles, genuine free trade has been distorted and trashed. That its so-called defenders and proponents in government have been party to it says nothing about the case for free trade and a lot about them and government.

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