1. The term "free trade" is an ideological construct. It's always hard to debate such constructs since the point of their construction
is to (a) conceal rather than reveal and (b) as such they carry little evidence with them.
I see 'free trade' as trade unencumbered by tariffs or tariff-like barriers. I don't think that's an "ideological construct." There's sometimes a lot of crap attached to the term and that's usually ideological construct.
The reason for foreign trade is to exchange imports for exports. That's the only reason isn't it? It's a market activity. It's not foreign aid. It's not make work for domestic workers. It's not welfare for corporations. It's not war by some other name.
The source of foreign trade is a country's surplus capacity or production beyond that used up by a country's economy.that is exchanged, ultimately, for goods not produced at home or produced at home at a price higher than that of imports.
Placing a tariff on an imported product is equivalent to giving domestic producer a monopoly or partial monopoly over the domestic market. It gives him pricing power beyond what he would get from the market without the tariff; it gives him a higher margin without investing to get it. The tariff also takes money out of the citizens' pockets and gives it to the government; the citizen doesn't get to spend it, save it, or invest it.
How am I doing? Any ideological construct? Straight description here as far as I can see. So far, the benefit of free trade is lower prices (higher standard of living) and greater savings and investments.
Lesser developed country exports (eg) food or textiles to the west and with the foreign currency earned, now may import things it doesn't produce itself, and make investments it couldn't make before (because of the new profits and savings), and reduces its (eg) 40% unemployment rate to 35%.
The west imports the food or textiles. Employment and profits rise in the importing sector and fall in the food or textile making industries momentarily while they switch to higher margin products or diversify to other sectors and investments are made to enable the switch - and some may go out of business. And of course, the west exports some goods to the now more prosperous lesser developed country.
In both cases standard of living increases. This is a 'virtuous circle': The new trade, investments and improvements in the lesser developed country allows for a slightly higher general price level thus allowing investments not possible before because they couldn't be profitable (no point in opening a scooter store if there's not enough money around for folk to buy scooters with). The west has higher profits in the imported goods and higher margin products, greater savings and investments which lead, there also, to higher general price level and new investments made which were before not possible.
That is a general description of trade in a market not encumbered with tariffs and tariff-like barriers. I've stayed away from ideological constructs, so far. I cribbed the whole thing from Adam Smith who was dealing with an ideological construct - the mercantilism of his time, which not surprisingly, is not much different from the mercantilism of today.
The clearest example of that is Japan which has sought to protect its domestic markets from foreign trade and expand overseas market share no matter how much difficulty this causes its citizens - difficulties show up in high priced goods, crappy housing, huge government debt, and a banking crisis.. It has these difficulties despite a huge trade surplus and enormous savings.
Mercantilism is not just a problem of international trade - it's also an internal problem because licensing and permitting, or general government direction leads to protection of internal businesses from internal competition and because there are fewer market participants the market discovery process of finding the optimal price is less efficient: fewer pricing points, less likelihood of a local price, more likelihood of successful price fixing collusion, etc. This reaches a climax in some lesser developed countries where it's almost impossible to start a new business, legally.
The ideological argument in favour of mercantilism, protectionism, dirigisme, whatever we may call it, is always cast as an attack on free trade: it's to protect local businesses and workers against __________ [fill in blank]. the best that can be said for it is that its a short term fix for some local difficulty, usually that of a specific interest. But it doesn't protect local workers long term, has a poor result in business formation.
A more sophisticated argument against free trade has to do with balance of trade deficit. As if some country or region was a business or household, it's said that we in country x are buying more from country y than it is buying from us. And it's implied this is a Bad Thing. What it means is that they have more of our money than we have of theirs and furthermore, it's said this has Been Going On For Years and that's an even Worse Thing.
But if they want to use that money of ours they have, at home, then they'll have to use ours to buy theirs and the values of the currencies will readjust relative to each other and their exports to us will become more expensive until some domestic business sees an opportunity in import replacement. The largest, most vigorous economy in the world might run a trade deficit for years until other economies develop enough to make the terms of trade more even. If the largest economy is not going to see certain sectors, where less developed countries have a natural advantage, hollowed out with closed businesses and unemployment, then it will have to see these sectors either lower their costs or produce higher value, or new, products.
The above implies that will be change for developed and undeveloped world: that some will be thrown out of work and others will gain work and others find new work. Industries and sectors do disappear to be replaced by others and there is precious little governments and societies can do to stop this, In the developed world we have enough wealth to provide unemployment benefits and retraining programs. The extreme free marketer will argue that ameliorating the negative effect on individuals of unemployment, or financially supporting industries that are struggling only extends the period of discomfort. He can make a pretty good case but in the end he'll say, if that's what you want to do, pay for it with higher taxes, lost productivity, slower growth, lower standard of living, etc: it's a democracy, after all..
The undeveloped, lesser developed, world doesn't have the wealth for very much in the way of unemployment programs etc and just has to adapt fast to avoid large difficulty.
I think large corporations setting up in lesser developed places, are generally beneficial. They pay near the top of the local wage scale and it's new income and investment they provide and there are usually local businesses that develop from their presence. They can also have a depressing effect on local industries since they can make local products more expensive than imports and this is particularly noticeable in places that don't have a big commercial tradition. On the other hand they may also be the foundations of an industrial base as in Taiwan and Korea.
Most places in the world where folk are worse off than 20, 30 years ago are victims of civil and proxy wars or repressive, kleptocratic governments not sharp practices by corporations. Large corporations going to those places should tread very lightly. And sometimes don't.
Where multi nationals often get into trouble is in lesser developed places that have governments wanting to build large projects. Sometimes they play into the local kleptocratic ethos or use their own governments as high pressure sales agents. But these aren't reasons not to pursue free trade. They are reasons to have laws regulating business practises.
The worst aspect of globalization, because it's done so badly, is the fundamental money market - the price of money - interest rates are controlled by central banks and so market can't make gradual, continuous adjustments in the fundamental cost of investing or doing business. Changes are sudden, even catastrophic, as a result because central banks don't know what the interest rate ought to be anymore than you or I do. "Deregulating" money markets in such circumstances is absurd - see Argentina, Japan. See the stock market crash and recession of the last two years - gone on far longer than necessary to adjust inventories and wind down the sick investments. Every one in developed and undeveloped world suffers from this. |
