Noah’s (free trade) ark

Posted: 29 April 2015 in Uncategorized
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I don’t often agree with Noah Smith. And we’re certainly not on the same side when it comes to the Trans-Pacific Partnership (which, as Timothy B. Lee explains, is really a deal that benefits only “a few well-connected interest groups”). But Smith does offer a useful reminder that Harvard’s Gregory Mankiw offers a case for free trade “that, even on its own merits, might be bogus.”

Maybe people are perfectly smart and rational enough to understand the David Ricardo idea, and also smart enough to understand something else that economists have known for 200 years — international trade doesn’t necessarily benefit everyone within a country.

That’s right — trade creates winners and losers. Econ 101 says that the winners outnumber the losers in dollar terms, but not necessarily in people terms — if the richest 1 percent of Americans gain $1 billion from a trade agreement and the other 99 percent lose $900 million, then Ricardo’s theory says the country benefited overall. That outcome is perfectly consistent with Econ 101.

Smith is right: even in the world of classical and neoclassical economics, it is quite possible to demonstrate that free trade can—and often does—create more losers than winners.

But that’s just the beginning of the problems with the story free-traders like Mankiw and Smith try to make. Because it’s also the case, as I’ve tried to explain before (such as here and here), that the mainstream case for free trade is based on an extraordinary set of assumptions (such as full employment, the absence of externalities, no economies of scale, and so on).

And, to top it off, mainstream economists persist with the false argument that it is countries that are engaged in international trade, as if the United States and Japan (or, since the usual theorems can be generalized beyond the two countries used in the standard equations and diagrams, whatever n-dimensional set of countries one wants) decide to buy and sell and goods and services produced in the other country.

The fact is, countries don’t make those decisions. Corporations do. Capitalist enterprises decide to buy and sell commodities from and to capitalist enterprises located in other countries, or to shift (without any trade whatsoever, since it takes place within firms) goods and services from one of their subsidiaries in one country to the subsidiary in another country. That’s how international trade takes place (and thus how goods and services show up on the current account). And the rest of us, without any say in the matter, go into stores to purchase commodities regardless of where they were produced or what the domestic or international content of those commodities is.

That’s the real story of international trade (and of agreements like the TPP) the Mankiws and Smiths of the world never tell— hoping that the rest of us will march, two by two, onto their free-trade ark.

  1. […] from rent control (which, it is argued, creates a shortage of housing and long waiting lists) to international trade (which, if regulated, e.g., by tariffs, would lead to higher prices for imported goods and less […]

  2. […] from rent control(which, it is argued, creates a shortage of housing and long waiting lists) to international trade (which, if regulated, e.g., by tariffs, would lead to higher prices for imported goods and less […]

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