Saturday, October 1, 2016

Laurence M. Vance: Free trade is fair trade

  As relayed by Harvard economics professor and chairman of George W. Bush’s Council of Economic Advisers, N. Gregory Mankiw, “The Princeton economist Alan Blinder once proposed Murphy’s Law of economic policy: ‘Economists have the least influence on policy where they know the most and are most agreed; they have the most influence on policy where they know the least and disagree most vehemently.’”

  The quintessential example of this phenomenon is the near-unanimity of economists from across the political spectrum on the benefits of international free trade to participants in any country engaging in it. Opposition to free trade is political. Arguments against free trade — usually made by special-interest groups who stand to benefit the most from some form of protectionism — are generally nationalistic in tone, with an anti-foreign and anti-market bias cloaked in an appalling ignorance of basic economics. Modern American opponents of free trade, like the mercantilists of old, favor exports while at the same time disdaining imports, never stopping to realize that if everyone in every country shared their opinion, then the United States wouldn’t export anything, as no trade would take place at all. What they really want is for the United States alone to be able to export its goods but not to have to import any goods from other countries.

  Instead of condemning free trade outright, many modern American opponents of free trade say that they have nothing against free trade as long as it is fair trade. That is true in the case of both liberals and conservatives.

Fair-trade liberals

  Liberal fair traders come in two varieties: union members and bleeding hearts.

  Union members believe that free trade is inherently unfair to them. They think that it ravages American manufacturing, sends jobs overseas, and suppresses their wages. Consequently, they consistently oppose the lowering of tariffs and trade barriers. They want to keep costs on imports high to “protect” their high-paying jobs from foreign competition. They also fear increased competition from domestic non-union businesses that benefit from free trade. To union members, trade is fair when workers in other countries have the same labor rights as American workers do to organize and collectively bargain so as to increase their wages, expand their benefits, and improve their working conditions. Trade is fair as long as it doesn’t affect U.S. companies that don’t want to compete, modernize, change, or innovate.

  Bleeding-heart fair traders, like Karl Marx in The Communist Manifesto, equate free trade with exploitation. What began with signs posted in coffee shops saying “We sell only fair trade coffee” has now expanded to grocery stores carrying whole lines of “Fair Trade Certified” products. The fair-trade buzz words are terms such as “ethical sourcing,” “sustainable agriculture,” “community empowerment,” and “environmentally friendly production.” The fair-trade mantra is “Fair trade helps free trade work for the poor.”

  According to the nonprofit organization Fair Trade USA, the leading third-party certifier of Fair Trade products in the United States,

       We enable you, the consumer, to make a difference with your dollar. We help people and the planet work in tandem so both are healthy and sustained. We provide farmers in developing nations the tools to thrive as international business people. Instead of creating dependency on aid, we use a market-based approach that gives farmers fair prices, workers safe conditions, and entire communities resources for fair, healthy and sustainable lives. We seek to inspire the rise of the Conscious Consumer and eliminate exploitation.

  Fair Trade USA’s “rigorous social, environmental and economic standards work to promote safe, healthy working conditions, protect the environment, enable transparency, and empower communities to build strong, thriving businesses.” Fair Trade USA “audits and certifies transactions between U.S. companies and their international suppliers to guarantee that the farmers and workers producing Fair Trade Certified goods are paid fair prices and wages, work in safe conditions, protect the environment and receive community development funds to empower and uplift their communities.”

  That is all well and good. There is certainly nothing wrong with going to third-world countries and trying to institute health and safety standards, improve living and working conditions, advance labor rights, and change farming and environmental practices. And there is certainly nothing right about forced labor and worker oppression. But that doesn’t mean that free trade is exploitive. It doesn’t mean that Americans who choose not to pay higher prices for “fair trade certified” products should be shamed for not doing so. And it doesn’t mean that foreign “sweatshops” and “child labor” are inherently evil. The terrible truth is that jobs in sweatshops may enable people, including children, in poorer countries to feed and clothe themselves. To limit imports from those countries or shame people into not buying the products they produce or the crops they harvest may actually hurt the very people that the trade restrictions are meant to help.

Fair-trade conservatives

  Conservative fair traders frame their arguments more in terms of nationalism, nativism, and national security than economics. And while they generally share a commitment to a domestic free market, they have an aversion to free markets when they cross international borders. When a buyer and a seller are on the same side of a national border, conservative fair traders have nothing to say. But when the two are on opposite sides of a national border, they join with labor unions — which they otherwise disdain — in demanding that Congress restrict or stop the exchange. Trade is fair only when it takes place on “a level playing field.” Because certain other countries don’t have the regulatory burden, safety standards, and environmental laws that the United States has, trade restrictions of some kind must be imposed to make trade “fair.” This is all predicated on the old mercantilist fallacy that although exports are good, imports are bad.

  The presidential candidacy of Donald Trump has led to a resurgence of conservative fair-trade rhetoric. “I am all for free trade, but it’s got to be fair,” says Trump. “For free trade to bring prosperity to America, it must also be fair trade.” Since other countries are “beating” the United States when it comes to trade, Trump believes that the United States needs to raise tariffs on some products and impose new ones on others. The United States needs smarter trade negotiators to cut better deals and make better agreements with its trading partners. Manufacturing jobs need to be brought “back home where they belong.” U.S. companies should make their products in America.

Free trade

  What is free trade?

  Free trade is the absence of any form of protectionism. This protectionism might consist of a tariff placed on some imported good, import quotas placed on certain items, the imposition of conditions that must be met in the exporting country before a good can be imported, regulations on trade, anti-dumping laws, restrictions on the importation of certain commodities, embargoes on goods from certain countries, pressuring some country to sign a “voluntary agreement” to limit the export of a particular good, or some other trade barrier that the government institutes. The idea is always that some domestic industry is protected by the government from foreign competition. That, of course, also always entails that a government trade bureaucracy be established to enforce the protectionism.

  Although most advocates of fair trade would shy away from the term “protectionism,” the only alternative to free trade is some form of protectionism. And regardless of what form the protectionism takes, there is no getting around the fact that protectionism is merely central planning. It is no different from the central planning that took place in the 20th century in communist countries such as the Soviet Union or takes place today in Venezuela, North Korea, and Cuba. All forms and levels of protectionism require central planning. Government bureaucrats must determine which domestic industries to protect, how to erect a particular trade barrier, which goods should be subject to tariffs, how much the tariffs should be, which countries should be punished, which counties should be excluded, below what price dumping is determined to be taking place, which goods should be restricted, which goods should be subject to import quotas, what the number of the quota should be, how long the trade barriers should be maintained, and how often the need for protectionism should be reevaluated.

  Protectionism is therefore no different from wage, price, and rent controls; minimum-wage laws; usury laws; price-gouging laws; or other forms of government economic interventionism.

  Free trade is also the absence of any government trade agreements. Government trade agreements are government-managed, centrally planned trade, not free trade. Trade agreements such as the North American Free Trade Agreement (NAFTA), Central America Free Trade Agreement (CAFTA), and the Trans-Pacific Partnership (TPP) are negotiated by governments, are hundreds of pages long, and relate to all kinds of things besides lowering tariffs and trade barriers. It is a misnomer to call them free-trade agreements. And the World Trade Organization (WTO) is not a free-trade organization. It is a globalist bureaucracy. No agreements, treaties, organizations, or oversight are necessary for free trade to take place. Trade does not need to be managed.

  Free trade is really just about commercial freedom. Trade is simply commerce. No county literally tries to trade 1,000 bushels of bananas for another country’s 1,000 bushels of tomatoes. Trade actually takes place between individuals and businesses, not countries. Although people often talk about the United States trading with China, France, or Japan, foreign trade really just occurs when entities in one country engage in commerce with entities in some other country. The Swiss government does not buy up watches from Swiss watchmakers and sell them to the U.S. government so that they can then be resold to American watch distributors or retailers. Trade between entities residing in two different countries should not be regarded as any different from what happens when two entities in the United States engage in commerce. Most arguments for free trade miss the real issue. Free trade simply means that every individual and business in every country is free to trade, or conduct commercial activity, in any way with any individual or business in any other country. Free trade is a fundamental right. As explained by Boston Globe columnist Jeff Jacoby:

       Human beings, by virtue of being human, are entitled to worship as they choose, to own property, to emigrate from their country, and to form peaceable associations. Those are fundamental rights, not dependent on the government’s political preferences or utilitarian considerations. The freedom to engage in mutual and honest commerce is just as fundamental, and it should be just as immaterial whether lawmakers approve of the bargain struck between seller and buyer. Jones shouldn’t have to lobby public officials for the right to hire Smith or teach Smith or pray with Smith, or seek Smith’s opinion. Nor should he have to win government approval for the right to sell his goods and services to Smith. Not even if Smith lives in another neighborhood, or another state, or another country.

  Free trade is ultimately about freedom. But is not free trade dependent on the economic theory of comparative advantage? A conservative critic of government-managed trade agreements and the “free trade agenda” writes in the New American magazine that “an understanding of the theory of comparative advantage is absolutely vital in any discussion of free trade, because it is the linchpin that holds together all of the standard arguments supporting free trade.” Comparative advantage is the idea that economic agents are most efficiently employed in activities wherein their relative efficiencies are superior to others. One agent has a comparative advantage over another in producing a certain good if it can produce the good at a lower relative marginal cost. As it relates to international trade, comparative advantage is all about the gains to be made from trade for individuals, businesses, and nations that result from the differences in factor endowments, labor productivity, and technological competencies. A country may be better off if it specializes in the manufacture of certain products for export and import the rest, even if it has an absolute advantage in manufacturing in general.

  What Adam Smith, the father of modern economics, wrote in The Wealth of Nations (1776) is still true today: “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” Smith recognized that the case for international trade was no different from the case for domestic trade — even down to the smallest level: “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.”

  Although this is all true, the linchpin of free trade is actually freedom: the freedom of an entity in one country to buy goods from or sell goods to an entity in another country, for any reason, and without interference from the government. Just as free trade does not depend on trade organizations, trade treaties, trade agreements, an export-import bank, or government oversight, so free trade is not beholden to comparative advantage — or efficiency, factor endowments, technological competencies, or labor productivity. Free trade does not depend on a certain set of conditions that must first be met. And free trade is not beholden to the economic philosophies of some dead economist.

  The foundation of free trade is freedom. As Edmund Burke, the great Irish statesman and philosopher of liberty, wrote in 1795, “Free trade is not based on utility but on justice.” And as American political theorist John C. Calhoun wrote to the British free-trader Richard Cobden, “I regard free trade, as involving considerations far higher, than mere commercial advantages, as great as they are. It is, in my opinion, emphatically the cause of civilization and peace.”

Free trade is fair

  The conclusion is inescapable: free trade is fair trade.

  Trade is not fair just when it doesn’t result in a trade deficit. Both liberal and conservative “fair traders” are always bemoaning the U.S. trade deficit. But the so-called trade deficit is simply a government accounting fiction. It doesn’t matter whether American entities buy more from foreign entities than foreign entities buy from American entities. Governments in both countries shouldn’t even be keeping track of trade surpluses or deficits. When we are told that the United States has a trade deficit with some other country, it shouldn’t concern us any more than when one American state, county, or city has a trade deficit with some other American state, county, or city. It shouldn’t concern us any more than when one business or individual has a trade deficit with some other business or individual. As the economist Walter Williams recently wrote, “I fear that the angst over trade deficits is simply a front for being against peaceful, voluntary trade among people of different nations.”

  Trade is not fair just when it doesn’t “destroy” jobs. International trade does not destroy jobs, standards of living, industries, or communities. To the contrary, trade creates jobs, expands the size of the market, increases opportunities for manufacturers, boosts demand for products, allows us to consume more, gives us more variety, and drives economic growth. Trade may reallocate jobs and capital from lower-productivity to higher-productivity sectors of the economy, but there are not a finite number of jobs in each sector. No one says that a company in New York purchasing goods from a company in California destroys jobs in New York. Why do some people think things are suddenly different if a company in the United States purchases goods from a company in Japan? It is government regulations, mandates, and taxes that destroy jobs.

  Trade is not just fair when American companies get a good deal. Trade does not result in winners and losers. Trade is mutually beneficial. Trade is a win-win situation. No party loses anything by trading with another party. Trade is not a zero-sum game. There are no conditions that first have to be met before trade can beneficially take place. As the Austrian economist Ludwig von Mises explained, “The statement that one man’s boon is the other man’s damage is valid with regard to robbery, war, and booty. The robber’s plunder is the damage of the despoiled victim. But war and commerce are two different things.” If both parties that engage in trade, that is engage in commerce, did not come out of the transaction better off than before they went in, then trade would not take place in the first place. Things are not any different just because the trade takes place across some invisible border line. In exchanges between individuals or businesses the supreme test of fairness is the voluntary consent of each party to the transaction.

  All trade is fair trade.

  Fair trade does not entail the government’s devising new ways to “protect” American consumers from better products, more variety, or lower prices. Trade is fair when it is free.

  Trade is fair when it doesn’t involve government’s subsidies, crony capitalism, or an export-import bank. Trade is fair when it is not hindered by tariffs, quotas, barriers, sanctions, or dumping rules. Trade is fair when it is not managed by government agreements, treaties, or organizations. Trade is fair when it is not overseen by a commerce department or trade representatives. Trade is fair when it is not subject to government interference, regulations, or restrictions.

  Trade cannot be made more fair by making it less free.

  About the author: Laurence M. Vance is a columnist and policy adviser for the Future of Freedom Foundation, an associated scholar of the Ludwig von Mises Institute, and a columnist, blogger, and book reviewer at

  This article was published by The Future of Freedom Foundation.

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