Monday, February 4, 2008

Free Trade

Free trade is a tough sell for a lot of people. When your job goes south, or west to China or wherever, it’s asking a lot to expect you to wave the banner for unhindered trade between nations. When you’re sitting there looking at unpaid bills with the first faint stirrings of desperation in the pit of your stomach, textbook explanations of comparative advantage are not going to be much comfort. You’re going to find it hard to be philosophical. You’re going to be much more inclined to call your congressman.

On the other hand, when Nissan opens a plant that gives you and your cousin jobs, or the company you work for adds an extra shift because their export sales have doubled this year, you tend to take it for granted. And when was the last time you wrote a politician to say thanks for that Chilean wine you’ve been getting at the Safeway because it’s just as good as the stuff you used to buy and a lot cheaper?

Free trade produces small numbers of obvious victims and large numbers of anonymous beneficiaries. That asymmetry is a problem for the people trying to make the case for free trade. This includes most economists, but economists don’t write our laws. Politicians do, and they’re the ones fielding the phone calls from the laid-off workers.

The victims of free trade are easy for journalists to find, and they always have specific decision-makers to blame—- the executives who decided to shift production to China. The beneficiaries, on the other hand, mostly don’t have a clue about how much they pay for shoes or televisions compared to people elsewhere or even about how prices are set. All most people know is that they wish prices were lower and jobs were more plentiful. So when they turn on the Chinese-made TV set they got such a good deal on and see politicians telling them that foreign competition is bad, they are happy to believe it.

A good example is the current controversy in Mexico over the lifting of tariffs on corn. Thousands of people, mostly farmers, protested in Mexico City on January 31st against the lifting of tariffs on corn from the U.S. The farmers protest that they can’t compete with subsidized corn coming from big mechanized producers north of the border. They’re right—they can’t. But the real question is whether that ought to be their aspiration. Most Mexican farmers farm less than five acres. They’re subsistence farmers, in other words. Now, I’m not sure why subsistence farming is so glamorous to anti-globalization activists-- perhaps it’s because Indians hacking at small uneconomical plots are so much more photogenic than tractors on big efficient farms. But the reality is that subsistence farming is poverty farming. Most subsistence farmers are dirt-poor, and a lot of them can’t wait to get off the land and go to the city and get a job in the Nike factory.

In Mexico, a lot of subsistence farmers have been given an incentive to stay on their farms and keep raising corn by government subsidies. Without them, most Mexican farmers would have either left the land or made the transition to more economical crops better suited to their plots. (Corn is particularly ill-suited to the small, arid plots that the poorest Mexicans farm.) Mexico would import most of its corn from the U.S. And all Mexicans would benefit from lower prices. (The way ethanol subsidies are currently driving up corn prices on both sides of the border, to the benefit of farmers but the detriment of consumers, is a separate issue and much more of a scandal than free trade.)

But it is true that any change in economic arrangements, like letting in cheap corn or moving production to China, is going to hurt some people in the short run. So what about those people who can’t pay the bills because their jobs have disappeared? Don’t they count?

Sure they do. But media coverage and outrage are selective. Few tears were shed for laid-off oil workers when the oil business tanked in the eighties. And environmentalists want to shut down whole industries based on coal and other carbon-producing technologies. I imagine at least some environmentalists are aware that people will suffer as carbon-related jobs disappear. But they don’t think that those jobs are more important than solving the carbon problem.

We should look at free-trade related job loss the same way. Laid-off workers should get temporary assistance and a new job. And, in a dynamic economy like ours, they usually do. Meanwhile, the gains from free trade make the economy as a whole more productive, which benefits everyone.

Most people, whether in the U.S. or Mexico, don’t understand how markets work to efficiently allocate resources. All they know is that there oughta be a law to protect them from economic adversity. And there usually is—which just prolongs economically inefficient and even contradictory arrangements, like paying subsistence farmers to stay on the land while letting in imports they can’t compete with. Putting politicians in charge of deciding what should get produced and how much of it is a recipe for absurdities like our tangled farm policy here in the U.S. Eliminating subsidies and tariffs and letting companies and individuals seek the best deal wherever they can find it is a much better way of making economic decisions.

And that’s all free trade is. Now, it’s quite true that NAFTA, CAFTA and all the other FTA’s that are popping up are not really free trade agreements—they’re managed trade agreements, which means they are messy political compromises with all that implies in the way of payoffs, bribes and sweetheart deals. But even under NAFTA’s absurd thousand-plus pages of micro-managing, Mexico and the U.S. both saw exports grow and unemployment fall. The warts on NAFTA are not an argument against free trade; they’re just another argument against politicians trying to run the economy.

And that’s the real problem. Politics always trumps good economic policy.

Sam Reaves

No comments: