On the topic of international trade, the views of economists tend to differ from those of the general public. There are three principal differences. First, many noneconomists believe that it is more advantageous to trade with other members of one’s nation or ethnic group than with outsiders. Economists see all forms of trade as equally advantageous. Second, many noneconomists believe that exports are better than imports for the economy. Economists believe that all trade is good for the economy. Third, many noneconomists believe that a country’s balance of trade is governed by the “competitiveness” of its wage rates, tariffs, and other factors. Economists believe that the balance of trade is governed by many factors, including the above, but also including differences in national saving and investment.
The noneconomic views of trade all seem to stem from a common root: the tendency for human beings to emphasize tribal rivalries. For most people, viewing trade as a rivalry is as instinctive as rooting for their national team in Olympic basketball.
To economists, Olympic basketball is not an appropriate analogy for international trade. Instead, we see international trade as analogous to a production technique. Opening up to trade is equivalent to adopting a more efficient technology.
That was for the Concise Encyclopedia of Economics.
What leverage do we have to make our mercantilists, their captured regulators and the other’s non-economists act like economists? Periodic revolt is all I can think of.
Just like Brexit, it seems like one side is pre-occupied with claiming the other side is associated with a miniscule number of deplorables rather than asking themselves if they have missed something.
My problem is that I can’t call the part of my brain that is concerned about these things deplorable and dismiss all its concerns.
Excellent piece!
Maybe noneconomics have a point? Forget “tribal rivalries” for a moment, which I think is pejorative. Consider a local society where current patterns of specialization and trade are such that there is low unemployment, and people are generally happy. We can call this state of things “good”.
Now enter Schumpeterian creative destruction. What was sustainable is not longer so. The “good” patterns have dissolved into… what exactly? It might be good, but it might not be. In practice, it is likely good for some people and not others. It might be economically efficient, but is economic efficiency our definition “good”? Not necessarily – there are human ends besides efficiency. What is good for the economy may actually be bad for society.
The reason people get cranky about trade is that rather than exploiting comparative advantage (as economists are quick to insist), it is more about regulatory arbitrage. This is why people generally obsess about the “level playing field”. Advances in technology don’t poke that part of our brain as they are available to everyone
You have to understand what’s required to prevent creative destruction. It’s nowhere near enough to throw up trade barriers. You also have to make sure no new products are invented and that no new, better processes for making existing products are introduced. And that’s still not enough. You also have to make sure there are no fads or changes in taste. New styles of music must be forbidden because — what will happen to the jazz saxophonists who can’t adapt to playing rock guitar? Or rock guitarists who can’t handle hip-hop? Hats, gloves, and furs for ladies used to be enormous businesses that are now all but gone because of changes in tastes. That kind of ‘frivolous’ change simply couldn’t be allowed in your happy stable kingdom. If ladies buy so many hats and pairs of gloves per year, they must be compelled to do so indefinitely and their daughters must follow their lead after them. Otherwise economic patterns could change and some people might find themselves out of work.
Keeping creative destruction out of a human society would require a lot of coercion — it’s just not a recipe for human fulfillment.
Oh I’m not saying there should be no creative destruction, just that it isn’t necessarily good with respect to disruptions in previously stable trade patterns. Specifically, those disruptions that are caused by what I am calling regulatory arbitrage, rather than true competitive advantage. The problem comes from thinking human labor is a commodity like oil – it obviously isn’t.
But given the inevitability of creative destruction in a free society and the continual flux of patterns of trade and specialization that goes with it, why focus specifically on foreign trade?
And government regulations and other policies definitely are critical factors in competitive and comparative advantage. An efficient, well-run, non-bureaucratic, non-corrupt government is a major advantage for business — how could it be otherwise?
Foreign trade can produce an environment where the rules of our relatively efficient, well-run, non-bureaucratic, non-corrupt government are completely bypassed because the foreign governments don’t abide by those standards. For example, isn’t it somewhat strange that this country has a minimum wage, but as far as I can tell it’s perfectly fine to buy goods made by people earning far less? Isn’t it strange that this country has tough environmental standards for pretty much anything, but we can buy goods from countries that are enormous polluters, effectively exporting our pollution? How is this possibly fair to domestic workers and producers?
Again, I’m fine with true comparative advantage, e.g. it’s better to import mangos from the tropics rather than raise them in Pennsylvania. But if your comparative advantage is “willingness to pollute your environment into oblivion”, I have a problem with it when the same option is not available to domestic producers
“For example, isn’t it somewhat strange that this country has a minimum wage, but as far as I can tell it’s perfectly fine to buy goods made by people earning far less?”
No, absolutely not. Developing nations could not compete and grow their economies if their workers had to be paid at rich nation levels. To refuse to buy products from poor people in developing countries unless they are paid an American minimum wage is to condemn them to remain trapped in poverty. Such a policy is evil. The moving of literally hundreds of millions of people in China and India into the global middle class is one of the greatest things that has happened for humanity in recent decades. Policies you’re advocating would have prevented that from happening.
“Isn’t it strange that this country has tough environmental standards for pretty much anything, but we can buy goods from countries that are enormous polluters, effectively exporting our pollution?”
Again, no. Very stringent levels of environmental protection are a luxury that wealthy nations can afford and poor ones cannot (indeed it’s something that we didn’t used to be able to afford either). Forcing poor nations to adopt U.S. environmental standards would, as with high minimum wages, work to price them out of the global market and keep them poor.
Then it’s a luxury that should be paid by all members of society (for example, via higher consumer prices due to tariffs) than a few (dis-employed local workers).
And yes, I am aware that I am advocating policies that favor local workers over foreign ones. One can argue that this is wrong or cold-hearted, which is definitely reasonable. But if things like environmental standards or not using child labor are moral imperatives rather than simply luxuries, then banishing them here while encouraging them to thrive abroad is very problematic
“One can argue that this is wrong or cold-hearted, which is definitely reasonable”
Yes, wrong and cold-hearted, but it’s even worse than just that. It also would tend to make the problems you say you care about — child labor and environmental problems in developing countries — worse.
“But if things like environmental standards or not using child labor are moral imperatives rather than simply luxuries, then banishing them here while encouraging them to thrive abroad is very problematic”
Nobody’s encouraging them. But again, look at the Chinese. In a few decades they’ve joined the global middle class and become wealthy enough to invest heavily in their children’s education (rather than sending them to work in the rice paddies or a factory) and have become very concerned about cleaning up their environment:
http://www.forbes.com/sites/jackperkowski/2012/07/30/environmentalism-comes-to-china/#593fafe2dc43
Child labor is not ‘thriving’ due to global trade, it’s gradually disappearing due to global trade that has been making more and more people in the world wealthy enough not to need their children to work in order for the family to survive.
Oh I’m familiar with the line of reasoning and used to advocate it myself, I just don’t buy it anymore. Watching people get fired en-masse to hire a different set of workers in another country did it for me. The economic efficiency of it does not outweigh the human toll. Sorry :/
Human toll!? You understand the economic logic and so you apparently realize that policies you advocate would leave more people in developing countries in grinding poverty and sending their kids to work instead of school, and…what…you just don’t much care?
You saw one particular group of people (people who are, by global and historical standards, extremely well off) affected by trade and that out-weighs the life chances of a billion or two poor people around the globe?
Even though the very same people who you saw lose jobs are also going to be better off in the long run (and especially their kids and grandkids) for living in a globalized economy?
Would it matter to you that the protectionist policies you advocate might also lead to trade wars, worldwide economic crises, and possibly real shooting wars (as in the 1930s)? Or is that also not particularly important?
The chief problem that people in grinding poverty have is that they have crummy institutions. Besides I’m not even against trade or technology, my position is simply that there are fairness implications with trade, so conceiving of trade simple as a “production technique” is inadequate, especially between nations with very different regulatory frameworks. Trade is good, throwing American workers under the bus for the sake of efficiency may not be. People are not commodities.
(I’ve made my point a few times and heard your quite clearly, for the sake of our host I’ll give you the last word)
“The chief problem that people in grinding poverty have is that they have crummy institutions.”
True. But trade makes living under bad institutions more tolerable. And trade introduces new connections, ideas and pressures for improving those institutions.
“Trade is good, throwing American workers under the bus for the sake of efficiency may not be. People are not commodities.”
Of course people are not commodities. But saying so is not a magic incantation that can justify superficially appealing but destructive policies (and especially when the bad effects fall most heavily on the world’s poorest and most vulnerable).
Creative destruction means that individual businesses and entire industries are rising and falling all the time, which inevitably results in some lost jobs and closed operations. And there’s nothing special about foreign competition vs domestic competition vs new technologies vs changing tastes as a cause.
What should we do for workers affected by such changes? A safety net is reasonable in the short term. Beyond that, the best thing is a dynamic economy that offers new opportunities for the displaced. But throwing sand in the gears by putting up trade barriers is just not the way to go.
Cf Warren Buffett: http://fortune.com/2016/04/29/warren-buffett-foreign-trade/
As long as each marginal trade was pare to positive there would be no issue. However, we are trading with a China who has a clear industrial policy whereas we are subsidizing capital to buy houses and consumer goods and have a central bank to facilitate debt to China. So I fear we are dismantling our factories to buy houses filled with Chinese goods produced in factories paid for in our inflated dollars backed by real debt. I don’t get economists who can see the problem but then talk about trade like it doesn’t exist.
I think there may be other roots.
Preference for trade within the network (local vs foreign) might be based on an informal understanding of friction, the benefits of repeated games, reputation, etc.
Preference for exporting vs importing might be a moral view about personal productivity vs consumption (esp. wasteful consumption).
The competitiveness piece? There is a sense in which spatiotemporal structure actually matters. Borders matter. They certainly do in biology. It might not be your tribe… but they are your neighbors. Plant gardens, invest, and import, because as your community prospers, you too will prosper.
Not very discerning. It just might be noneconomists care about jobs as much as goods, liabilities as much as cost, risk as much as value, income as much as expense, wealth as much as consumption, distribution as much as production, and neighbors more than strangers. Families, neighbors, and nations can be considered tribes, but that doesn’t mean you can dismiss them, but must understand why they exist and are important, otherwise you risk dismissing what is more important than economics.
Also while some do view trade as tribal, more view non trade as tribal, and when people save in currencies other than their own, they are not trading. It is not savings rates that effect imbalances, but savings rates in currencies other than their own. It is only saving in currency denominated assets that have this effect on exchange rates and cost jobs, but economists always assume full employment.
If economists got out of their bubble and worked in an IT department, they would easily notice the tribalness there by the non-American staff.
Will economists ever eat their own dog food?
It appears you may have minimized the Trump threat here in 2016. Realize some of the populism against the last 30 year neoliberalism elite order is it is all the politician fault that outsourcing occurred. It was all Bill Clinton fault and nothing to do with the Koch Brother are literally outsourcing production. (Again listen to Trump rallies.)
Are you going to write the pro-NAFTA story like Brad Delong?
Even if I were legally allowed to, I don’t have time to read or understand trade deals.
But I do understand that means they don’t pass the Ron Paul test: free trade takes one sheet of paper that starts with “There will be…” and ends with “…free trade.”
The term “tribal” seems to have come to carry the negative connotation of exclusion of the “other” and when used in discussion of international matters to connote xenophobia and disapproval. A neutral use of the term “tribal” would simply describe an acknowledgement that one’s own self-interest at times conjoins (for whatever purpose) with that of certain others. I thought that economics was all about people acting in their own self-interest (or not….)
Also, isn’t there a difference between the overall economic concept of international “trade” and the real-life commerce that goes on pursuant to “trade agreements”? When economists address discuss international trade, the assumption seems to be that all parties are maximizing productivity, that there are no impediments, and that therefore and obviously, arguments against “free trade” are foolish.
But isn’t it true that, for example, the 12-party TPP trade agreement has over five thousand pages of technical terms, qualifications, restraints, obligations, recognitions (e.g., IP), and the like?
You cannot arrive at an agreement among 12 self-interested parties without making compromises that may likely have a negative effect on one or more of them. To be against a 12-party trade agreement (rather than bi-lateral or among fewer parties) is not necessarily to be anti-free trade.
Nor is it necessarily anti-free trade to be for REnegotiating a 23-year old trade agreement, like NAFTA. The relative economic situations of the parties have obviously changed over the course of 23 years, and it’s merely common sense to restructure & adjust an agreement periodically. That it’s never been done is not a reason to not do it ever.
To use the Olympic basketball analogy, current multi-party international trade agreements are as if, in any one game, the U.S. team has to wear 10-pound ankle weights during the first half, and the opposition has to play with their left arms tied behind their backs during the second half. Some players will do fine, some not so well, under their respective handicaps, and each team will still score points, but neither team will score as many points as they would were they not handicapped at all.
That’s not “free trade.”
Well put. But is it possible to convince those without economic training or an economic outlook NOT to be tribal when it comes to trade? That seems to be the really hard problem. For example, I live in Ann Arbor. The biggest business here is a university that sells educational services on a global scale (there are large numbers of foreign students). Toyota and Google have facilities here as do a number of biotech and software companies. All of them have a global outlook. The (generally well educated) populace would be horrified to be thought of as xenophobic. And yet, they just love all the ‘Buy Local’, keep-the-money-in-the-community nonsense, and simply cannot grasp the contradiction even when it’s pointed out to them. It’s discouraging.
It seems reasonable that protectionism may reduce economic inequality. Does anybody know if there have been any studies that address this issue?
I’ve come to conclude that the discussions of international trade qua international trade could almost always be re-framed as domestic trade issues. Here’s what I mean.
Economists are correct when they say we argue, for example, that increasing trade, over the long run, tends to reduce bad things like child labor and environmental damage in poor countries.
However, Economists are patently wrong to conclude based on some sort of vulgar utilitarian grounds, that the net outcomes are always positive or the cost is worth the benefits.
This is where economics falls down. We have pretty good support for the proposition that “there will be net gains from trade”. We hand wave, a lot, when it comes to the level and distribution of those gains.
Oops… meant to take out the first paragraph of that. What I mean is suppose you imagine alternative scenarios in which you’re engaging in domestic trade. In one scenario, you trade with someone pretty much like yourself, maybe you’re neighbors and you get along. In another, you trade with a person you think is somewhat scuzzy. But you observe the scuzzy person’s kids appear well fed when they start appearing one day at your kid’s school. In a final scenario, you trade with a person you think is really scuzzy. His wife is his receptionist, and you’ve noticed him smacking her around a couple times. Once, he interrupted a business conversation to proselytize to you. His kids are jerks. He sinks all his money into home security systems, his gun collection, and private eyes to follow his wife around.
Which guy do you want to trade with? Does it matter to you that you might get slightly better terms of trade with the wife beater than you do with your neighborhood buddy? How much should it matter?