The Vexations of Free Trade

I meet two groups for coffee each week. One predominantly left in its political orientation, the other conservative. I have almost continual disagreements in person and online with those in the first group (it gets wearing) and am in complete agreement most of the time with those in the second. You will notice I said ‘most’ of the time. It was evident at a recent meeting that free trade divides us. I find this is the case generally when I talk with conservatives, particularly with those of a classical-liberal bent.

I used to be a free trader. David Ricardo set out the script in 1817. Adam Smith had already demonstrated that specialisation and trade was beneficial. Ricardo went further by showing that trade was (almost certainly) beneficial even between two countries where one could produce all tradeable products more cheaply. Economist Robert Findlay described Ricardo’s theory of comparative advantage as the “most beautiful result in all of economics.” It has had a powerful influence on free-market economists ever since. And, by extension, on the views of conservatives/classical liberals more generally. It has become totemic. Free trade is good. Protectionism is bad.

I explained my revisionist views in two Quadrant articles (The Debate That Never Dies and  The Deplorable Victims of Free Trade). Why go over it again? I would like to make it simpler in order to bolster my case; and, as a longshot, to persuade free traders to think again.

Take two primitive Island communities separated by a body of water. Each grows sweet potatoes and catches fish. Sweet potatoes and fish make up their staple diet. One community is relatively better at growing sweet potatoes and the other at catching fish. The communities decide to trade freely. The more the communities specialise and trade the more they produce. Perforce, free trade inexorably leads one community into producing only sweet potatoes and the other only fish; which they share between them.

The communities become richer (in sweet potatoes and fish). However, they notice other disquieting differences. Each community becomes more uniform. Sweet potato growers can no longer share stories with fishermen and vice versa. They don’t have the same enriching cultural cross currents. Also, some sweet potato growers are not adept at fishing and languish out of work. The same thing happens in the other island to fishermen not adept at growing sweet potatoes. There are plenty enough sweet potatoes and fish to provide for those out of work but it is observed that they grow surly and are often depressed. Drinking of the local brew increases.

One day a giant storm strikes, destroying all fishing boats. Those on the island specialising in fishing all die of hunger for there is no means of getting sweet potatoes to them. They had put all their eggs, so to speak, in the one fishing basket. It would have been better if the communities had compromised. Some trade. Some specialisation. But not free trade and complete specialisation.

To the lesson of the tale. Trade deals should not be struck solely on narrow economic grounds. Industrial diversity is important for a nation’s cultural life and can be vital for national security. Specialisation can leave you vulnerable when trade is interrupted. Think of war. Trade can be disruptive and put people on the scrap heap. The human cost of displacing people from their jobs should not be summarily dismissed as a cost of doing international business. It must be taken into account.

None of this is to say that international trade is bad. It is unmistakably good and has undoubtedly contributed mightily to the prosperity of most nations of the world. But free trade is not good. It is bad. It leads to what might be called ‘overspecialisation’; particularly now that international transport costs are relatively small in the scheme of things.

Overspecialisation undermines the integrity of the nation state on which our culture and security rest. Fortunately, there is still no such thing as free trade in practice. All countries retain some level of tariffs and other trade barriers. Take the North American Free Trade Agreement (NAFTA). It runs to about 1000 pages. It is a contradiction in terms; free trade with many caveats. It follows that a renegotiated NAFTA with different caveats, tilting the way Donald Trump would like, could be as equally misnamed free trade as the current version.

Trump has been roundly criticised for going against the free trade totem. This is nonsense on stilts. America imposes lesser trade barriers than those of its trading partners. They are the ones offending against freer trade. Or, to turn it around, they are the ones being more sensibly alert to the need to protect their own industries. It depends on how you look at it to determine who the bad guys are.

To sum up. All of the costs, as well as the material benefits, of freeing trade should be brought to account. Only when there is overall net benefit for its own citizens should a country strike a deal and lower its trade barriers. I find it hard to understand why conservatives would disagree with this. But if they do I will continue to disagree with them.