These days many people talk about free trade. In this essay, I will cover some background about free trade and show how government introduces many problems into free trade.
Free Market is the free flow of goods and services between different people in the society. Free trade is the free flow of goods between political jurisdictions. The free market benefits the consumer because it makes multiple producers compete to offer goods and services offering the consumer the best possible price. Free trade expands the market to include foreign producers as well as the domestic ones. Free market benefits the consumers and the efficient producers and punishes the inefficient producers. Producers who don’t offer good value end up shutting down and freeing their resources such as capital and labor for other uses in the economy and this creative destruction ensures the proper distribution of resources.
On the long run countries in a free trade system will specialize in certain products that they produce more efficiently. The same way individuals specialize in the areas of production they are the best fit for according to their comparative advantage. On the short run, there may be a trade imbalance between different countries but on the long run, any trade imbalances will be resolved through currency relative prices. For example, if country A exports less than it imports that means that its trading partners will end up with a surplus of country A currency. This surplus can be used by the trading partners either to invest in country A assets, keep the currency as a reserve, or they will trade that currency out. If the trade partners sold their access country A currency, this would push the currency relative price down and the raise the price of imports for country A which will on the long run forces it to consume less imported goods and create a trade balance.
Free trade works like the free market when we let the market process work and respect the outcomes. The role of government in the market should be limited to protecting property rights and resolving disputes between private parties. Problems arise when the government expands its role and select winners and losers.
The first problem is that the inefficient producers don’t go down quietly, instead, they use the political system to gain protection. They ask for tariffs and restrictions on imports to protect them against the foreign competition. This is similar to anti-trust laws on the national level that mainly protect the inefficient producers and penalize efficient ones. These laws end up creating inefficiencies in the market and protecting the well-connected companies and sectors and leaving other sectors out.
The second problem is that free trade exposes the problems with each country’s economic, legal and regulatory systems. If these systems impose extra costs on some or all areas of the economy these areas will be at a disadvantage against foreign competition from countries that don’t have similar costs. If country A has regulations that cause cars to be 25% more expensive, then equivalent foreign cars that don’t suffer the same regulation cost will be cheaper as long as they are priced less than the domestic producer even if they are not cheaper without the regulation overhead. These producers will have several options:
- Work for a political solution to reduce government-imposed overhead through tax, regulation, and legal reform.
- Join the inefficient producers and lobby the government for protection.
- Relocate their production to foreign countries and import their products afterward to their home country.
The third problem is the whole notion of a trade agreement. Governments pretend that the only way to have free trade is through complicated agreements that include 2 or more countries. Free trade doesn’t require complicated agreements, a commitment to remove tariffs or reduce them to the same level on all products should be enough. By looking at NAFTA or TPP as examples, we can see that all of these trade agreements come with thousands of pages of tariff schedules, exceptions, procurement rules, and regulation mandates. These agreements are examples of corporate welfare where connected firms get their products access to foreign markets or prevent foreign competition through exceptions and quotas.
Free trade, like the free market, has a very limited role for government and any deviation from this role cause imbalances and negatively affect the whole market. Government overreach cannot be solved without citizens holding the politicians accountable and vote them out of office for crossing the boundaries. We have made the mistake of relying on electing free market advocates to government and hoping to make a change. The better approach is to work on spreading true economic knowledge and expand the liberty movement to more people and only then we can hold the politicians accountable and turn the country around.
There are two competing views of the world that can explain most of the political opinions in the United States. The statist view is that the government is responsible for directing the whole society towards the good so it has to enact and enforce rules to direct the society. The libertarian view, on the other hand, is that the individuals should be left free to live their lives and use their property to meet their own goals provided that they don’t commit aggression towards other people.
The statists define the good in an egalitarian fashion to mean the state of affairs that provide similar outcomes for all. They ignore the fact that outcomes are defined mostly by the inputs and efforts used to achieve them and that people have different abilities and resources so they cannot reach similar outcomes. For example, statists decry income variations as unfair and advocate policies and rules to redistribute income from people who made more to people who made less. Some of the statist policies to achieve what they see as fairer income distribution are the welfare state, progressive income tax, and affirmative action. In spite of over 100 years of progressive income taxes, over 50 years of the welfare state, and over 40 years of affirmative action no fundamental change happened. People who have more human capital such as education and skills make much more money than people who no or less human capital, people on welfare remain on welfare and rarely move out of government dole, and people who have stable families and belong to cultures that believe in hard work and driving for results achieve better education outcome. The main reason that statists fail to achieve any of their goals is that equality is not the natural state of the world, people have different skills, cultures and resources and that cause different outcomes and nothing can change that. You can place anyone in a high-quality university but unless that person developed the right skills he or she cannot graduate with the same grades and education as someone who did. You can use force to take money from a successful person and give it to someone who doesn’t have the work skills and doesn’t want to change and that person will remain on welfare forever.
The libertarians don’t believe that any outcomes should be forced on the society and that the individuals are free as long as they don’t commit aggression against anyone else. They don’t see inequality as a problem as long as it didn’t result from the use force. In that worldview, people are liable for the consequences of their actions and the role of the law and the courts is to stop anyone who uses force against someone’s person or property. People will get the reward the market allocates to them based on the value they provide and people who cannot contribute because of disability will be helped by family, friends, and charity.
The statist worldview depends on the arrogant assumption that government bureaucrats can manage people lives, care for their well being and provide for their children better than they can do for themselves. This world view ignores the fact that these bureaucrats are also people who have their own biases and prejudices and do what they do for their own benefit. The failures of statist solutions are numerous and well documented in the United States such as the new deal, the great society, and Obamacare but these failed programs never get canceled because they serve the needs of politicians to maintain a voter base of government dependent people.
The next time you hear a politician claim that he or she wants to help the people by creating a government-run solution know that he or she wants to help himself or herself get elected.