The new attack on free trade

by on May 11, 2007 at 5:25 am in Economics | Permalink

It is by Erik Reinert, How Rich Countries Got Rich, and Why Poor Countries Stay Poor; here is a home page for the book.  The title is misleading and sounds too monocausal.  Reinert’s well-written book in fact revives the arguments of Friedrich List, Henry Carey, and the 19th century protectionists.  In his view many forms of manufacturing are increasing returns to scale activities and help support civil society in the longer run.  Agriculture and the sale of raw materials are "Malthusian" sectors with diminishing returns and they are unable to create a stable middle class.  The solution of course is to stop pushing free trade upon the third world and thus allow it to develop.  Reinert claims Tudor England, 19th century America (though see Doug Irwin’s revisionist work), Bismarckian Germany, and pre-reform Latin America as data points on his side.  Unlike many critics of free trade, he does fully understand Ricardian and other theories of comparative advantage.

I don’t think his main claims are crazy and they are by no means theoretically impossible.  I wish however he had devoted more attention to the following:

1. Many other preconditions — most of all educational potential and some decent institutions — must be in place for tariffs to spur economic development in this manner.  Not all regions can create sustainable increasing returns to scale industries in manufacturing, tariffs or not.

2. Reinert cites many historical examples but doesn’t establish that they all apply, or apply with the force he suggests.  The book is a polemic, as might be written by an advocate of free trade.

3. On average the free-trading poor nations have had higher growth rates than the protectionists; see the work of Anne Krueger.  India is one obvious case of a miscalculated protectionism.

4. More often than not, tariffs and trade protection are abused for purposes of corruption and special interests. 

5. Reinert himself stresses that the proper growth path requires a later move to free trade.  This development is by no means automatic, given that protectionism creates its own special interests.

I’m still not sure why Dani Rodrik thinks that invoking 4 and 5 amounts to playing politics, or guessing at politics, at the expense of substantive economics.  I think of it as citing a downward-sloping demand curve in the time-honored tradition of political economy and public choice.  Like so much of modern economic thought, it comes from Adam Smith. 

No economist says "I favor a philosopher-King and here is what he should do.  I can’t tell you what he will do, that is politics."  Sub in "protectionist trade policy" for "a philosopher-King" and decide whether this sentence makes any more sense.

datacharmer May 11, 2007 at 5:46 am

I wholeheartedly agree with this point.

Most economic advice stemming from academic papers is directed towards a benevolent, non-generational discounting dictator. There’s a natural reason for this: it’s the simplest case. However, if economists harbour any desire to affect policy they better start taking the political economy of reform more seriously. An economic policy that will eventually bestow everyone with mythical weatlh, improve the weather and make the national team win the World Cup is no good if it’s going to lose you the next election.

This is also the point Alan Blinder was recently making on outsourcing.

http://bluematter.blogspot.com/2007/05/should-we-worry-about-offshoring-what.html

John Goes May 11, 2007 at 6:10 am

Tyler, it still seems your points on free trade are essentially those that would be made in an analysis of the Pareto-efficiency of free trade vs. protectionism. To what extent is your analysis grounded in cost-benefit analysis? Points 4 and 5 can be recognized even by the protectionist, but what cost he attaches to it is in a very real sense subjective and arbitrary.

If you would comment on what measure of efficiency you are using, even if it’s merely your own political intuition, it might clarify the dispute about politicizing economics.

John Pertz May 11, 2007 at 9:13 am

Even if protectionism lead to growth or higher growth than free trade, there is still one gigantic problem that the protectionists must overcome. There exists an enormous faith amongst protectionists that their fellow countrymen have the ability to produce every significant innovation that could be possibly produced. However, this is impossible. Innovative ideas can be produced at any time and in any part of the world. Hence, the reason why free trade will ALWAYS trump protectionism as the most socially optimal trade policy. The larger the role government plays in determining exchange outcomes amongst its citizens then the more inclined other nations become to do the same. Nobody wants to live in an inward looking nation do they? I cant believe that in the year 2007 we are still having trade debates. Does the other side really have any relevant arguments these days?

Rebunga May 11, 2007 at 11:08 am

I was pondering why some countries were perennially rich and others perennially poor the other day.

Is there any scholarly analysis of the relationship between life expectancy and wealth. I know that many studies talk about life expectancy as dependent upon or indicative of a country’s relative wealth. Eg. Zimbabwe’s declining life expectancy resulting from economic meltdown.

But what if it is the other way around? Assuming a 7% return on investment, wealth doubles every 10 years. Japanese, Scandanavians, Europeans, Americans, etc. can have their capital double, quadruple, octuple in the extra 30 years of life they have over someone in a developing country. What chance does a fellow in Africa have when he can only expect to live to be 40?

Plus, it seems to me that wealth building occurrs more at the end of life than at the beginning. Much of one’s early years are spent in immaturity, training, debt, etc. But in the last years of life, savers can generate far more wealth than they actually need to live on, allowing them to put their wealth to work as capital.

It seems to me that the wealth and additional lifespan are a competitive advantage that the developed world has over the developing world. Putting that wealth to work is a necessity. This means finding new markets for the capital to be utilized.

Isn’t that a good policy reason for free trade? Can anyone direct me to some thinking along this vein?

Lawrence Glenn May 11, 2007 at 6:13 pm

Shortly after Mr. da la Madrid began to dismantle the ancien regime, I visited Mexico. While there I met with an old friend, at that time a PRI member of the Chamber of Deputies. He was quite pleased that at long last Mexico was turning away from protectionism. His comment has stayed with me ever since: “We, The PRI, championed the infantry industry argument for three generations and have produced a nation of midgets.” Any argument in favor of protectionism is quite simply and quite logically naught but sophism.

Biopolitical May 13, 2007 at 3:45 pm

Tyler, sub in “gas tax” for “protectionist trade policy” and give us your thoughts. ;)

hnellis May 16, 2007 at 7:45 am

I happen to agree with the point made regarding the cost-benefit analysis. Yes, there may be benefits that exist for the underdeveloped countries in the long-run. In that same regard, we have to take into consideration the life expectancies, as was mentioned above as well. The majority of people in these underdeveloped countries will never live to reap the benefits of such a proposal. All these people know is their current way of life, and their current abilities in the trade market with agriculture and other raw materials. To say that it is a simple process of converting the trade to other products is plainly impossible. These people survive on the trade of their crops and these other raw materials. To even attempt a change in the existing patterns, so many other changes would have to be taken into account, like education, and offering the populations better alternatives, and an opportunity to learn a different way. Otherwise, the cost to the existing population will certainly outweigh the benefit to the later generations in the long-run.

Anonymous June 14, 2007 at 4:27 pm

“The anti trade people could make a much better argument if they made specific proposals as to what kind of trade they would like to restrict and how such policy would be more economically efficient than free trade. Id love to hear a such a proposal from the anti trade side.”, John Pertz

Sure. I would be one of the anti “Free Trade” wierdo’s. Actually I am all for trade but we have to be realistic. We have a society now where absolute advantage reigns, meaning that corporations can take all the tools developed here and go to another market where the ratios of currencies are different. Then they sell back to the higher market, which continues to hold up as they buy products through debt. They lose jobs, undermine their economy and in the long run lose the ability to do much of anything because they simply cost too much based on artificial fiat currency values.

My suggestion is to allow REAL free trade. Remove the Federal Reserve System and World Bank by starting a free banking system; the government can mint the money I don’t care. Then remove any protections for corporations through markets, let everyone play by the same rules. Every individual in one market should have the same opportunity and support to enter the markets and buy and sell, as they desire. Right now it is all from corporate spigots at the expense of everyone. Why can’t I buy directly from the Chinese guy at his prices in China instead of the American market prices? In real free trade, with our instant society, we should be able to do this. Why protect the corporations and undermine our economy?

Solutions:
1. Free banking – Down with central banks.
2. All people have same buy/sell access to market. (End Market Arbitrage by Corps)
3. Possibly a gold exchange standard over markets, no fiat junk.

That to me is closer to free trade. What we have now looks almost like mercantilism if you look at the effects of making Wall Street wealthy and putting business out of business in our home market. Right now there is no way we can compete in America if labor doing the exact same job is several times more expensive because of currency differences. That’s why we lose and they win, it is absolute advantage and the corporations know this and will continue to cut and run all over the globe to use market arbitrage. It only favors wall street and the wealthy, causing massive hatred in the populace as they are constantly forced to chase jobs over borders. This won’t last.

Of course I don’t mind. If things keep going it will likely crash and burn. The socialist “free traders† will blame everyone else but themselves and the free trading “socialists† will blame everyone else as they attempt to do it all over again. Personally I will blame both and bbq both as needed when and if the time comes.

Olaguibel December 23, 2010 at 2:29 pm

How could the free trader be so blind? As the communist were saying, if it don’t work, is because the economy is not enough socialized†¦ now, if it don’t work today, if because is not enough ‘open’†¦ The PRI from Madrid to Salinas have effectively destroyed the former protectionist and substitution for importation, but what was the result for Mexico? A total disaster!! They were no more patriot wanting to develop Mexico, but traitors that play the useful idiots for Wall Street and London City; the same role as Menem in Argentina that completely ruined the country with Free trade and betraying the industrialization of Argentina: why they don’t cite Argentina as a big success of Free Trade? (sic) By the way, the country under the heterodox Kirchner know 8 to 9% of growth: how much in Mexico today?

There was problem with former Protection in Mexico, missing investment in technology and support of scientific project by state as in South Korea, but the medicine of IMF to Mexico since 1982 is worst. Supposedly, free trade could lead to more inequality, but to more growth. But Mexico have more inequality, more poor and less growth than before!!! The rate of growth of Mexico is less under Free Trade (from 1982 to 2010, or 1994 as starting point) than the entire period were the state was playing a bigger role and with protection (1930s to 1981). Mexico have seen a deindustrialization with a losing of job and wages in the complete industrial sectors to go cheap Maquilas that pay lower wage than the industrial industries and which are just assembly line, which require input from outside and is reexported: only 5% of value his added†¦ Now Mexico don’t produce enough food and must import at high price (no, the market don’t always provide cheap price, cartelization anyone??? Big business hate competition, they either killed the competition or buy it: fusion&acquisition). The loss of job was immense, and the % of population that quit the country pass from 0.1% in 1982 to more than 10 % today: is that what you called a success??? That US , London and Spaniards banks men push Free Trade to Mx and defend it today is understandable for they have huge profit from the finance (the foreigner control 90% of the banking system in Mexico!! And they don’t lend to industry, they make profit from borrowing to the state at high interest rate, which are high cause supposed to fight inflation, but are destroying the national industries with this high interest rate, from the remesas, credit card and big fees), but that Mx been so stupid to believe the theory the masters of the country impose to them in 1982 (after having attacking Mx with speculation in the ‘debts crisis’ which was not the result of the protectionist policy, it was a conjectural one; the Chili of neoliberal Pinochet had the same debt crisis at the same time, as the Junta in Argentine), is really not understandable! There is no ideology here: look all the stat, from growth, to the power of consuming, to the unemployed, poverty, the state of infrastructure in the country: nothing growth better, but worst except the level of violence and drugs traffics!! You must be more blind than the blind to defend Free trade in Mexico!
And how stupid to concentrate only in avocado: it is an decreasing return activity, meaning that the more you will want to do it, the less the soil will be good for it (for the good place are already take, thus after a boom of expansion, it will always cost you more per unit to produce because you go to less good soil). And you don’t make living a country of more than 100 millions persons on avocados†¦ Good to do it, but why not having avocados and soy beens? They said is cheaper with free trade: but if you lose job or win job that pay less, you can’t pay for the cheaper product coming from China†¦ Someone wining 1$ an hour in the maquiladoras can’t never thing of buying a house (thus all the internal market is not function), neither buying car, but not even a bicycle!!! With no internal market (for no good wage for the majority and unemployement) and an external market where there is always someone working even cheaper than you, it serve nothing the ‘cheap’ good for you can’t even buy with the miserable wage.
Mexican, get smarter and read this book and other before repeating as stupid parrot what you learn in your ITAM school†¦

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