Tuesday, June 22, 2004

Free Trade or Managed Trade?

What are the advantages of free trade? A simple question really, but the wrong answer can be devastating.

The wrong answer is that it enables us to sell to other people and make profits. Well of course some people will be able to do that but many others won't. Not only that but there will be other people who will actually suffer as they find that what they used to sell at a profit is undercut by better producers. Expanded markets are a byproduct of free trade (as is greater domestic competition) and it is very much a game of swings and roundabouts.

The right answer is that it enables us to buy from other people, and so have a wider and cheaper range of products. Thus our living standards improve as we can better satisfy our needs, even if it is on the same amount of money.

To see why this seemingly petty distinction matters, read this article about British second hand clothes reaching Zambia. Now are the Zambians better off as they can buy (presumably better) clothes at a fraction of their old price and so free up their money for other uses or are they worse off because they now have empty factories? That's why this answer matters on free trade.

However this is not about making Zambians needlessly pay more for clothing themselves. This is about us. How should we respond to, for example, Germany subsidising East German coal miners (presuming we don't pay towards the subsidy)? Either we could look at our dwindling coal miners and be slighted at the German's pushing our coal miners out of work. Or we could re-employ the out of work miners somewhere else (some of those jobs we seem to need immigrants for) and quietly thank the Germans for subsidising our energy consumption.

Tarrifs are not so easy, but again the issue is crucial. If we believe that the primary benefit from free trade is that we can sell to outsiders then we "should" only let down our tarrif barriers when they let down theirs. However if we believe that it is our consumers who are the primary beneficiaries then keeping up our tarrif walls is pointless. Sure we'd like other people to let us sell them more stuff but it is a secondary benefit (besides if they are concentrating more of their labour and capital on satisfying domestic markets it cuts down on our domestic consumption).

It also eliminates the need for free trade agreements, free trade areas or customs unions. If anything by holding out for concessions they block access to all these great other goods.

This article from the Mises institute makes roughly the same point.

I do accept that there may be other, essentially non-economic, reasons for tarrif walls - but it is useful to clarify why free trade is good before we start rushing into sacrificing sovereignty on its altar.


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