Category Archives: Free trade

“Mr. Gorbachev, give us this wall”

Throughout Trump’s campaign he repeatedly promised that “we” would build a wall and that Mexico would pay for it. The details of that boast were conveniently omitted. But class is now in session and the homework is due, so at long last we have been made privy to his “secret” method of getting Mexico to pay for this wall: tariffs. Trump plans on imposing a 20% tariff on imported Mexican goods coming into the US. The proceeds are earmarked for paying for said wall. There’s just one problem with this little scheme of course: it won’t work, or at least not the way Trump imagines. In other words, as with all government actions, there will be unintended consequences. One of the central tenants of economics is that incentives matter. Closing a door just means now the window doesn’t look so bad. Like rats from a sinking ship, there are numerous routes to avoid the tariff. To offset the tariff Mexican exporters may raise prices, which of course means US buyers will shoulder the cost (although magically increases in minimum wage never incline one to increase prices). But higher prices mean US buyers may then opt to forego the purchase or to seek alternative goods; the net effect being no tariff earned and decreased sales for the Mexican company employing, you know, Mexicans (homework assignment: what effect might increased Mexican unemployment have on the demand to enter the US looking for work?). Or if the Mexican company decides to absorb the cost then that means they’ll either have to cut costs by potentially scaling back their work force or slowing the rate of hiring – all of which puts more Mexicans out of work (again see homework assignment above). The more you turn up your stereo to drown out your neighbor’s music, the more he does likewise in a perpetual game of one-upmanship until you both go deaf.

The immigration “problem” is one of positive feedback. Actions designed to decrease an effect actually make it grow. The irony here is that Trump of all people doesn’t see the problem. He is quite fond of blaming China for harming the US economy and putting people out of work by flooding the US market with cheap goods. However, he fails to see the US has been doing the exact same thing to Latin America for decades. That area of the world is less developed and so depends much more on agriculture production to support its economy. Any factors (such as cheap imports) in that agricultural market will have an outsize effect in that region. The US has a long history (since the depression) of agriculture subsidies to US farmers. Subsidies lower the cost of US agricultural products, allowing US farmer to export heavily into the Latin American market where local farmers can’t compete. That darn NAFTA! Yes, NAFTA enabled cheap imports in both directions. These imports had the obvious effect of putting them out of work whereupon they are left with little choice but to move to where there is a demand for low skilled labor – the US.

The inconvenient truth is that the solution to most of the immigration “problem” is to simply end all agricultural subsidies. But no, we’d rather scratch our heads as to why so many keep coming here, shrug our shoulders, and then set about building a wall to keep “them” out. Farm subsidies have become such a political lighting rod in this country that it is actually easier to subsidize foreign farmers (the US sends subsidies to Brazilian cotton farmers!) than to scale back subsidies to our own farmers.

If Trump really wants to stem the tide of Mexicans entering the US he needs to make Mexico great again – great enough that their economy becomes a magnet to all expatriates, drawing them home to where the jobs are. Perhaps Carrier should build that Mexican plant after all.

On Brexit

The recent vote to “Brexit” the European Union in Great Britain has provided an opportunity to cast light on the hypocrisy of one side and the irony of the other. The “leave” (pro-Brexit) camp taps into the natural human disdain of involuntary control. From willful toddlers to headstrong teenagers to entrepreneurs – no one likes being told what to do. This instinct is normal and natural. The problem occurs when one conflates ones own sovereignty with the sovereignty of the “my”, e.g. my town, my city, my state, my country. People erroneously view this “regional sovereignty” through the lens of a primitive territorial instinct that says everything I can see is “mine”. This territoriality or regionalism is hypocritical at its best and downright evil at its worst. Regionalism purports to trump the sovereignty of the individual by placing the interests of the collective above those of the individual. In short, the many tell the few what they may or may not do. Now, were these constraints restricted to bans on murder, theft, and rape there would be no complaints. But it does not stop there. The regional collective (city, county, district, state, nation, or treaty union) dictates rules over every minutiae of life.

Every nation-state that seeks independence is guilty of the deepest hypocrisy, as they invariably see no problem leveling the same type of control on their own smaller political sub-units. So yes, seek independence, but be prepared to give it as well (cough, Northern Ireland, cough, cough).

The stay (pro-EU) camp is actually host to two types of irony. The first is the credulous acceptance that a large bureaucratic body is needed to achieve an end (free trade) that could also be achieved were each member state to simply do nothing to interfere with the free movement of goods. Which is easier: employ a thousand men to drain the lake you are sitting in so that you might be dry, or, simply get out of the lake?

The second irony pertains to their secondary goal – human unity. The Centralizers (anywhere) believe they are an enlightened sort whose high-minded goals of inclusiveness, equality, and community stand in opposition to backwards notions of nationalism or individualism. This conceit leaves them blind to the fact that centralization is itself inimical to their desired goals.

Forcing people together into larger autarkic unions strengthens those unions in a way that leaves them more capable of waging war (indeed, Turkey shot down a Russian jet last year knowing full well the EU would back it up in a potential Turkish-Russian conflict). Numerous, small groups are too weak to do this. Their interdependence through trade guarantees peace; the hand and the arm need each other, it would be folly for one to destroy the other. Counter intuitively; the freest individual is likewise the most dependent individual. No man is an island, as they say. We rely on our fellow man, through trade, to provide all that we need. Large trade unions like the EU or NAFTA are superfluous. Trade is the lifeblood of human civilization and existed long before such pan-national agreements. Indeed these agreements, rather than “freeing” trade instead manage it – to the benefit of the political and economic elites within each territory. They transform former explicit trade barriers into new regulations. These regulations stifle trade and growth by extinguishing the entrepreneurial flame before it has a chance to flourish. The EU has 109 regulations governing pillows; Europe is in economic decline. Coincidence?

Centralization foments a unique kind of conflict. Not allowing or creating barriers to leaving the union can do nothing but foster resentment. In the past (and present) it has lead to wars. Fortunately today in the case of Brexit it has only risen to the level of schoolyard insults. Heaping ultimatums or derision on the party attempting to leave (as many in the EU are now doing to Britain) smacks of the sour grapes hurled by a jilted partner when a romantic relationship ends: “hey baby, you’re nothing without me!”

Decentralization of authority achieves the goals of peace, prosperity, and equality because it depends on trade. Two people that but for ideological or religious reasons would never have cause to interact are more than willing to ignore those differences and engage in the “just business” of trade. Once a trade relationship is established, a human relationship will soon follow. Trade humanizes the foreigner, stripping away their “other group” title leaving behind only the person. Trade then has the power to expand both our wealth in things and in each other.

The path to uniting humanity is more, not fewer, groups. We should be promoting the break up of states, not their mergers. If all countries could dispense with this Trumpian siege mentality that implies a country can’t be “great” unless it is also autarkic, the world could achieve the peaceful utopia that the one-world centralizers dream of. Spontaneous order works in Nature. We are a part of Nature. It will work for us as well if we can make the right choice to the only question that matters: shall our relationships be governed by force or choice?

Trade Balance

Last week’s article touched on seen benefits and unseen harms wrought by political intervention into people’s lives. This week we pivot to a somewhat new corollary of that principle, that of imagined harm. This is harm that can’t exist but because of a fundamental ignorance one has an expectation that it will occur. Ignorance of economics leads to a broad range of bad predictions and decisions and even businessmen (e.g. Donald Trump, Warren Buffet, etc) are not immune to such ignorance. Despite Trump’s repeated protestations that “we” (America) are “losing” because of the presence of trade deficits with some countries (notably Mexico and China) there is simply no cause for concern. The current trade deficit between the US and Mexico is $58 billion. That means that Americans purchased $294 billion in goods from Mexico but Mexicans purchased “only” 236 billion in US goods.  In Trump’s mind (and many others) this constitutes a loss. Well if that is so I guess I had better stop buying my groceries from Publix – my family’s trade deficit with Publix is thousands of dollars every year! Yes, I would be much better off if I grew all my own food, than my trade deficit with Publix would be zero. Do you see how ridiculous this sounds now? So to solve a trade deficit Americans should pay even more for the goods they want? This is supposed to somehow compel the Mexican government to coerce its citizens into buying more US goods? How can any government make its people buy more from a particular country? Countries are not monolithic entities; they are composed of individuals.

Trade is not a zero sum game where one side “wins” and the other side “loses”. Both sides gain or profit from any trade in the sense that if either party did not value the thing they got more than the thing they gave up they would not have engaged in the trade. Trump and his ilk view trade like a game of Monopoly because they fall for the fallacy of anthropomorphizing countries into single actors and then distill all trade down to a single good: money. So in his mind the US gave Mexico $294 and Mexico gave the US $236 – as though they were just swapping currency and nothing else. Yes, that would be a loss, but that is not at all what is going on. It is an absurd distillation of the transactions of millions of individual actors into a meaningless aggregate. To get a clearer picture of what is going we need to disaggregate these numbers. Let’s imagine that Joseph buys $10 worth of goods from José. Joseph now has a $10 item and José has a $10 bill. Who lost here? No one. Trump would view this as a $10 trade deficit. But a deficit implies some sort of debt obligation, that something is owed, but nothing is owed, both sides swapped value for value. Now imagine that José buys $7 worth of goods from Joseph. Joseph now has $3 in goods and $7 cash, or $10 of value. José now has $3 in cash and $7 in goods, again, $10 in value.

Indeed all trade follows the rules of double entry accounting. Mexico’s cash account goes up while their goods account goes down: in balance. The US’s goods account goes up while their cash account goes down: in balance. Claiming a trade deficit exists is the equivalent of looking at only one side of a standard accounting balance sheet and claiming it is not balanced because one refuses to look at the other side of the sheet.

To the extent that jobs and industry are moving out of the US and that this harms in the short term those that lose their jobs perhaps it would be more appropriate to not lay blame at the feet of those business moving away but rather ask the origin of the incentives they are responding to (regulations, unionization, taxes anyone?)

Trading Places

A basic economic principle is the necessity of accounting for both the seen and the unseen (first elucidated by the great French economist Frédéric Bastiat). It provides a basis for understanding how politicians perennially cast themselves in the role of Santa Claus whilst picking our pockets. We are a willing audience to the magician who dazzles us with (for example) public works project (the seen benefit) while remaining unaware of the unseen harms unfolding (those things not done, created, or attempted due to diversion of resources into the political projects). The principal works for any intervention into people’s lives. For example, sanctions or trade embargos are often put in place in order to influence the actions of the leaders of another country. Although there is not a single historical precedent for this ever working, it remains the most popular passive-aggressive tool in the arsenal of the state. The language used to speak of such embargos employs the ruse of anthropomorphization (“America” cuts off trade to “Iran”) in order to hide the underlying reality that rather than the target country being harmed it is the individuals that constitute that country that are harmed. See, it’s not millions of people being made to suffer; it’s just a nebulous non-human “country”. Those who engage in these practices of course understand the reality of weighing human suffering and misery against the greater good of their desired ends. Indeed it was Madeline Albright’s admission that the deaths of approximately half a million Iraqi children during the 1990s sanctions against Iraq were “worth it” in order to achieve their goals (this remark was specifically cited by Osama Bin Laden as one of the many reasons behind the 9/11 attacks).

But that is just the seen harm. There is also an unseen harm levied against US citizens and businesses who are barred from trading with the country embargoed (for example, Iran). Iranians want to buy US made goods. US businesses want to sell those goods. We have a willing buyer and a willing seller being prevented from engaging in trade because of a belligerent busy-body-bully in the middle. Those lost sales for US businesses will not be made up somewhere else – they are simply gone. These missed opportunities lead to more unseen harms – lost jobs, or rather jobs that would have been created but never were.

To the extent US businesses have foreign competitors in countries lacking an embargo against Iran then it is our own government that is pushing sales into the arms of their competitors. Brilliant. Some might say that this loss in sales to US companies is “worth it”, that it is their patriotic duty to suffer through such lost sales in order to help our country battle the existential threat we face from a country… that has never threatened us nor attacked any other country in over two-hundred years. Well that is certainly easy to say when you’re not the one cruising past potential income you are barred from touching. Ask yourself, would you willingly skip annual bonuses if your government told you it would help influence Iran? Yeah, I didn’t think so. And apparently Boeing doesn’t think so either   – this politically well-connected company managed to get itself on a short list of companies exempt from the current trade embargo with Iran. How convenient. Apparently the expediency of pleasing big donors trumps the so-called “national interest” that applies to everyone else. Justice for all indeed.

Paddling in Circles

One of the more frustrating “Trumpisms” is his idea that in order for American to “win,” US exports must exceed US imports. He sees the entire country as just one big corporation whose sole purpose is to make a “profit” by exporting more than it imports (that is, sells goods at a greater value than what it paid for them). This simplistic viewpoint is deeply flawed. It presumes trade is a zero-sum game where one side always “wins” and the other side “loses” in the exchange. Indeed this mindset would mean every time we buy groceries the store has “won” and we have “lost.” Trade is always a win-win game; both parties have gained more than they gave up, otherwise they would not have made the exchange.

Viewing trade at a macro-level is myopic at best (as it ignores the underlying individual decisions being made by billions of people) but in order to make a point we will proceed with that fiction. That point is this: a trade surplus or deficit can never exist. Although that may sound shocking at first it really shouldn’t when you consider the nature of any trade. If I buy a candy bar, I hand the clerk a few dollars. Does the store now have a trade surplus with respect to me? Do I have a trade deficit with respect to the store? Of course not. The store traded away a candy bar and traded in money. I did the exact reverse. So when we consider China and US trade we see that China sends us a whole host of goods and we send them green paper rectangles. Now, ignoring the fact that Federal Reserve is constantly swelling the money supply for its friends on Wall Street, we’ll assume that the supply of US currency is constant. Given that assumption we must ask: how did we acquire those pieces of paper to give to China? We got them by producing goods and services for someone else. So if we send $x to China for $x worth of goods A that means we had to first produce $x worth of goods B. China didn’t want goods B, they wanted the money. That is the nature of indirect exchange and is why money is an emergent property of trade (it solves the double coincident of wants problem).

Ok, but some will say that’s all fine and good, but the problem we have is that the total export of goods to all countries is less than total imports of goods from all countries. So even though the US may have a trade surplus with respect to US dollars, we have a deficit with respect to goods. That is true. But it doesn’t it matter, or rather it shouldn’t matter. The only reason this is viewed as a problem is because of the artificial attempts to solve it actually make the problem worse. In order to explain the problem we must once again assume that the quantity of money is constant. In that case, as more goods come into the US and more money flows out of the US there will be fewer and fewer dollars remaining in the US. This is called deflation (a contract of the quantity of money). This is natural and does not cause depressions or any other nonsense like that (no matter what your 4th grade teacher told you). Under deflation money is in high demand (because there isn’t a lot of it), which means the money price of goods decline (in order to get that scarce money, people will trade more and more goods for it – hence prices fall). So if prices of goods made in the US fall, what do you think that would do in terms of making American goods more competitive to overseas buyers with fistfuls of dollars? That’s right, they’ll start buying all those cheap US goods which will naturally swing the trade pendulum the other way, with more goods leaving the US than coming in and likewise more money coming in than leaving.

That this does not occur presently is a testament to how much the Federal Reserve and US monetary policy has distorted these natural incentives. The Federal Reserve short circuits this natural feedback system and inflates the money supply. This very temporarily makes US goods cheaper overseas (buy devaluing the exchange rate of the US dollar relative to other currencies that are inflating less rapidly), but (a) it doesn’t last long because other countries quickly adjust their inflation to counterbalance the effect and (b) it has the deleterious side effect of making US goods MORE expensive for US buyers (that’s what inflation does, it increases the money price of goods). So, under the natural system of deflation ALL prices fall which benefits both domestic and international trade. However under the artificial Fed induced inflation system we have domestic prices rise while relative prices for international buyers fall for a short period but then quickly also rise resulting in market disruptions and distortions. Using money creation to solve trade problems is like rowing a boat with one paddle forward and the other paddle backwards.

If we want to “fix” trade we need to examine the current incentives created by the distortions into the market introduced by Fed monetary policy. Only then will we see we need to do less, not more, to “fix” the situation.

Plugging the tailpipe

Newton’s third law of physics posits that every action has an equal and opposite reaction. From the kickback on a firearm to the lift provided by chemical propellants in a rocket, nothing in this universe acts in perfect isolation. This dictum applies equally to everything in the universe; from muon to man. Human action will also induce a feedback-based response; love begets love and violence begets violence. When the actions are voluntary and un-coerced we tend to see predictable outcomes (if I am kind, you are quite likely to be kind in return, but, if I hit you, you are most likely going to hit me back). When the actions are involuntary or otherwise unduly influenced then the results become unpredictable. Economic interventionism is like plugging a car’s tailpipe to silence it; it may bring temporary silence, but the building pressure will soon be relieved. The only question is when and where.

So just as plugging a tail pipe to silence a car is a fool’s endeavor, so too are forced attempts to mold society and the economy to suit the ideological leanings of those in power. Such attempts at societal meddling always end badly, typically in the form of increasing that bad thing one was trying to eliminate. The interventionist approach has all the logical soundness of hitting people in order to reduce violence in the world, yet the politicians continue to do such things everyday. For example, paying people to be unemployed augments, rather than diminishes, the number of unemployed. Likewise, subsidies for certain industries results in a whole array of undesirable side effects. Subsidization of corn production in combination with tariff-based protection of the domestic sugar market has distorted the economy and our health. Tariff-fueled high domestic sugar prices creates an incentive for sugar users to seek a lower cost alternative, which just so happens to be state subsidized HFCS (high fructose corn syrup). The state is simultaneously constraining supply of one product and expanding supply of another to make up for the ongoing constraint. This distortion alters the market in ways that would not exist absent this intervention. It has caused HFCS to become the dominant material used in domestic food production – pushing the somewhat healthier straight sugar out the door. That the overwhelming prevalence of HCFS has recently been implicated in the obesity epidemic (and all the costs associated with obesity related health ailments) should give anyone pause the next time a politician tells you they have the perfect solution to a problem.

Another side effect of agricultural interventionism is in of all places immigration. When the government guarantees a price floor for certain agricultural goods it creates a natural incentive to over produce those goods. The excess is then dumped at low subsidized prices into other countries (such as Mexico). Farmers there can’t compete with the low prices and soon go out of business. Those farmers are now desperate for work. So they come to the US. And then people wonder why so many “illegal” immigrants are pouring into the country. Time again for the government to fix the problem they created. You’ll never go out of the tire business if you keep dumping nails in the road.

The height of absurdity though is that when those in power are faced with the reality of the damage caused by subsidies they find it easier to expand those subsidies rather than to contract them. The most inane example of this is the fact that the US government pays Brazilian cotton farmers the same subsidies it pays US cotton farmers so that they can better compete with cheap US imports.

The moral of the story here is that economic interventionism (supported by the implied violent power of the state) will cause parties to behave differently than they otherwise would absent such threats. These differences lead others into altering their behavior so as to neutralize the effects of the initial intervention in a predictable sort of feedback loop. Plugging the tailpipe merely reroutes the exhaust. Equal and opposite reactions are on net a null.

Free trade comments

After reading an excellent article on immigration reform and free trade by Benjamin Powell, I was depressed by the numerous knee-jerk mindless comments of those that have been indoctrinated into the belief that all good in this world can only come at the end of a stick-wielding state… that the state is the last thing that stands between “the people” and evil rich people who are poised to take over the world and put us all into chattel slavery. Anyway, I picked one of the most obtuse comments and made a comment, you can see the whole thing here, but here are the highlights:

Commenter says: “The basic case for free trade builds upon the fact that different people, in different places, have different abilities to produce goods and services.” That is not a basic case – it says nothing about who will benefit and who will lose. 
So called Free trade has ruined people in Africa, South America, Latin America, and now in the USA.”

So then I say You don’t really understand what trade is do you? Nobody loses in trade. The only reason people trade is that they value what the other person has more than they value the thing they are giving up to get it. Both sides “profit” from trade. “Free trade” has not ruined the peoples you cite – Marxist/totalitarian governments who keep their people poor by confiscating all wealth created have ruined them. Because the standard of living in those countries is not the same as it is in the US is not the fault of free trade… we’ve just been doing it longer than they have. That’s like saying school is harmful because you compare a 12th grader to a 1st grader and blame school on the fact that the 1st grader can’t do calculus like the 12th grader can. Ceteris paribus. You aren’t making an apples to apples comparison.”

Someone else says “You don’t understand trade. You probably took Econ 200 and think you know something. You probably learn “comparative advantage” but never learned “absolute advantage”. Also would you consider trade with slave masters a “win win”? How about trade with cannibals? What about trade with a brutal dictatorship?”

 

So then I say: “There is no “absolute advantage” in trade – “absolute” is a term reserved for the physical sciences where one can make objective “absolute” measurements, i.e. mass = 20 g, temp = 25 °C, 12 neutrons in a carbon atom, etc. Economics is the study of value, and value is subjective… 

To your points: Trade with slave masters: (I presume you mean between the slave master and the slave) that is not trade by definition, trade can not be coerced, if the process of exchange is coerced then it is theft, not trade.
Trade with cannibals: is this a joke? who is trading with cannibals?
Trade with a dictatorship: this is similar to your slave master example although here I presume you mean trade of a “normal” person with the slave master himself (in this case the dictator who enslaves his populace)… so no, of course that is not “win-win” for everyone but it has nothing to do with fact that trade is occurring, it has to do with the fact that one party gains their advantage by stealing from others (the citizens so enslaved). 

You’re straw manning the argument here, no different then implying trade can be bad if a thief engages in trade. Well that is “bad” not because it is trade, but because one party is a thief. If a thief eats hamburgers does that make eating hamburgers bad? No, well then it doesn’t make trade bad either just because a criminal engages in it.”