Free Trade at the Bottom of the Garden

free tradeWhen Donald Trump announced the imposition of tariffs on steel and aluminium many conservative commentators – some of whom I suspect have never been within cooee of an economics text – became free-market economists overnight. I heard some bringing Adam Smith into the frame in support of free trade. Now it is true to say that Smith favoured ‘free trade’ but with more nuance than those who casually drop his name.

Like most people who studied economics I read some of Smith’s work but not much of it. The late, great economist Mark Blaug in his book Economic Theory in Retrospect spoofed the notional man who laboured through every word of The Wealth of Nations before revealing his view that there “probably never was any such man.”

That said, it’s a safe bet that Blaug read a lot more of Smith’s magnus opus than most economists of the past and infinitely more than the current breed. He makes the point that Smith supported free trade but also understood that “protectionist measures are justified…in retaliation against foreign tariffs.” There, you see, fair trade. Trump and Smith in furious agreement.

This is my view. Those who spout the free-trade mantra live in fairyland. They simply don’t know what they are talking about. There is no such thing as free trade between independent nations.

Free-trade deals find expression in long and complex documents. They are long and complex because of a litany of carve-outs and also because each side knows that the other is predisposed to cheating. And cheat they do.

Does anyone think that a US vehicle manufacturer setting up shop in Mexico doesn’t get a sweetheart deal from the Mexican government? Does anyone think that China operates in the best traditions of laissez-faire? And where are the purists in arguing for dismantling the plethora of barriers that every country puts around its agricultural sector? Let me repeat for the benefit of so-called free traders: there is no such thing as free trade.

What is the truth about international trade? On the whole, without doubt, it has been enormously beneficial. But, like many beneficial things, it should not be embraced willy-nilly or lauded beyond its potential bounty.

International trade provides scope for all sides to reap gains as specialisation increases the total quantity and quality of the output of goods and services. However, the distribution of these benefits between countries is indeterminate; in the sense that economic theory offers no reliable way of predicting the outcome.

Trade is disruptive. In each trading country it leads to the development and growth of some industries and to the demise and the decline of others. There are almost always attendant transitional economic and social costs on working families and communities. The size and longevity of these costs is indeterminate.

Trade produces a less diverse industrial base in each trading country than would otherwise be the case. The extent and consequences of this effect is indeterminate.

Trade can undermine national security by robbing particular countries of their capacity to produce strategically important materials and goods. The extent and consequences of this effect is indeterminate.

Let me say, in respect of this latter point, that every Australian should want the US to have a very strong steel industry out of which weapons are made to defend us from barbarians. Take note: According to the World Steel Association, US production of crude steel fell from 102 million tonnes in 2000 to 82 million tonnes in 2017. During the same period, Chinese production rose from 129 to 832 million tonnes. Be informed and wary or be starry-eyed and stupid.

According to the New York Times, tariffs on steel and aluminium “raise fears of a damaging trade war.” This sentiment was echoed around the world by the usual nincompoops and so-called economic “experts” who make a habit of being wrong about everything. Some facts are useful. And Trump, unlike the nincompoops and experts, knows them.

The US is the largest market in the world. Its merchandise imports outstrip those of any other country. Access to the US market is the key to riches and the world knows it. World Bank data for 2016 shows that the value of US imports was 42% higher than China, its nearest competitor in these stakes. The rest are far behind.

The US buys much more than it sells. According to the US Bureau of Economic Analysis, the US had a merchandise trade deficit of $810 billion in 2017. Of this $375b was with China, $151b with the EU, $71b with Mexico and $69b with Japan. And these countries, selling much more to the US than they are buying, are going to retaliate? Really, Trump isn’t trembling in his boots.

Consider this, for example. The EU imposes a tariff of 10% on imported US cars. The US imposes a corresponding tariff of just 2.5%. The Obama White House reported in May 2015 that “almost 70 percent of U.S. imports [in 2014] crossed our borders duty-free, but many of our trading partners maintain higher tariffs that create steep barriers to U.S. exports.” Threats of retaliation of any materiality are whistling Dixie.

There is a power imbalance and it is in favour of the US. Here’s an analogy. As a supplier, you might not like Coles or Woolworths putting their own brands on their shelves and buying less of your product than they used to. But you have to consider your options.

Trump knows exactly what he is doing. He has first-mover advantage. He is already using the tariffs as a bargaining chip with Mexico and Canada in renegotiating NAFTA. No country will want to take him on. Opposition will melt away. He is a giant among minnows – inside and outside the US.

  • David Fitzpatrick

    The only control we, as a nation, have on free trade is allowing (or not) our own citizens to import goods as cheaply as possible. Retaliatory tariffs prop up a particular industry’s workers (given it no incentive to be efficient) at an expense to everyone else. It’s not in our national interest to impose tariffs even when other nations are. If other countries are happy to continue to accept our debased currency while our economy is weakened, more fool them. If they recognise our currency is devalued, then they’re not so cheap and we start exporting again. Of course, our industries die through artificially high wages and tax before tariffs have an effect. Lower company and individual taxes, deregulate (scrapping subsidies for energy, childcare etc), scrap the minimum wage (or make it different for different parts of the country depending on housing costs), make most university positions employer-sponsored and we would have more industry than we can poke a stick at – tariffs or not!

  • padraic

    Trump is right. “Free Trade” is an aspiration rather than a reality. Western journalists may talk authoritatively about Adam Smith’s “unseen hand” but they miss the point that the hand is attached to someone who is calling the shots and who is putting their country’s interest first before those of America.

  • padraic

    except Australia, who came out second best in the 2000 FTA with the USA.

  • ianl

    Again, Trump stays one step ahead of the self-appointed MSM commentariat.

    As Peter Smith points out, “tariff” is a poker bid – the MSM are guaranteed to bid against him knee-jerk and lose face when deals are teased out beyond their ability to influence.

    Brussels is all agog with righteous, tighteous indignation but will not lift their own tariffs and quotas on imported agriculture or Chinese manufactured goods.

    Meanwhile, back at the Korean ranch, that which the commentariat were baying for a month ago (US/SK/NK negotiations) are now likely to occur. A full 180 is promulgated now by the MSM: Trump can’t be trusted here, he’s too inconsistent, he’ll have early Alzheimers next … and so on …

    No, I’m not pushing Trump per se, but rather the single-mindedness of the commentariat in demonstrating their absolute rock-solid irrelevancy. Fake news indeed.

    I’ve often wondered why we deserve these people.

  • peter prenavon

    Trump, was an opportunity taken at face value, by American workers.
    HE HAS KEPT HIS ELECTION PLEDGE, now there is an economic theory worth considering.

  • pgang

    Frankly Trump is exceeding even my expectations. I’m finally getting the message through to my circle of acquaintances that he is not the embodiment of evil. It’s astonishing how easily people are led by the domestic media. But simply sticking up for him and his record as president is enough to give people second thoughts about all the rubbish they’ve been spoon fed.

  • en passant

    Buddy. Pal. Sensible rational economist – where have you been hiding these past 50 years?

    When Whitlam began the destruction of Oz manufacturing with a vengeance two of my friends lost their businesses overnight when orders immediately ceased. 300 workers were now dole-recipients by a stroke of the Great Leader’s wand and the owner’s lost everything. One was a business begun by one bankrupt’s grandfather.

    In 1997 I wrote a paper (that was edited so badly that when it was published I asked for my name to be removed from it). However, for the record, it was entitled “In Defence of Strategic Industries” and the synopsis was: any country wishing to remain sovereign & free from foreign pressure must retain a range of strategic capabilities irrespective of the strict economic rationale for doing so. I cited metal refining (particularly Steel, Aluminium, Nickel, Copper & Lead), an oil refining capacity capable of supplying the nation indefinitely without imports, some heavy and a lot of light engineering facilities (including a capability to manufacture weapons {including armoured vehicles and artillery}, ammunition & specialist equipment, IT (both advanced hardware & software), etc.

    All gone today, but we have some great Masters of Engineering Barristas making coffee from imported beans on Italian designed machines.

    Let me finish with a cheering (true) story.

    An Asian acquaintance invited me to a business awards ceremony in which Senator Button would present him with a productivity award. The clothing & footware industries had been devastated when tariffs were removed. Mr. C (with the help of a grant and a low-interest loan from the government) had started a clothing manufacturing business that was succeeding. The bureaucrats were thrilled and the Senator extolled Mr. C’s efficiency as his factory had an output x3 the productivity rate of China & Fiji. Had the pollie-waffler not suspected anything? Did he not think to send in the consultants to learn the secret so this could be reproduced across the nation?

    Apparently not, as a 2-second glance out the window would have revealed a large fleet of vehicles used to deliver the raw materials to garage sweatshops paying $3/garment (about an hour’s work). Every out-worker collected unemployment benefits and was on the black economy, but by working all day and having their children work in the evening and their husband at night they could add $200 a week to their income.

    I cheered when the award was given … It was the right thing to do in celebrating pollie wisdom & Oz entrepreneurship …”

  • padraic

    You are right en passant. There’s many unheard stories like yours showing the adverse impact on our nation of industry destroying initiatives. A friend of ours (a top stenographer – do we still have them?) got a job with a clothing retailer in the early 1970s when they switched to buying from China because it was cheaper to buy from them than purchasing locally. The big boast of the economists advising Whitlam was that this would benefit consumers through lower prices. Our friend, as part of her job, attended a marketing meeting in order to take notes and write up the minutes. The main discussion was around what was to be the retail price of the imported low cost goods replacing Australian made products. One person suggested passing on the reduced price to the customer but was howled down on the facetious grounds that their market image as “quality” clothing retailer would be diminished if they stooped to what looked like price-cutting, so they kept the retail prices the same as before and just increased their mark-up on sales, rather than passing on Mr Whitlam’s economists’ promised savings. More bottom-of-the-garden stuff.

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