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May 09, 2007
Free Trade, Unilaterally
Don Boudreaux
Robert Samuelson's column in today's edition of the Washington Post features several classic, unalloyed mercantilist errors. Try to spot them all.
I point to one error in this letter that I sent in response:
Robert Samuelson suggests that free trade benefits Americans only when foreign governments practice free trade ("China's Trade Time Bomb," May 9). Not so. The case for free trade rests on the recognition that prosperity is enhanced by permitting consumers to spend their money as they choose. When foreign firms are subsidized, those subsidies (while they hurt foreign taxpayers and foreign economies) benefit American consumers and the American economy just as surely as when the attractive prices and qualities of foreign products result from foreign-producers' comparative advantage.
Sincerely,
Donald J. Boudreaux
Posted by Don Boudreaux in Myths and Fallacies, Trade | Permalink
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Comments
I'm not qualified to critique Samuelson point for point, but two immediate reactions:
1. I've always felt that any attempts at inflating a currency in order to improve a trade balance is like asking for a paycut in order to pay less in tax.
2. He's invoking Keynes: "Chinese officials favor higher local demand. But either they can't or won't stimulate it." I don't know if officials of any country can stimulate demand, but they shouldn't want to.
Posted by: Henri Hein | May 9, 2007 9:40:52 PM
Don,
Here's a simple example that counters arguments such as that made by Samuelson.
Let's say that pharmaceutical companies in the U.S. invent and produce a drug that cures cancer and that Japanese pharmaceutical companies invent and produce a drug that cures diabetes. Are we in the U.S. made worse off if we purchase the drug that cures diabetes, but the Japanese, for the purpose of managed trade, refuse to purchase the drugs produced in the U.S. that would cure their cancer?
Posted by: Me. | May 9, 2007 9:43:15 PM
No matter. The Senators(*) have just voted to "protect" us from cheaper imported drugs.
(*)...with a little help from their Big Pharma friends...
They've said to us "You shouldn't be taking those foreign drugs that might kill you before you have a chance to die for lack of treatment!"
Posted by: True_Liberal | May 9, 2007 11:05:34 PM
Try to spot them all.
But then I'd have to wade through his column. I've got plenty else to do.
Posted by: Sam Grove | May 10, 2007 12:39:27 AM
It's sounding more and more like Samuelson is not an economist.
Posted by: Russell Nelson | May 10, 2007 1:51:06 AM
I'll be fully convinced by this argument when somebody explains to me why it would be (or would have been) a good thing to permit the EU to subsidize Airbus to a such extent that Boeing would exit the passenger jet business.
Posted by: Slocum | May 10, 2007 7:07:44 AM
What does it mean that Samuelson is an award winning business and financial columnist, but still makes basic mistakes in economic theory?
Posted by: cjc | May 10, 2007 8:19:56 AM
Looks like all the awards are from journalistic institutions; are any from groups with an economics foundation?
Posted by: True_Liberal | May 10, 2007 8:38:05 AM
Slocum,
All those Boeing Engineers will be freed up to work on other things; working on improvements to cars, producing small planes for private aviation etc.
Posted by: tarran | May 10, 2007 9:36:54 AM
I suspect that Robert Samuelson gets some extra mileage because readers may confuse him with Paul Samuelson, a real economist whom they may remember from their high school or undergrad days.
Posted by: jp | May 10, 2007 10:40:07 AM
'...why it would be (or would have been) a good thing to permit the EU to subsidize Airbus to a such extent that Boeing would exit the passenger jet business.'
Of course, Boeing for years argued successfully for Ex-Im Bank subsidies to counter Airbus's subsidies.
Posted by: Patrick R. Sullivan | May 10, 2007 11:44:56 AM
I am but a humble A level economics student but a few things jumped out at me:
1) Free exchange i.e. trade, cannot cause net 'harm' to either partner
2) A currency on a floating exchange ratescannot, in the long run, be undervalued
3) Since trade beenfits both partners, a 'current accound deficit' is a pointless concept
4) If saving is replaced by social security, the same or more capital will be tied up in these security measures - demand will not increase and might in fact decrease (some people who choose not to save will be forced to pay social security)
5) A growth in economic inequality is no bad thing - it means icnreased productivity in the most productive industries, comparative advantage is working as it should
Posted by: The Cynical Libertarian | May 10, 2007 12:22:29 PM
If Chinese taxpayers want to subsidize my purchases, I will shoulder this burden and let them.
Posted by: Al | May 10, 2007 2:27:32 PM
Imagine two kids, Alan and Bob, trading baseball cards. Alan wants to trade three of his baseball cards at random for two random cards from Bob. Bob says, "What, are you nuts? No way! Hope about this instead, I'll give you three of my baseballe cards at random and in return you give me two of your baseball cards at random".
Clearly Alan and Bob are idiots. But what they are trying to do is exactly what people like Robert Samuelson want us to do with our exchange rate with China, give them more things than we get back from them. And to make matters more laughable, the Chinese are saying "no way Jose!", they prefer to hurt themselves to our benefit.
Think of it another way. Imagine you have a project that you need two sets of hands for, so you ask your neighbor to help out. He says "ok, but I alsohave a project and youhave to help me in return". Now, in theory a fair trade would be you do work for him in the same amount of hours he does for you. If it turns out your project takes longer than his, you figure you got the better deal. You certainly don't insist on working longer for his benefit than he does on your behalf. But when it comes to foreign currency exchange you can find tons of people eager to trade more of our labor for less of foreign labor, and they get incensed when fools on the other side of the border insist on the opposite.
Posted by: happyjuggler0 | May 10, 2007 3:55:32 PM
Here is some evidence: well ahead this trend of globalisation, Chile lowered its tariffs from 100% to 10%, in just 5 years (1974-1979). This was done unilaterally.
Then during the 90's and 00's came all those FTAs, currently with 85% of world's GDP. But the first and decisive steps toward free trade (which helped to shape our recent success), were all alone...No regrets.
Posted by: Ignacio | May 10, 2007 6:08:01 PM
All those Boeing Engineers will be freed up to work on other things; working on improvements to cars, producing small planes for private aviation etc.
I'm skeptical -- it's not as if there's currently a shortage in either of those areas or as if the highly specialized skills of passenger plane engineers transfer easily. Obviously the laid-off engineers would have to do *something*, and a few would do something more valuable than what they're doing now, but I think it's reasonable to assume that the vast majority would do something less valuable, both to themselves and to society, than they're doing now.
Of course, Boeing for years argued successfully for Ex-Im Bank subsidies to counter Airbus's subsidies.
Perhaps, but that's neither here nor there. My point is that there are certain industries (passenger aircraft, automobiles, for example) where existing companies have huge reserves of institutional knowledge and barriers to entry are very high. If we permitted it, it would not take long for foreign competitors to kill such companies with subsidies to their competitors. But the subsidies would last only as long as the competition. The EU wouldn't be using taxpayer funds to provide us with discount Airbuses after Boeing was out of the way.
Posted by: Slocum | May 11, 2007 8:11:29 AM
No one starts a business to create jobs, they do it to make money.
"We" don't benefit from Boeing's creation of jobs, but from Boeing's production of aircraft.
Jobs are the cost of producing things such as aircraft.
If Boeing was able to produce aircraft more cheaply by using a bunch of robots istead of humans, we would benefit from cheaper aircraft, cheaper tickets.
If Airbus managed to get the government to force its citizens to subsidize Airbus to the point that Boeing got out of business, we would still benefit from cheaper aircraft...at the expense of European taxpayers.
Won't happen.
Posted by: Sam Grove | May 11, 2007 12:11:24 PM
Slocum, you're looking at costs and benefits too narrowly; you're not counting the transfer of wealth from European taxpayers to Americans. That benefit is correctly deducted from the costs borne by laid-off engineers in deciding what is in the national interest.
Posted by: ben | May 11, 2007 3:55:30 PM
Dear Cynical Liberatarian:
Economic inequality opened the door for people like Lenin, Hitler and Mao and nightmarish theories such as Communism. Can you imagine how incredibly bad things had to be for people to buy into Karl Marx's madness? The same could have happened here in the thirties save for the actions of that optimistic liberal (definitely not a libertarian) known as FDR. He saved capitalism from the capitalists, but never received the thanks he deserved from them.
Posted by: David P. Graf | May 12, 2007 8:20:25 AM
After Boeing is dead and quite decomposed, Airbus will lower their prices to reward their customers.
Posted by: Kent Gatewood | May 12, 2007 10:48:44 AM
ROFL!!!
Posted by: True_Liberal | May 12, 2007 11:33:27 AM
David P. Graf,
Dosn't this problem stem only from a lack of understanding of economics? If people understood that economic inequality is not necessarily bad, they would not be drawn to Marxism etc.
Posted by: The Cynical Libertarian | May 12, 2007 11:47:42 AM
Yes,I am a Chinese.
Posted by: gamecheats | May 12, 2007 12:35:52 PM
Dear Cynical Libertarian:
It's hard to understand why economic inequality is good if you're on the "minus" side of the equation.
Posted by: David P. Graf | May 12, 2007 2:03:20 PM
Unfortunately, I am on the "minus" side. Well, I say "minus" because that's the word you use but I think just the "less well off side" would be more appropriate - just because some people are earning more than others does not mean that they are taking away wealth/income from the less well off.
Anyway, I can understand that though I may not be rich, just because others are getting richer it does not mean I am getting poorer (or if I am, not because of them getting richer).
Posted by: The Cynical Libertarian | May 12, 2007 3:08:07 PM
The same could have happened here in the thirties save for the actions of that optimistic liberal (definitely not a libertarian) known as FDR. He saved capitalism from the capitalists, but never received the thanks he deserved from them.
You are well versed in the popular mythology.
As the world is all about perception, we can restate that: FDR took advantage of the misperception that the run on the banks was a failure of capitalism and instituted large dose of socialism into the U.S. economy and gave everyone the perception that he was saving them from the "failure" of capitalism. Unfortunately, his actions and actions of the FED prolonged the depression to a record 8 years, but fortunately (for the FDR legend), misperceptions were saved by our entry into WWII thus bringing another misperception into being, that the federal government could do anything.
The reality is that the run on the banks occurred over a decade after the FED was created, ostensibly to prevent such runs and economic ups and downs. Could the FED have been doing something to set up the stock market crash of '29? Maybe is had something to do with the massive creation of credit by the FED leading traders into a misperceptin that the economy was really going gangbusters.
Inflation fools a lot of people.
Posted by: Sam Grove | May 12, 2007 4:15:10 PM
Sam Grove,
Thanks. I meant to say something about that but it slipped my mind. The depression was not caused by free market forces, it was caused by a 60% increase in the money supply followed by a 30% decrease - both of which carried out, of course, by the Federal Reserve. FDR did not jump in and stop the depression, he prolonged it. There were numerous depressions in the preceeding decades, all due to the same reasons. Luckily, lassaiz faire policies during the depression itself put the economy back on its feet in a couple of years. FDR broke the trend by overtly intervening and ended up stretching it into the longest depression in US history.
Posted by: The Cynical Libertarian | May 12, 2007 7:00:56 PM
David Graf
It's hard to understand why economic inequality is good if you're on the "minus" side of the equation.
Obviously you haven't thought very hard about this. Returns to education depend on inequality. Returns on investment of any kind require inequality. You cannot stimulate investment without permitting a share of the returns to accrue to the investor, and that requires inequality.
Most students and, I suspect, many investors start out on the minus side of the equation, and go to all the trouble of gathering information and saving up and taking out loans and bearing risk for a chance at making it over to the positive. The incentive to make these investments depends on inequality, and the benefits accrue to those making the investment, regardless of whether they are on the minus side of the equation.
I guess your comeback will be something that refers to too much inequality, but that is different to your point. Being on the minus side of inequality can be good because inequality, which requires as many minuses as positives, is an essential part of wealth creation, which benefits everybody.
Posted by: ben | May 12, 2007 9:32:36 PM
David Graf
There's another point to be made, which is that there is a negative relationship between leisure and income. Furthermore, the recent increase in income inequality has been mirrored by an increase in leisure inequality: people on high incomes have disproportionately less leisure time. Many people on the "minus" side of inequality are being counted there only because an incomplete measure of welfare -- income, not income + leisure -- is being measured.
Posted by: ben | May 12, 2007 9:39:09 PM
The depression was enhanced by a panic reaction on the part of the FED. There may have been some anti-semitism involved as well. The first bank which suffered a run was Jewish owned, and when the run began, other banks could have stepped in with some reserves to quell the panic, but they did not. Of course, one run led to another.
Humans are emotive creatures.
Posted by: Sam Grove | May 12, 2007 10:00:24 PM
Many people want wealth without having to earn it. Some people obtain wealth because their parents earned it. Many people earn their wealth. Many people avoid having too much responsibility which is what starting and running a business entails.
Equality of results can only be acheived by making everyone poor, that is, by removing any incentive to produce.
Posted by: Sam Grove | May 12, 2007 10:06:59 PM
We should unilaterally disarm and allow the
Chinese taxpayers to subsidize our national defense.
Posted by: Kent Gatewood | May 14, 2007 12:17:50 PM
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Posted by: Edwina Griffith | Dec 15, 2007 6:04:55 PM
