Conservatives and Free Trade

In the last Republican debate it became very clear that Republicans and conservatives do not all march to the same Gene Krupa. Republican presidential aspirants espoused widely divergent views on many subjects notably Syria, immigration, tax reform, and free trade. To note these differences is not a bad thing and knowing we have healthy debate means some thought and effort is going into important policy issues.

Today I want to focus on the debate about free trade. In the good-old-days of a decade ago or longer, I thought that conservatives favored free trade while modern liberals and progressives did not. You could count on Democrats to be against free trade agreements as part of support for labor and environmental issues. Republicans in contrast liked the efficiency and growth that came from expanding capitalism beyond ones borders.

But those simple differences evaporated. Knowing one’s party does not guarantee a position about free trade and free trade agreements. So I thought now is a good time for me to step back and says some things about free trade. The first thing to note is that free trade suffers from the same language inadequacy as say, free markets and free Internet. In all three cases there is no such thing as "free". In the latter case building and operating an Internet takes labor and capital and ingenuity. So someone has to pay for it. In the case of free trade and free markets, they only exist in the minds of economists and are less a real event or outcome and more a desirable though unattainable goal.

It’s like you wanting to fit into your wedding suit from 1969. That suit was long ago donated to some important charity but you have black and white photographs of you smiling and being totally unaware of what the next 46 years would bring in terms of large rib-eye steaks, mounds of mashed potatoes with gravy, and huge servings of apple pie-a-la-mode. But there is no reason that you should not strive to fit into a suit that resembles that one of long ago.

And that’s how I feel about free trade and free markets. Real markets have lots of warts. There is always someone or something that interferes. Find any book called "Introduction to Microeconomics" to remind yourself of all the assumptions that need to be met to yield the results of free markets. For one thing, no business firm can monopolize the market. For another, the prices and qualities of most goods and services must be known by the many buyers and sellers. And too, you don’t get the competitive outcomes if the Department of Labor tells the companies how much to pay the workers.

You can diet all you want but you are not getting into that old suit and you won’t have hair where hair does not grow anymore. But you can get close and the attempt to get closer can bring favorable results. Touching toes that you have not seen in decades is definitely a plus.

Economists prefer freer markets because the closer you come to having more competition and fewer trade impediments, the better chance you have of allocating resources in a way that benefits us. Free markets and competition drive prices to levels that give firms a normal profit and return on investment. These prices come closer to resembling the costs of production and thus do not waste precious resources. You pay pretty much what the stuff is worth. If it takes $25 to make a pair of yoga pants, then the market price of a pair of yoga pants is that $25 plus a normal profit for the firm that goes to repay the time and trouble to buy the materials, sew them, advertise them, and so on. A government that demands that firms price yoga pants at $1 per pair is going to mess up the supply chain. 

I can hear some of you closing your browsers and complaining – Come on Davidson, the world doesn’t work that way. Firms rip us off and the government adds layers of costs to protect workers, the environment, and Donald Trump’s hairdresser. And advertising – don’t get me started.

Notice that I said that there is no such thing as free competition. One firm recently tried to price a drug at hundreds of times what it cost to produce. Firms sometimes use a lack of competition to get much higher than normal profits. Lack of competition is what allows the worst outcomes including a horrible allocation of goods and services. 

We will never get rid of all barriers to competition. Corrupt firms will hide information and cheat in myriad and clever ways. Corrupt governments will use tax power and regulation to help their powerful friends gain advantages or to prostitute themselves for votes. But that doesn’t mean we can’t recognize all this and still promote freer competition.

The same goes for free trade. Free trade sounds terrifying to some people. Some say that Haiti cannot compete against the US. If we ask Haiti to reduce tariffs on corn, beans or wheat, you will hear the protests all the way to Washington. But please explain why the world has been moving towards freer trade since World War II. The World Trade Organization now has 161 members that agreed on major reductions in import tariffs and on other policies designed to reduce protectionist trade barriers. Or maybe you want to talk about the European Union’s 28 members who operate in a virtually single market zone where once there was a complex of trade impediments and tariffs. Freer trade and competition work and countries vote for it.

Also part of the real world beyond the corruptions I discussed above are real policy tradeoffs. Every country has a long list of goals that include ways that government intervenes and promotes growth, security, fairness, environmental quality, poverty, and many more. In the real world we recognize the benefits of freer international trade but have to compare those advantages to gains coming from pursuing other goals. It is no secret that the WTO has been working without agreement on its latest round of negotiations since 2001. The closer we get to reducing remaining trade barriers the more we seem to encroach on other national goals. It does not help that the world’s economy has been weak since 2008 – struggling countries care less about gains from trade and more about keeping the food on the table.

It is easy to see why a free trade agreement is so controversial today. Free trade is the right thing to do but it appears to jeopardize other goals. Some politicians will see an opportunity to accept a watered down trade agreement if it gives them the chance to advance other policies. Witness the 2000 plus pages and 30 chapters of the latest proposed agreement (TPP). It is ironic that those who often hate free trade agreements are so willing to sign one now. Equally ironic is that those who usually love free trade agreements see what is going on and don't want to be part of it. I guess the truth of the matter as it relates to free trade is what is contained in those 30 chapters and 2000 pages and if the trade-offs are worth each ounce of free trade advanced. It is okay if free trade Republicans decide that this agreement does pass muster.