No Free Trade from China

A while ago, I wrote about the perverted application of the theory of competitive advantage in a post called Everything we ignore about Free Trade. I want to be clear: I love free trade.

What I hate is the fact that free trade does not exist and everybody ignores injustice in the economy. Recent international events constantly demonstrate that we do not have international free trade. In China, local citizens are protesting the construction of a coal-fired plant where they live. The Chinese stooges who work for the government are beating them into submission.

There may be nothing that anybody can do to stop the evil Chinese government. However, we should not delude ourselves into thinking that the cheap junk we get from Chinese factories demonstrates the benefits of industrialization for them and the benefits of free trade for us.

The truth is that we benefit from both outright theft and our ignorance of the truth.

Michael Den Tandt, clueless about globalization

In his editorial today, Michael Den Tandt demonstrates his ignorance of his fellow man as it relates to basic economics by printing this mindless tripe:

Anyone who bothers to crack an economics text will know that globalization and free trade have lifted more human beings out of poverty than any other idea in history.

The reason is that trade creates wealth and jobs. Jobs allow people to feed their families and buy extras, produced by other people, which in turn employs those people. And on it goes.

I invite him to read my blog post: Everything we ignore about Free Trade which explains the falsehood of his economic faith. However, since he has demonstrated publicly his ignorance in economic principles, I will now summarize his ignorant mistake: He does not know whether the people in third world countries are freely choosing to participate in trade.

Michael Den Tandt should be blogging instead of wasting printed paper.

Jim Flaherty, Free Trade and the Power of Me

Over at The League of Ordinary Gentlemen and at my own blog, I comment that Canada should re-dedicate itself to free trade.  Apparently, Jim Flaherty and the Conservative government take my opinion quite seriously:

The Harper government is set to eliminate all import tariffs on machinery and equipment, reinforcing its commitment to freer trade even as other members of the Group of 20 nations slip on their pledge to maintain open markets.

Finance Minister Jim Flaherty today will announce consultations on his plan to expand a previous tariff reduction initiative to all the gear that automotive parts makers, sawmills, printers and other companies might seek to become more productive as the economy recovers.

For good measure, the Prime Minister was in New York, stumping for free trade:

Canadian Prime Minister Stephen Harper said Canada “got it right” and will emerge from the recession in a strong position, crediting the country’s commitment to open markets, its solid financial sector and the stimulus measures it has put in place to deal with the economic downturn.In a speech Thursday to the Canadian-American Business Council and Canadian Association of New York, Harper reiterated the anti-protectionist message that has been a focus of his trip to the U.S. this week.

It shouldn’t be news when governments act so prudently; sadly, it is.  We know that trade is beneficial.  We know that a policy of free trade will benefit us as well as other countries.  Even if every other country wishes to be protectionists, there is no good reason, economically speaking, for us to follow suit.  There have been a number of reasons to be disappointed in Stephen Harper’s reign, but as long as he continues to carry the flag of free trade, he’s someone worthy of support.

Mr. Obama, I understand that you were once a professor, but now it’s time to learn from someone else.  Trade is good.  Please change your ways, and follow Mr. Harper’s lead.

Everything we ignore about Free Trade

The theory behind the benefits of Free Trade is simple, straight forward and indisputable. I have no interest in teaching anybody the law of comparative advantage since it has been clearly laid out ages ago. I want to speak to people who understand the basics of economics.

The law of comparative advantage is true. However, the “conservative” often naively applies this principle to make unjustifiable conclusions about the benefits of trade in the real world. For instance:

• foreign subsidies hurt us
• the best way to help poor people is to trade with them
• we should still buy sweatshop-imports to support jobs in third world countries
• even though sweatshops are horrible working conditions, it is the best those workers can get or it is their path to freedom

The above conclusions are commonly touted in defense of free trade. However, I will dispel them by demonstrating that the conditions of the theory do not hold in the real world. In short, the conclusions fail because we do not have free trade.

I want to examine the mythology of international trade by starting with the fact that “countries” do not trade with other “countries” at all. Anybody who wants to appreciate economics in any honorable manner must get that straight. They have to stop thinking of “countries” as economic agents. The only valid economic analysis is based on the simple fact that individuals trade with other individuals.

The reason why we use the word “free” in Free Trade arises from the concept of freedom. Unless the individuals are trading under their own free will, the concept of Free Trade does not strictly apply. Nevertheless, it does not negate the ability to analyze the trade as market transactions.

When I buy an import, I am not buying it from a foreign “country” but rather I am buying it from a middleman. I buy it from a local retailer. Since my purchase is made of my own accord, the first reasonable conclusion that I can make is that this trade benefits myself. Second, if we assume that the local retailer is in business out of his own volition, I could also conclude that the theory of comparative advantage applies: we both benefit from trading. However, I do not know how my local retailer got his stock. The middleman could have stolen it from a neighboring retailer. As such, it is foolish to wave a theory around and say that everybody is better off as a result of trade. If you can understand this last principle, you have completely grasped the mythology behind free trade.

Now, let us examine the real world of trade.

The consumer has no idea how the coffee, sugar, bananas or oil got off the ground and into the market. The reality in many third world countries is that poor people are often forced off their land to make way for commercial enterprise. Some people are deceived. We can not say that poor people would be worse off without sweatshops. We know their ancestors survived for several generations without industry. These poor people may actually prefer a sustenance level of existence without industrialization. Their preference will never be known to us. The only intelligent conclusion that can be made is that trade makes myself better off because I am buying out of my own volition.

Most of what I consume (and I bet everybody reading this blog consumes) is an import. If we had to consume only domestically produced coffee, sugar, bananas and oil, practically none of us could afford them. [Nota Bene: That may not be a bad thing.] The prices would be astronomic however, it would technically be possible to produce them. Enter subsidies.

I believe subsidies in trade create a huge rift in “conservative” logic and morality. Many people will complain about foreign imports being unfair when foreign producers receive subsidies or tax breaks. This is the thrust behind anti-dumping laws.

The question must be asked: What constitutes a subsidy? The truth is that the definition of a subsidy is arbitrary. Anything can objectively be considered a subsidy. In principle, whether you get a grant to build a factory or your employees get subsidized housing, your costs of production are partly assumed by state subsidization. Furthermore, if your heating costs are lowered by geography, you are receiving a subsidy too — from Mother Nature.

If a foreign producer receives a grant to produce coffee, sugar, bananas or oil, that would be a subsidy. However, most employees need food, clothing and shelter to survive and without which they can not go to work. Most employers must train their employees to make them more productive. Therefore, if a foreign government provides public education, the public education is a subsidy to anything that population produces. In Canada, we get subsidized education, health care, law and security — among other things — which are services that are either absent or certainly different in third world countries. As long as the government exists and acts, there is no intelligent distinction between a government subsidy and any other government activity.

It should be apparent that a foreign government can conceal subsidies any way it wants. A foreign producer could also have a superior technological advantage. From an outsider’s perspective, the two are indistinguishable.

Complaining about foreign subsidies is nonsense. First of all, with foreign subsidies, the domestic consumer pays lower prices and is better off. However, the domestic producer can not compete as before. Thus, the domestic producer is worse off. How do you balance the competing interests? The answer is simple: you do not. It is impossible to compare welfare between individuals. [You can make foolish comparisons of how much money they make or lose due to a policy but those are all nonsense estimations of transactions that do not occur -- sort of like the young athlete who complains about the lost professional football career because he broke his leg when he was 13 years old.] The best you can do is liberate the market and let people choose as freely as possible.

Some people advocate boycotting trade as a method to combat human rights violations.

Advocating trade boycotts is difficult. It may turn out that the laborer’s goal is to seek freedom by pursuing the demise of his employer. Boycotting the industry may help. However, the laborer may also want to make the best out of a bad situation by staying employed. Boycotts would hurt him further. As an outsider, you can never really assume what a poor laborer wants. Economic policies which hinge on such assumptions are nothing but deception.

One thing that is often omitted from discussions of free trade is the free mobility of people across borders. I would like to address that in the future in a separate discussion on immigration.

from a multi-part series entitled “The Subconscious of a Conservative“