The Logic of Free Trade

Via Mark Thoma we get Thomas Palley:

"The logic behind classical free trade is that all can benefit when countries specialize in producing those things in which they have comparative advantage."

The logic behind classical free trade is not dependent upon countries specializing. The logic works whether you are talking about people, companies, towns, tribes, cities, regions, countries or continents. To insist on the artificial barriers of the nation state as being a crucial part of the logic is to sell the pass.

The same point comes up in Roberto Unger\’s new book, Free Trade Reimagined (which Palley is riffing off I think):

If countries specialize in what they produce, the whole world can reap the benefits. It is a simple message of enormous power promising both greater riches and more freedom.

I haven\’t finished Unger (he comes up with some excellent points: there\’s one part where by implication he attacks the EU\’s insistence upon standardisation) so I don\’t know what his final solution is. However, if you start by insisting that the logical unit to study trade is the nation state then you end up with the possibility of reaching some very unwelcome solutions. That, for example, Governments have a part to play in creating comparative advantages (something Unger does say). That perhaps they should "manage" trade, that, in short, perhaps the Man in Whetehall does know best.

If you accept the real case for trade, that voluntary exchange benefits (at least in the minds of those doing it) all participants, that is allows the division of labour, there\’s nothing special about countries and nation states as being the unit required to make it work, nor the unit we should consider in our analysis. In fact, once you have accepted the case for trade all you\’re then arguing about is the unit over which it should be free: and there\’s nothing special about countries there at all.

As the once separate countries that now make up the US show, as the currently still sovereign nations of Europe in the EU show.

12 comments on “The Logic of Free Trade

  1. Tim,

    “As the once separate countries that now make up the US show, as the currently still sovereign nations of Europe in the EU show”

    Come on! They were never independent countries! They were an imperial power’s colonies – different thing.

  2. Many of the US states went through a period between not being part of the newly-forming Union and having departed from colonial rule. That made them countries to all intents and purposes, though they are rarely called as such.

  3. Philip is correct. The original colonies, before joining, were regarded as independent, sovereign states (national entities).

  4. ‘If you accept the real case for trade, that voluntary exchange benefits (at least in the minds of those doing it) all participants’

    This is not believed by anyone. The case for trade is that it increases output, which could be redistributed to make everyone better off.

    Tim adds: I beg your pardon? No one believes that voluntary exchange benefits (at least in the minds of those doing it) all participants? What are you talking about? If people didn’t believe that an exchange would benefit them then they wouldn’t do it voluntarily then, would they?

    If I, having an apple, prefer an apple to an orange and the man with an orange perfers an orange to an apple then we won’t trade the orange for the apple, will we? We’ll stay as we are. However, if we both think that having the other will benefit us, then we’ll trade, and in our minds we’ll both better off, minus an apple/orange and plus an orange/apple.

    Trade that participants believe won’t benefit them doesn’t happen. Trade that they believe will will, unless restrained.

    The case for the division of labour is that it increases output and it’s certainly true that trade enables such division. But the case for trade does not rely solely upon output, division of labour or the potential for redistribution.

  5. The argument for free trade is not that everyone will be better off, as you seem to think. It is that the gains outweigh the losses.

    The losers from free trade are those who lose business to foreign competition:English port producers and Portuguese cheesemakers, in the Ricardian example.

    Tim adds: No, you make the common mistake. You think that trade means “foreign”.

    It doesn’t. It means trade.

  6. “Many of the US states went through a period between not being part of the newly-forming Union and having departed from colonial rule. That made them countries to all intents and purposes, though they are rarely called as such.”

    Yeah – for about 40 seconds.

    Next!

  7. ‘Tim adds: No, you make the common mistake. You think that trade means “foreign”.’

    I am not surprised that people make this ‘mistake’ when talking about trade between countries as, I thought we both were.

    But never mind, I am still interested in your assertion that free trade benfits everyone-there are no losers.

    Tim adds: Did you read my original post? I state that the logic of trade does not rest upon it being between countries. So, no, we’re not talking about trade between countries.
    Further, you’re also missing my point. I said that voluntary exchange (trade) only takes place when the participants believe (for sometimes people make mistakes, of course) that it will benefit them.
    What I did not say is that there are no losers if the terms of trade change. But said losers are not those who participate in a specific act of exchange. They are those who would have participated except for that change in the terms of trade. The change in the terms could be a change in production technology, it could be a change in consumer desire, it could be a change in the legal landscape about who you can trade with without interference, the effects are all the same.
    Those who participate in a trade benefit, that’s why they do it. The losers are those who would have done so before the change, but now do not participate because of it.
    The distinction is that no one loses from free trade: but there might be losers from the move to free trade. Just as there are no losers from a particular technology, or a particular consumer desire, but there most certainly can be losers from the move to freer trade, or from a shift in technology or consumer desires.
    So the statement “free trade benefits everyone” is indeed true. It’s just that the current system of restrictions (just as with, say, restrictions upon the technology that might be used: think Luddites, or perhaps the old closed chop print unions) benefit some and disbenefit others. The move from one state, of restricted trade, to free trade, does indeed have losers. But then so does the current state of restricted trade have losers. What changes is who those losers are.

  8. You are writing more and more and managing to say less each time.

    You say that:

    ‘The distinction is that no one loses from free trade: but there might be losers from the move to free trade. ‘

    What on earth does that mean?

    Suppose we consider a real life example, and think what would happen if the UK removed all tariffs on agricultural products.

    In my world, UK farmers are made worse off. as the price of their products falls. Their losses are outweighed by the gains made by the rest of the UK population, hence the argument in favour of free trade.

    What happens in your world? Are the farmers better off or worse off. You say everyone benefits, but there might be losers from the move from free trade.

    Tim adds: Yes, exactly. I say that all participants in a voluntary exchange believe themselves to be better off as a result of that exchange. The people who might suffer from a trade are those who do not participate in it. In the farmers example: those consumers who buy foreign food benefit. Those foreign farmers selling it to them benefit. Thus, as I say, the participants in a trade benefit. The people who lose are those farmers who no longer get to trade with the consumer. That is, it is the people not participating in the voluntary exchange who suffer the disbenefit.

  9. I really am at a loss to understand your various comments.

    First of all you reject my statement that there are winners and losers under free trade. I would understand that to mean that you believe there can only be winners, but please tell me if you disagreeed for any other reason.

    Then you make some distinction between ‘free trade’, where everyone wins and a ‘move toward free trade’ where apparently losers do exist.

    Now you seem to be saying that there are losers, but somehow they were never part of the ‘all participants’ in your original post.

    Tim adds:

    “First of all you reject my statement that there are winners and losers under free trade.” Correct, I do reject that. Imagine that we currently had no restrictions upon trade. All trade that took place would therefore be beneficial to all parties involved in that specific trade. Otherwise, given the voluntary nature of said trade, it would not happen, would it?

    Good, so in a world of free trade there are no losers.

    Can there be losers in a move from our current more restricted form of trade to one of free trade? Certainly. Currently, there are two groups of losers under our current system. The domestic buyers who are refused permission to buy from whom they wish and the overseas sellers who are denied the opportunity to sell. These losses are redistributed as gains to the more restricted group of sellers that the consumers must currently deal with.

    If we remove this artificial insistence on excluding the preferred trading partners then there will indeed be losers: those who currently benefit from the restrictions.

    But, as you say, said losers will not be the people who are participants in the trades that happen under free trade. They will be the people who would have participated in the trades if the restrictions were in place but now do not as people are able to express their true preferences.

    So, yes, in a free trade regime all of the participants in voluntary exchange benefit. The move from our current system to that one will have losers. Those losers being the people who will be excluded from future trades.

    Now, to go back to your original point, about it being possible to compensate the losers from the gains made by trade. Quite true, it is possible. But shouldn’t the losers in the current system of restrictions be compensated for the losses they suffer by those who benefit? The logic is the same, after all: that the losers should be compensated from the gains of the winners.

  10. I am afraid you have lost me. I cannot see how this statement

    ‘Can there be losers in a move from our current more restricted form of trade to one of free trade? Certainly.’

    is consistent with this one.

    ‘Good, so in a world of free trade there are no losers.’

    Tim adds: Excellent. You have shown yourself incapable of following simple logic. Next?

  11. “Next?”

    OK

    See my earlier comments concerning the collapse of the sugar industry in the British West Indies caused by a policy of free trade in sugar which gave cheaper slave-produced Cuban and Brazilian sugar the same access to British markets as that produced by emancipated slaves –

    http://timworstall.typepad.com/timworstall/2007/09/stiglitz-on-lab.html

    The theory is great, and very orthodox; it’s a very great pity that the theory that free trade enriches everyone has never, never, never been borne out by history.

    Never.

  12. ‘Tim adds: Excellent. You have shown yourself incapable of following simple logic. Next?’

    Perhaps you could let us know what that simple logic is. I am not holding my breath.

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