The Case for Unilateral Free Trade

How’s the trade war treating you? A lot of people had hope it would be coming to an end soon, but well, they forgot how unpredictable President Trump is (and how economically illiterate). Now, instead of doing what pretty much every article out there is doing (pointing out that trade barriers hurt us), I’m going to take it a step further. Not only should we not be raising trade barriers, but we should lower all trade barriers across the board (unilateral free trade), regardless of whether other countries (yes, even China) do it or not. After all, Trump’s supposed actual goal is to get other countries to lower their trade barriers to our exports, so even he ultimately believes (somewhat) in free trade. But why do we need to get other countries to lower their trade barriers? Unilateral free trade is the pursuit of free trade policies by a country without the guarantee that other countries will do the same.

Unilateral free trade gives consumers the cheapest possible goods, giving them more purchasing power, or, in normal speak, more bang for your buck. Think about it. If I can get t-shirts from China at a lower price than in the United States, then I can either buy more t-shirts than I normally would buying American, or, I can put my money elsewhere. This is why free trade increases consumers real income: prices on goods and services that are imported fall, so the consumer can get more goods and services with the same amount of income. (If you want to help reduce poverty, one thing you can do is make the goods and services that the poor purchase cheaper through free trade.)

Unilateral free trade doesn’t just support consumers, but also businesses. Are you operating a business in the United States? Chances are, you use some goods and/or services that are made cheaper by the production of inputs in other countries. This is why so many manufacturing firms have been harmed by President Trump’s steel tariffs. Steel is an input. If the cost of an input rises, so to does the cost of the products it is used to make. What happens when a firm’s costs rise? They either can raise prices, or fire employees. This is why free trade is so often a boon to exporting businesses in the domestic economy. Those exporting businesses utilize inputs that they themselves import from other countries.

There are really three counterarguments to unilateral free trade. First, some domestic industries will be harmed by competition from foreign firms in those same industries. The argument goes that, since such free trade would harm domestic producers, we ought not pursue it. This is a limited view in that it only considers the producers, and not the consumers, who undoubtedly benefit from this economic restructuring towards those firms that produce a good better, and more cheaply, than other firms.

Now, in a more specific argument against unilateral free trade, opponents argue that unilateral free trade would leave domestic firms at a competitive disadvantage, since other countries will still have their trade barriers. I cannot say that this argument is incorrect. However, if the pursuit of unilateral free trade brings us the significant benefits that I believe it does, then other governments will most certainly consider instituting such policies in their own countries. This is especially true since we are the largest economy in the world: our example will have an immense ripple effect.

Opponents also argue that we must maintain trade barriers as tools for negotiation of trade agreements with other countries. This goes back to the point I made before. If our economy benefits significantly from this change in trade policy, surely it is possible that other countries, in order to reap the same benefits, also pursue such policies.

Now, what about the unfair propping up of industries in other countries that compete with our own unsubsidized and unprotected industries. Currency manipulation and export subsidies are thought of as unfair. Even many free trade proponents dislike these actions taken by foreign countries. Initially, their arguments seem, well, fair: these actions distort markets functioning naturally. That’s true, but who benefits and who loses?

Well, in both cases, if the US is importing from countries doing these actions, then US consumers (and, just as before, some US industries) benefit, since both actions result in cheaper imports for the US. I am not saying these market distortions should remain, but the argument that these two actions are reason alone to forego pursuing unilateral free trade is flawed. Pursuing unilateral free trade will bring far more benefits than will waiting for these countries to finally agree to reduce their support measures for their exporting industries.

Now, who loses? Well, in both cases, most of the people in the market-manipulating country lose. Currency manipulation, as the Chinese have done it, well, devalues their currency, decreasing their purchasing power. In other words, goods and services will cost more for Chinese consumers. Both to this point and on top of it, as Karishma Vaswani points out, currency manipulation is a double-edged sword, helping exporters in the short-run, but discouraging investment in the long-run. The story is slightly different for export subsidies, where taxpayers in, say, the EU, pay more in taxes to subsidize their industries that export to the US at lower prices. The EU is literally footing the bill for part of what we pay to buy their goods and services. Again, hardly a clear lose-win relationship for the US. The point of what I’m saying is that market distortions at the least are not costly enough to warrant foregoing the benefits of unilateral free trade.

An argument for unilateral free trade is little different than one for free trade agreements (FTAs). Both operate on the idea that trade is good for a country. The only difference is that people argue that unilateral free trade lacks the “fairness” of FTAs. I attempted to address the arbitrariness of this point in the previous paragraphs. The question remains. Are there countries that have pursued unilateral free trade? How have they fared?

As it turns out a few countries have already instituted unilateral free trade, and the results are clear: unilateral free trade is extremely beneficial. Singapore, Macau, and Hong Kong all have near-zero trade barriers, and have been among the most prosperous places in the world in the past few decades. As Dan Mitchell points out in the article cited, the only competition in the rankings are “oil sheikdoms and tax havens.” Mitchell even goes into the case of New Zealand, who, after reducing trade barriers significantly, experienced significant economic prosperity. Tired of the examples that involve small countries? Okay. Back in the 19th century, the British were among the first to realize the boon of unilateral free trade. They abolished the Corn Laws, and subsequently experienced significant economic growth.

This is a big reason why I have moved from being a skeptic of Brexit to a supporter. People mistakenly believe that EU membership means greater free trade. While it does mean so between countries in the EU, members must adhere to common external tariffs enacted by the EU Parliament. In other words, the British have no control over trade interactions with non-EU countries. It would behoove the British to take full advantage of this opportunity, and lower its trade barriers to EU countries and non-EU countries alike.

It should be noted that this isn’t much of an issue at all to economists, be they liberal or conservative. Hell, even Marx thought free trade was good.

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20 thoughts on “The Case for Unilateral Free Trade

  1. Great. Americans can look forward to our wages reaching an equilibrium on par with ROW. Won’t that be terrific? That is, after all, an unspoken endpoint of this set of arguments. Nobody ever quite completes the argument. One might wonder why.

    I, personally, look forward to the day when American wages are on par with ROW. Shouldn’t be too much dislocation and civil unrest on our way down to average.

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    1. I don’t think that is an endpoint. Perhaps within the same industry that may be true, but it should be noted that in a global free trade system, countries specialize. I don’t think Americans’ wages would decline overall, since we do not specialize in the same industries as a China, or an Argentina, etc. Different industries come with different labor supply and labor demand, which means the wages between industries will be different. Wages, after all, are significantly influenced by one’s human capital. This is why wages rise in the long-run: people move from low-skilled labor, to relatively higher-skilled labor.
      Keep in mind, this is also only talking about NOMINAL wages. As I mentioned in the post, our REAL wages will rise overall because goods and services relative to a fixed income will fall.

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  2. Um, no. With an economy like ours, tariffs, or the threat of tariffs, give us great leverage against other countries on a number of fronts, not just their tariffs. If there’s ever a good time to use them, it’s now that we have a very strong economy.

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    1. Note that you did not argue for tariffs as a good thing in itself, but rather as a means to achieve some other end. In other words, you did not argue against the argument for unilateral free trade, you just argued that maybe, if we find ourselves in a sticky situation, we should raise tariffs until they change their behavior.
      The argument for tariffs as a foreign policy tool is hard to debate, since it really comes down to the situation at hand. But let’s look at sanctions, for example, which predominantly hurt the non-wealthy in countries we use them against. Will these people blame their own government? Or will they blame the best scapegoat in the world-the Americans.

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      1. Right, that’s why it’s called a trade war- because both sides get bloodied. If we can pummel the other guy into a bloody swollen mess while we take a light jab to the ribs, then we have a lot of leverage. Just the threat may get them doing our bidding, as was the case with Mexico recently. That was achieved at no cost to us, but it could not have been achieved with a unilateral free trade agreement policy.

        As you noted, one thing we can do with that leverage is get them to lower their tariffs. I’m not sure what you’re getting at by saying “However, if the pursuit of unilateral free trade brings us the significant benefits that I believe it does, then other governments will most certainly consider instituting such policies in their own countries.” A lot of countries implement a lot of bad policies despite their track records of failure. Perhaps they’ll be less likely to do so if we bring the pain.

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  3. ” However, if the pursuit of unilateral free trade brings us the significant benefits that I believe it does, then other governments will most certainly consider instituting such policies in their own countries.”

    The issue here is that you are assuming the leaders of these other countries are interested in mainly economic matters and benefiting their citizens/subjects in said economic matters. Does increasing the wealth of the average Chinese citizen benefit the Chinese Communist Party leaders? I don’t think so. They’re interested in enriching themselves and solidifying their power. They can see what happens when their people become richer– they lose control over them. See: Hong-Kong

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    1. You are correct. This is a major assumption, but not unwarranted. Pinochet, after all, did himself pursue economically-prosperous policies that benefited the Chilean people greatly. Even China in the 1980s began instituting market-based policies. Further, if democracy continues to spread, then the people in each country will have more of an ability to request such change.

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  4. In the long term, we are all dead.

    To be more specific, your unemployment will run out before China stops subsidizing their export market.

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    1. I really hate that statement by Keynes. It implies that we should have an almost complete focus on the short-run, and ignore the immense benefits of taking a long-run approach. Anyways, could you clarify what you mean by “your unemployment will run out before China stops subsidizing their export market.”

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  5. US consumers who still have jobs may benefit from lower prices for foreign goods, though their employment may be threatened by competition from workers who have lost theirs and are, therefore, after yours, and willing to accept a lower salary for the privilege of feeding their families. Plus your employer’s goods and services now have to be priced within the budget of the smaller number of people who have jobs. Which is why you didn’t get a raise this year. At that point, is unilateral Free Trade such a bargain?

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    1. So, you are arguing that expansive free trade will result in increased unemployment and lowered wages? I must say that this has no empirical backing. Perhaps in the short-run, but not in the long-run. No doubt trade disrupts employment and wages in certain sectors, but is likely offset by increases in both in other sectors. I believe it is statistically proven that technology changes actually result in greater disruption than free trade, and yet, no one wants to stop the invention of new technologies. People lose jobs in one sector, and another sector is either created, or expanded.
      If we are really concerned about the short-term consequences of free trade, we can, as many pro-trade advocates have argued, establish temporary programs to either support the unemployed as a result of trade financially, or perhaps help them acquire new skills that will help them in the new economy.

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  6. The best case for unilateral free trade is that nothing justifies giving government the power to interfere in the citizens’ fully voluntary economic activities. Certainly, the fact that the criminal gang called the Chinese Communist Party improperly and immorally punishes the millions of slaves it rules doesn’t give Trump the right to decide that he will retaliate by treating the American people as if they were slaves as well. “You bleed yours, I’m gonna’ bleed mine” is a horrible and immoral policy for any American President to follow.

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    1. Your right to trade freely is vast but not absolute. The government certainly does have the right to restrict the export of weapons, for instance. You have the right to trade freely, but not at the expense of selling your countrymen into slavery.

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    1. You’ll have to elaborate. If you’re referring to sweat shop labor, then your morality is mistaken. Our trade allows all of these “sweatshop” workers to gain a better income than if we did not trade with them. Often, when we restrict trade to countries who do not treat their citizens well, we often end up hurting their citizens more than their leadership.

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      1. No.. I am talking about slavery. A person with no real freedom and who can’t own property. Forced to work by their master under threat of violence. Buying goods from their owners is immoral. It may be cheaper, but that is a poor justification.

        And regarding your comment that ‘we often end up hurting their citizens more than their leadership’ that seems to be another poor justification. Prolonging despotic regimes and even propping them up may help the citizenry in the short term, but in the long term it dooms them.

        Not to mention giving funding to countries that want to destroy you is one of the stupidest ideas I have ever heard……

        I am not unsympathetic to free trade, but free trade, much like the ‘free’ market needs to operate according to a set of rules, such as contract law. Pretending we can have a free market without rules is just as misguided.

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      2. What specific countries are you referring to?

        With regards to the second point, and your argument in general, I suggest you take a look at this report:
        https://www.cato.org/events/how-free-trade-promotes-democracy
        With regards to your point on “giving funding to countries that want to destroy you,” again, we benefit from trading with them too! In your wording, they are funding us too! in fact, they are investing in our country.

        Your concerns over rule of law are reasonable, but rule of law tends to gain ground with the interaction that is brought about by international trade.

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  7. This would be great for importers and consumers, but what about exporters? They would still have to deal with tariffs and then, without threat of retaliation, other countries could raise their tariffs to block American goods. We get cheaper imported cars but the auto export market collapses.

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    1. As I said, this is doubtless a potential outcome of unilateral free trade. However, exporters, like car manufacturers, will also benefit from the cheaper input goods available as a result of lowering tariffs. Who is to say whether this makes them equally as competitive if not more so than prior?
      Yeah, other countries could. So what? Our economy is so large that it doesn’t necessarily depend on one country. Our industries could find cheaper alternatives, as is usually the case when trade barriers are erected.

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  8. Because running massive trade deficits is fake prosperity. If you don’t pay for goods and services with goods and services, you wind up paying for them with capital assets and/or debt. A growing economy can sustain some such trade of capital for consumption, but too much and they wind up owning you. Then, they can jack up prices as much as they want, and that’s without getting into the issue of trading partners sacrificing economic growth for other interests, like political ideology.

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