Tag: free trade

Mailvox: A Bad Case Against Free Trade

I was asked to consider Paul Craig Roberts’s case against free trade, which he describes as follows:

In 2004 NY Democrat Senator Chuck Schumer and I opened a New Year with a jointly authored column in the New York Times. We raised the offshoring issue. American manufacturing jobs and the tech jobs of American professionals were being sent to Asia. We posed the question that if jobs offshoring was free trade, as economists claimed, was free trade any longer in America’s interest? My position was that jobs offshoring is a contradiction of free trade–more later–and Schumer was still in his idealistic period when he was concerned about the displacement of American labor by foreign labor in the production of goods and services that Americans consumed.

Our article caused a firestorm. The Brookings Institution in Washington called a conference and asked us to come and defend our position. C-Span broadcast the conference live and rebroadcast it a number of times. Schumer and I carried the day.

Delighted with the publicity, Schumer suggested a follow-up article. The NY Times was eager. We began a draft, and then it went cold. My explanation is that Wall Street, which was committed to jobs offshoring, got to Schumer and explained campaign contributions to him.

I continued on. Conservatives, free market economists, and libertarians, who are indoctrinated with free trade, but who do not comprehend the theory, called me a heretic. Nevertheless, both the Wall Street Journal and the Washington Post were intrigued that the “most ardent” of the “Reagan policymakers” had taken a position against the policy that Wall Street was imposing on the country.

The Wall Street Journal assigned Timothy Aeppel to arrange a series of debates to be published in the Wall Street Journal between me and Columbia University Professor Jagdish Bhagwati. The question was: Is jobs offshoring really free trade?

Adam Smith and David Ricardo’s theory of free trade rests on the principle of comparative advantage. What this means is that a country’s capital remains employed at home and is employed in areas in which the capital is best used. If all countries do this, there are gains from trade, and all countries will be better off than if they are self-sufficient. I have wondered if the free trade theory was used as a stratagem to repeal the British Corn Laws and reduce the income and power of the landed aristocracy.

Both Smith and Ricardo made it completely clear that if a country’s capital left the country, it was pursuing absolute advantage, not comparative advantage, and free trade theory is vitiated. This is the point I made. Without comparative advantage, there is no case for free trade.

This is trivial and irrelevant Econ 103-level criticism of free trade. No one has ever denied it, and it permits the discussion to be transformed from “is free trade good for the nation” to “is the current situation one in which absolute advantage or comparative advantage applies”.

Political matters are intrinsically rhetorical, so building a circumstantial case on what most people will see as a minor technical point is never going to be very convincing. It’s no surprise that despite the fact that he and Schumer “carried the day”, they ended up completely losing the political battle.

The point is not that “free trade is sometimes bad”, the point is that free trade is bad even in the case of comparative advantage that supposedly provides for mutual benefit, but destroys both nations in the process.

And yes, the free trade theory was never more than an excuse to repeal the Corn Laws. Ricardo was an an investor and politician, not an economist, and the arguments he presented were dishonest, incomplete, and wrong, which is why Joseph Schumpeter labled the structure of Ricardo’s arguments “the Ricardian vice”.

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Free Trade is Economic Heroin

In all the many defenses of Free Trade going back to David Ricardo and his fatally-flawed concept of Comparative Advantage, and in all of the critiques going back to the 18th century mercantilists, one of the issues that no one either side of the economic issue ever seems to discuss is the inherent fragility of free trade and the way in which that fragility is imposed upon the economies of nations foolish enough to adopt a free trade policy.

I’ve already laid out, in statistically-significant detail, the proof of the total incompatibility of free trade with nationhood, in my Efficiency of Labor Mobility critique of free trade. But the scale and scope of that argument, combined with its requirement to have a basic grasp of neo-Keynesian economic theory, has proven to be well beyond the average individual and the average free trade economist alike. Lest you think I exaggerate, the total inability of the author of an introductory textbook on Austrian Economics to understand the critique, let alone formulate a response to it, really has to be read in order to be believed.

But the European Union’s successful attempt to force the Hungarian government to approve its economic aid package for Ukraine demonstrates another fundamental problem with free trade that even the average heroin addict is able to comprehend. It goes well beyond the obvious problem that many have previously observed with the regards to the way in which free trade can result in needing to buy weapons and raw materials from a trading partner with whom one is at war.

Several EU heads of state directly told Hungarian Prime Minister Viktor Orban that they would crash the Hungarian economy if he blocked a €50 billion ($54 billion) economic aid package for Ukraine, his adviser, Balazs Orban, has revealed.

EU leaders signed off on the mammoth four-year aid package earlier this month, after the Hungarian leader lifted his veto in exchange for some minor concessions from the bloc’s 26 other member states. These concessions included an annual debate on its implementation and a promise to review its impact on the EU budget after two years.

Before the package was approved, the Financial Times reported that the European Council had drawn up a plan to cut funding to Budapest and tank the Hungarian economy if Budapest maintained its veto. According to the Financial Times, the EU planned on pulling funding from Hungary, thereby hampering its ability to subsidize foreign direct investment and eventually crashing the value of the Hungarian forint.

EU leaders threatened to ‘politically rape’ us – Hungary, RUSSIA TODAY, 10 February 2024

In other words, since the Hungarian government foolishly permitted itself to become dependent upon the transfer of free money created ex nihilo by German banks, it now no longer has the ability to establish its own policies in the interest of the citizens of Hungary. Hungary might as well be a heroin addict attempting to defy the wishes of his heroin dealer.

This illustrates both the anti-democratic nature of free trade and usefully explains why Clown World is so hell-bent on imposing free trade policies everywhere from Azerbaijan to Zambia. Once Clown World can get a nation hooked on its destructive economic drug, it can literally dictate that nation’s policy. Only going clean, like Russia was inadvertently forced to do by the sanctions regime enforced by the West, can free an economy from the external chains and intrinsic fragility imposed by free trade.

Free trade is economic heroin for a nation. It might make things feel good for a while, but it’s very bad for your health and will eventually kill you if you don’t get off of it.

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Trump’s Trade War 2.0

Contra economists from both the Democratic and Republican parties, a trade war in 2025 would be a very, very good thing for the US economy:

Former US President Donald Trump has told advisers he wants to impose a 60% tariff on all imports from China if he wins this year’s election, the Washington Post reported on Saturday, citing three unnamed people familiar with the plan. The measure would trigger major disruptions to the US and to economies around the world, which would far exceed the impact of the trade wars initiated by Trump during his first presidential term, economists from both the Democratic and Republican parties told the newspaper.

During his current presidential campaign, Trump has pledged to revoke China’s status as a “most favored nation” for trade. The designation is applied to almost all nations that do business with the US, and the White House can introduce any tariffs on imported goods from countries that do not have it. According to the GOP front-runner, tariffs on foreign goods raise vital revenue for the US budget, and current import levies are among the world’s lowest.

China ranks third in the list of US trading partners, behind Mexico and Canada. In November, Beijing accounted for 11.7% of total US foreign trade.

As I pointed out six years ago on Chinese state television, a trade war is very much to the advantage of the United States economy. The net effect of the Western sanctions regime on the Russian economy only serves to underline my original point: a trade war is, by definition, always beneficial to the trading party that has a negative trade balance. And the USA has a massive trade deficit vis-a-vis China. Unlike a naval war in the Pacific, an air war in the Middle East, or worse, a ground war in Europe, this is one war that the USA literally cannot lose.

The reason the Russian economy didn’t suffer from the trade war the West imposed upon it despite having a trade surplus is because the West is now actually the smaller of the two global markets by a significant margin, both in terms of population and purchasing power parity. What Russia lost in Western trade, it more than gained in trade with the BRICSIA countries. And from the defense manufacturers to fast food chains, Russia’s industries benefited massively from the protection from Western imports that was inadvertently provided by the sanctions regime.

As recent history has demonstrated, the Clown World economists are totally wrong, even by their own Samuelsonian metrics.

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Questionable Sushi

China suspended all imports of Japanese fish after the Japanese government permitted the release of more than one million metric tons of treated radioactive waste water from the destroyed Fukushima nuclear plant into the sea.

Chinese seafood imports from Japan have plummeted following Beijing’s ban on marine products from its neighbour in response to the discharge of wastewater from the Fukushima Daiichi nuclear power plant. Imports fell by 67% in August from the same month a year earlier, to about ¥3bn ($20.2m), the public broadcaster NHK said, citing data from Chinese customs. The decision by Beijing and Hong Kong to suspend all imports of Japanese marine products in late August has sparked a diplomatic row and a rise in anti-Japanese sentiment in China.

Maybe, just maybe, they had reason…

Thousands of tons of dead sardines, mackerel wash ashore in northern Japan.

Mystery surrounds the phenomenon of tons of dead fish that were washed up on a beach in northern Japan last week. Sardines and mackerel were washed ashore in Hakodate on Japan’s northernmost main island of Hokkaido on Thursday morning, creating an unsettling sliver blanket that covered almost a mile of shoreline.

Marine biologists have concluded that a lack of oxygen in the water may have killed the fish. The first theory is that the fish were being hunted by predators and were herded into the shallow bay by the village of Toi, where the huge numbers of fish quickly consumed all the available oxygen in the water.

An alternative explanation is that the fish encountered a sudden pocket of significantly colder water on their migration route, which weakened them.

It is, indeed, a mystery.

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The Red Terror of Free Trade

French wine terrorists are attacking and destroying Spanish wine trucks.

French winemakers quite literally painted the town red today when they intercepted trucks carrying cheap Spanish booze and smashed crate-loads of it all over the road. 

Le Boulou tollbooth, just ten miles from France’s border with Spain, was turned into a battleground this morning when dozens of protesting winemakers halted lorries and tore into their contents. They destroyed several wine shipments, smashing the bottles and pouring the red booze all over the tarmac in a vintage demonstration of the French public’s penchant for demonstrating against perceived injustices.

In videos posted on X, protesters can be seen tumbling over a mountain of crates carrying Freixenet wine. Many of the crates had been upended so their valued contents spilled out across the road. Bottles upon bottles of bubbly were seen rolling around amid a sea of broken glass and wasted booze.

What sort of world are we living in, that outrages such as these are allowed to happen! I blame teetotal immigrants and beer-swilling peasants. Thank Bacchus that they didn’t interrupt the Torres trucks!

Figures from the European Commission say wine consumption for the current year is estimated to have fallen 15 per cent in France, 7 per cent in Italy, 10 per cent in Spain, and a staggering 34 per cent in Portugal. However, production in the EU has risen by 4 per cent.

There is the real problem. Now do your patriotic duty, Frenchmen! Stand by your vines, Spaniards! Have a second glass at lunch, all you Portuguese! European civilization depends upon you!

I will do my part.

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Losing Their Free Trade Religion

The Tree of Woe contemplates the fallacies of free trade:

Fletcher’s assault on Fortress Free Trade consists of five interlocking theoretical arguments and one empirical argument. He begins by undermining the assumptions at the foundation of Ricardian free trade theory.

Labor and Capital are Mobile. Go back and re-read the examples above. Did you notice what was excluded from the hypothetical? The movement of capital and labor. That’s because Ricardian free trade theory simply assumes as given that labor and capital are immobile. All competition is via industry or product.

But this is not the case nowadays. Nowadays both labor and capital can move. The result of that is that investment capital and labor pursue absolute, rather than comparative, advantage. And with capital and labor mobility, absolute advantage trumps and gains from trade evaporate.

Let’s imagine that the advantage that accrues to British labor is due to better capital investment: each man-hour of labor is more productive in Britain because it has better factories. Let’s also imagine that Britain and Portugal have foolishly agreed to enter some sort of “union” which allowed their workers to work and live in either country. Labor is now mobile so each worker can move where the best jobs are available. Since labor wages tend to increase when productivity increases, the Portuguese workers will realize they can earn more and tend to move to Britain. The outcome is not happy Portuguese vineyard workers, but Portuguese immigrants trying to get jobs in British wool and wine factories.2

Now let’s imagine that the advantage that accrues to British labor is due to the fact that hourly wages are lower and working hours longer than in Portugal. The factories are equally the same, but you can get 60 hours of British labor for the cost of 35 hours of Portuguese labor. Let’s also imagine that Britain and Portugal have deepened their union such that financial investments can flow freely between the countries. Obviously, what happens is that the Portuguese investors invest their capital in Great Britain, where they can take advantage of the cheap labor. Many high-paying Portuguese jobs vanish as the capital flight causes the factories to shutter. This is, of course, exactly what has happened between the US and China.

Capital is Not Fungible. Go back and re-read the examples again. Did you notice that I said “each has enough factories to let 500 workers work in each industry” initially, but that when they began trading, “each specialize in the area where they have absolute advantage, changing their factories to the new type they need.” I didn’t allocate any cost to this switch — there was no depreciation of the old factories, no loss of investment, no scrap metal yards filled with wool-spinning machines the Portuguese no longer need, etc. Ricardian free trade theory just assumes that capital is fungible – an investment into wool factories is convertible into an investment into wine factories.

In the real world, we know this is not true. If it were true, the entire globe wouldn’t be fixated on Taiwan’s chip manufacturing factories. Capital is very much not fungible. To the extent that capital is not fungible, it means there are deadweight costs to free trade, in the form of shuttered factories, depreciated machines, and so on, that Ricardian theory does not take into account.

An orthodox Ricardian will reply to this criticism by asserting that in the long run capital is fungible and that the long term gains from trade will more than make up for the short-run costs. This argument will be accompanied by a complex econometric paper that uses 10 pages of math written in Greek symbols that says exactly the same thing as I just said in one sentence.

Not so fast, mathemagicians. Fletcher has another howitzer to fire at Fortress Free Trade, and it demonstrates why the infungibility of capital is a much bigger deal than the orthodoxy wants to admit.

Read the whole thing, particularly if you don’t fully understand why free trade doesn’t work. My Free Trade Efficiency and Labor Mobility critique is mentioned, but nothing more since it isn’t actually relevant to Fletcher’s critique of David Ricardo’s theory of comparative advantage. However, I do think it would be easier for people to understand if someone else were to explain it, as most people don’t appear to understand the real consequences if free trade were to actually work as advertised.

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Capital Controls Come to America

Remember when everyone believed that the USA was a free market economy that pushed for free trade all around the world because it was mutually beneficial? Yeah, those days are over now. This is additional evidence – not that any more was needed – that the free trade critics were correct all along.

On Friday, the Wall Street Journal reported that Washington is planning to outlaw American investment in the high-tech sectors of rival economies, citing sources and reports from the US Treasury Department and Commerce Department relating to the proposed regulation.

Sources close to the formulation of the new regulations said the restrictions will primarily be aimed against China and will likely focus on private and venture capital investments in the semiconductor, artificial intelligence, and quantum computing sectors

The Wall Street Journal noted that the reports did not specifically name countries which will be affected by the new regulations, nor did they single out the specific economic sectors which were being identified as being of particular risk to US economic security. However the reports indicated that the regulations will seek to target sectors which might increase the military capabilities of nations that rival the United States.

As one example, a report from the Treasury Department, noted that the new rules on foreign investment would focus on “preventing US capital and expertise from being exploited in ways that threaten our national security while not placing an undue burden on US investors and businesses.”

The new regulations have reportedly been in the works for months, while the US Treasury Department sought to craft the rules so as to be strictly focused on national security issues, while not being arguably designed to foster unfair economic advantages.

It will be interesting to see how a “rival economy” is defined. And it’s even more interesting to see decades of free trade propaganda abandoned overnight.

On the grand historic level, however, this is another bad sign for the survival of the USA as a unitary political entity. Empires that are forced to engage in capital controls in order to prevent money from being invested elsewhere usually are not empires that survive very long.

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An Ill-Conceived Policy

People are beginning to figure out that economic sanctions do not work, but they still haven’t figured out why:

Western sanctions against Russia are the most ill-conceived and counterproductive policy in recent international history. Military aid to Ukraine is justified, but the economic war is ineffective against the regime in Moscow, and devastating for its unintended targets. World energy prices are rocketing, inflation is soaring, supply chains are chaotic and millions are being starved of gas, grain and fertiliser. Yet Vladimir Putin’s barbarity only escalates – as does his hold over his own people.

To criticise western sanctions is close to anathema. Defence analysts are dumb on the subject. Strategy thinktanks are silent. Britain’s putative leaders, Liz Truss and Rishi Sunak, compete in belligerent rhetoric, promising ever tougher sanctions without a word of purpose. Yet, hint at scepticism on the subject and you will be excoriated as “pro-Putin” and anti-Ukraine. Sanctions are the war cry of the west’s crusade.

The reality of sanctions on Russia is that they invite retaliation. Putin is free to freeze Europe this winter. He has slashed supply from major pipelines such as Nord Stream 1 by up to 80%. World oil prices have surged and eastern Europe’s flow of wheat and other foodstuffs to Africa and Asia has been all but suspended.

Britain’s domestic gas bills face tripling inside a year. The chief beneficiary is none other than Russia, whose energy exports to Asia have soared, driving its balance of payments into unprecedented surplus. The rouble is one of the world’s strongest currencies this year, having strengthened since January by nearly 50%. Moscow’s overseas assets have been frozen and its oligarchs have relocated their yachts, but there is no sign that Putin cares. He has no electorate to worry him.

The interdependence of the world’s economies, so long seen as an instrument of peace, has been made a weapon of war. Politicians around the Nato table have been wisely cautious about escalating military aid to Ukraine. They understand military deterrence. Yet they appear total ingenues on economics. Here they all parrot Dr Strangelove. They want to bomb Russia’s economy “back to the stone age”.

I would be intrigued to know if any paper was ever submitted to Boris Johnson’s cabinet forecasting the likely outcome for Britain of Russian sanctions. The assumption seems to be that if trade embargos hurt they are working. As they do not directly kill people, they are somehow an acceptable form of aggression. They are based on a neo-imperial assumption that western countries are entitled to order the world as they wish. They are enforced, if not through gunboats, then through capitalist muscle in a globalised economy. Since they are mostly imposed on small, weak states soon out of the headlines, their purpose has largely been of “feelgood” symbolism.

A rare student of this subject is the American economic historian Nicholas Mulder, who points out that more than 30 sanctions “wars” in the past 50 years have had minimal if not counterproductive impact. They are meant to “intimidate peoples into restraining their princes”. If anything they have had the opposite effect. From Cuba to Korea, Myanmar to Iran, Venezuela to Russia, autocratic regimes have been entrenched, elites strengthened and freedoms crushed. Sanctions seem to instil stability and self-reliance on even their weakest victim. Almost all the world’s oldest dictatorships have benefited from western sanctions.

Whenever one’s logic is proven faulty, the correct response is to question the assumptions that underlie the syllogism. In the case of the repeated failure of economic sanctions, the false assumption is the beneficial nature of free trade. Sanctions intrinsically assume that trade is necessarily good for a nation in any and all circumstances, and therefore imposing sanctions that reduce the amount of trade will weaken the targeted nation.

This is a provably false assumption, as evidenced by the way in which economic sanctions have made Russia wealthier and stronger relative to its former trading partners. Economic sanctions don’t work because free trade doesn’t work.

This conclusive evidence of the failure of free trade dogma should inspire more economists to be skeptical of the claims of the comparative advantagists, but unfortunately, the history of economics suggests that it probably won’t.

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So THAT Didn’t Work

Sri Lanka’s plan for economic development, VISION 2025, didn’t even survive the summer of 2022:

Our economic policy, Vision 2025, is firmly embedded in several principles, including a social market economy that delivers economic dividends to all. In the first place we need to ensure we have a skill pool that matches the job market’s demands. Sri Lanka’s education system is being transformed through progressive and important policy reform: the minimum length of schooling has been increased to 13 years, while better education is being brought to rural areas through the Nearest School Is the Best School programme, and Sri Lanka is investing in more teachers and better training. Also, opportunities for vocational training in selected areas during school education will be introduced. Further, we have taken action to empower new and innovative ideas by strengthening the intellectual property regime in Sri Lanka. The plan for an “Empowered Sri Lanka” identifies the priorities of raising incomes, ensuring employment and housing for all, and improving the quality of life for all citizens.

The plan is delivering impressive results. The current government has created over 460,000 jobs and helped more than 260,000 families secure a home. Strong progress is being made on plans to bring opportunities to rural communities by building necessary infrastructure such as roads and bridges, connecting rural and urban areas and linking Sri Lanka’s economic hubs. A programme, Enterprise Sri Lanka, has been launched to encourage young and educated entrepreneurs, who will receive loans to start SMEs. The government has also invested in some mega projects, including the Colombo Megapolis constructions – to build a city of the future – and irrigation projects including the Moragahakanda-Kaluganga Dam, to generate green energy and provide water resources for agro-production.

For the first time, Sri Lanka has now been linked to the large ASEAN region by entering into the free trade agreement (FTA) with Singapore. To have struck its first comprehensive trade agreement (including not only goods but services and investment) with a country like Singapore, regarded as one of the most open economies, with high-quality institutions, is an important milestone for Sri Lanka, and a major achievement for the current government. The Singapore FTA is a strong step towards closer integration with ASEAN, and in fact was signed in the same month that Singapore took over the chairmanship of ASEAN for the year 2018. It signals to ASEAN that Sri Lanka is interested in the region, and signals to the world that it is serious about reform.

It only took FOUR YEARS for Sri Lanka’s embrace of free trade to lead to massive riots and politicians being forced to flee the country. This should cause even the most intrepid supporter of the Comparative Advantage concept to consider the possibility that Ricardo is indeed Retardo.

The American Century Debacle

As even its advocates now admit that the American Century is over, it’s worth looking back and seeing exactly what it was for which Americans abandoned the country founded by their forefathers:

What specific steps can the United States take, however, to reach Luce’s goal? We have already mentioned one of the steps – it must embrace internationalism over isolationism. But Luce provides us with other steps to follow. First of all, the United States must share its Bill of Rights, its Declaration of Independence, and its Constitution with the world—America’s principles of freedom largely rest on reverence to these documents, and although they may not be applicable to all peoples, other nations could learn quite a bit from them. Sharing them, however, is not enough; Americans must have a passionate devotion to the great American ideals embodied in those works for them to be effective – they must be devoted to freedom, the equality of opportunity, and a tradition of self-reliance, independence, and cooperation. By showing the citizens of the world that they are dedicated to the same ideals expressed in their documents, Americans will set an example that other peoples can follow.

Second, the United States must be willing to provide its industrial products and technical know-how to the world. In many ways, Luce writes, the United States is already doing this. After all, it sells its industrial products abroad and other peoples are consumers of the products of American scientific, artistic, and intellectual life. But the United States must be willing to do more than just export the products it creates. It also must be willing to provide the skills and training for others to create successful artistic, intellectual, and scientific products of their own. Luce guarantees his readers that such training will be needed and welcomed around the world, but only if Americans have the imagination to see it and “the sincerity and good will to create the world of the 20th century.”

Third, and related to the last, the United States must ensure that its vision of the international economic order is the dominant one—without that economic order, American prosperity could stagnate, and the idea of the “American Century” would fall flat. Pursuant to ensuring that its ideas of economy become (and remain!) dominant, the United States must be willing to defend a principle that Americans have long held dear: the freedom of the seas. Only by guaranteeing free trade among the nations of the world can this vision be fulfilled.

Fourth, and finally, Americans must become the good Samaritans of the world, sending out an “army of humanitarians” to feed the world wherever it is needed. And why not? This kind of action would, Luce seems to argue, foster good will among the nations of the world that need it most, and it is certainly possible in light of the United States’ overwhelming prosperity. Feeding the world is not simply something the United States should think about doing, either. Rather, it is the “manifest duty” of America “to undertake to feed all the people of the world who as a result of this worldwide collapse of civilization are hungry and destitute.” If the United States can spend millions of dollars on weapons of war, it can surely spend some money on food for the people displaced by weapons: for “every dollar we spend on armaments we should spend at least a dime in a gigantic effort to feed the world.”

It probably sounded very high-minded and inspirational at the time. Now, it sounds like a horrifically bad, obviously stupid recipe for disaster. Feeding the world and free trade… did Henry Luce never read the historical aphorism that once you pay the Danegeld, you will never be rid of the Dane?

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