Is the case for free trade still valid in a world of welfare states?

That is a request from dearieme, and the answer is yes, the case for free trade is still valid.

First, some welfare states, such as the United States and Denmark, are quite compatible with full employment, or could be compatible with full employment if say monetary policy were better.  The welfare state may still, through say tax rate effects, keep some family second earners out of the work force.  That is likely inefficient, but it doesn’t boost the case for protectionism.

Second, the actual second best problem comes when a welfare state (especially a poorly designed one, and there are some of those) interacts with job churn.  Given that some people are out of work, the welfare state may limit their incentive for job search, or the associated taxes and regulations may limit job creation on the employer side.  So some workers will lose their jobs due to foreign competition, and find reemployment difficult or not sufficiently desirable relative to the dole.

Overall, though, a lot of those jobs were going to disappear anyway, because of either automation or simply shifts in consumer demand.  In that sense free trade is simply the “messenger,” rather than a unique villain.  Are jobs more precarious in larger trade zones?  I can’t recall seeing a protectionist make that case, instead they simply rely on the superficial observation of the first-order, visible effect, namely that some jobs have gone away for trade-related reasons.  The possibility of importing intermediate goods makes many jobs more stable, as do exports.  There is no a priori reason to expect free trade to under-perform in this regard.

Free trade still gives an economy more wealth for dealing with transition problems, and it gives workers a better chance of finding a new job somewhere else.  To be sure, not all classes or regions of workers will benefit from this dynamism at any point in time.  But a welfare state will help protect those workers who do not.

For all of those reasons, the case for free trade is robust to having welfare states.

Alternatively, you might try a “race to the bottom” argument for thinking that free trade and welfare states may interact in counterproductive ways.  Let’s say that free trade causes governments to compete to lure or keep business activity.  That tends to encourage a social welfare state funded through consumption taxes (not corporate taxes), accompanied by a minimum of regulation.  That sounds like an OK enough race to me.  I’m not even sure there is a race to the bottom on the regulatory side, but at the very least there are incentives for regulation not to exceed a manageable level, again all to the better.


If you cap government employee salaries and pensions, you can have a welfare state with reasonable taxation. This probably requires the end of public unions.

How did you beat me to first poster? We tied says the timestamp and we posted the same minute, 30 minutes after the OP.

It's called white male privilege.

In other words, cap GDP?

Economies are zero sum.

Speaking as a scientist and engineer, I realized that economists see economics as winners and losers, totally different than engineers.

Engineers see costs and benefits as zero sum compliments.

To increase benefits, you increase costs.

To go up ten floors you expend the same energy as released going down ten floors.

Zero sum.

If you cut labor costs you cut GDP.

Zero sum. Tanstaafl

Consider the limiting case of robots replacing all human workers.

If there are no workers paid, then the price of goods produced by robots must be zero. If the price does not fall when robots take over, sales will be quantity zero because workers will not be able to buy anything on zero income.

Unless the robots not only get paid wages, but spend their wages buying what robots produce.

Money is still just a proxy for labor. Eliminate labor, you eliminate money.

Free trade is about trading labor in tribe or nation A for the equivalent labor in B.

When money is disconnected from labor and assigned to property like land, you get Nauru. High per capita income, until all the land was traded away and life is now unsustainable. The same future awaits Saudi Arabia, the Emirates.

@Mulp - economies are only zero sum at the so-called "Pareto Optimum" state, which is a theoretical limit that no actual economy has ever achieved. Otherwise there's 'room to grow' (i.e., not zero sum). Of course, in a bizarre and inaccurate way, Soviet Communist and Chinese Communist states were pseudo-Pareto Optimum, since in those command-and-control economies, for somebody to win, somebody else had to lose.

When you trade Target $10 for a pair of gloves, you increase your wealth, because the pair of gloves is more valuable to you than the $10 was. Target also increase it's wealth, because it values the $10 more than the pair of gloves.

In a similar manner, in each freely made trade, wealth is increased. That's not zero sum, trade is literally how most wealth is created in the world. It doesn't change when the people trading happen to live in different places.

You are leaving out innovation, creativity, and productivity increases that make economies non-zero sum. This makes all your words meaningless.

Engineers always design for cost < benefits as the basic non-zero sum approach.

There is no free trade. This is a ploy used by multinational companies to assist them in getting favorable treatment and allow them to exploit both producing and consuming countries for profit. ALL of our trade agreements were bought and paid for by big business and favor big business and harm the citizens and the government of the U.S. The U.S. is the biggest market in the world and the game is to be able to manufacture products in shit hole countries where workers are paid a dollar or two a day and sell them in the U.S. at a 1000% profit. In the process of making that %1000 profit they must by default put American workers out of work. This game has been going on for 50 plus years and the elite, including our own politicians who magically become millionaires while in office don't want this to change.

What’s elite is protecting the jobs of 2000 parasites in PA at the expense of 300M Americans.

Jobs are important but the more important points here are the strategic importance of maintaining a domestic steel industry AND upsetting the corrupt world trade cabal that has a stranglehold on international trade. It would please me if this steel and aluminum deal is just the beginning of Trump's fix our trade agreements.

What silly thinking.

The trouble with TC's argument is that it ignores the average person does not understand free trade, and is willing to sacrifice a few dollars a year in cheaper prices for perceived "job security". So free trade is not the messenger, but the villain, to the average person (i.e., a Trump supporter).

I'm not so sure that the "average person" doesn't understand free trade nowadays. My understanding is that Texans, for example, are highly supportive of NAFTA as Texas does a lot of cross-border trade. Farmers are also highly supportive of trade as the US is a large producer of food.

The benefits of free trade are socialized, the costs are individualized. People understand free trade from that perspective. A different understanding requires a different distribution of the costs and benefits.

+1 and what will happen when, like in BrExit, the US renounces free trade, and for the short-to-intermediate term, nothing bad happens but the economy continues to grow (as it has in the UK for now)? That will be the death knell of free trade. Kind of like, in a another era, "The Strange Death of Liberal England is a book written by George Dangerfield published in 1935. In it the author discusses the causes of the decline in the influence of the British Liberal Party in the years 1910 to 1914."

Note the Liberal Party in the UK was sort of like "libertarian free trade" while the Conservative / Labour parties that overtook it were more like today's "Republican" and "Democratic" parties in the USA, i.e., essentially statist. TC please do a comment on this if you have a moment (how free trade can die and nobody will notice or care, short-term to intermediate term).

"when, like in BrExit, the US renounces free trade": you seem to be confused. How can leaving the EU possibly be considered to be renouncing free trade? It's a highly protectionist bloc.

Let them eat their welfare checks....

The trouble with TC's argument may be that it assumes Trump's action had to do with economics.

It is not news to most libertarians that the case for free trade is counter intuitive, nor is it news that it is politically difficult to implement, due to the problems of dispersed costs and concentrated benefits. That's why it's taken generations of gradual construction of multi-lateral institutions such as the WTO to get to this point.
trump is about to put the torch to about 80 years of economic progress.

'such as the United States and Denmark, are quite compatible with full employment'

Strangely, Germany has lower unemployment than both, but then, Germany is a socialist hellhole with the world's oldest welfare state, if measured by such things as health insurance and government provided pensions. According to the OECD HUR data, Germany's Dec. 2017 unemployment rate was 3.6%, the U.S. had a 4.1% rate, and Denmark had a 5.6% rate. - table 1

'The welfare state may still, through say tax rate effects, keep some family second earners out of the work force.'

Or even worse, keep a second wage earner earning wages through three years of parental leave. Talk about a drag on employment in a welfare state like Germany's.

'That sounds like an OK enough race to me'

But not to most Germans, living in their socialist hellhole.

The labor force participation rate (LPFR) is a little lower in Germany

Germany - 61% , US - 63%, Denmark - 68%

US has 15 % over 65, Germany has 22%, so the labor participation rate should be lower.

"Labour force participation rate is defined as the section of working population in the age group of 16-64 in the economy currently employed or seeking employment. ..."

But won't non-welfare states like China with imperialist ambitions enjoy a geopolitical strategic advantage over welfare states like the US, especially if they are abe to collude with Canada and Mexico to gain NAFTA advantages without all the treaty burdens?

One way to understand trade (and immigration) questions is to apply the question to states and cities. Does the fact that different states offer different packages of welfare benefits mean that states would be better off not trading with each other? Hardly.

Unfortunately this is also a good way to avoid understanding those things too, if that's what you're after.

It seems that protectionism overall is bad for an economy, welfare state or not. The welfare state has to be funded somehow. In a sense it’s a parasite of the private sector. The parasite can end up killing the host ( Greece). With protectionism , the country ends up with uncompetitive industry and higher prices, lower growth and eventually the welfare state requires massive borrowing. So perhaps free trade is even more vital , the larger the welfare provided by the state.

Last I checked Greece actually had the lowest percent of GDP devoted to government in the EU, it was lower than Sweden, Denmark, France, Germany and even I think the UK. The trouble with Greece is that the government doesn't actually do anything except dole out favors. At least in the other EU countries the government kind of works to fix potholes and the like.

Greeks spend a lot more of their GDP on military than usual (at least for EU standards).

Given their cordial relations with Turkey, this is actually rational.

The point of protectionism would surely be to let you scrap parts of the welfare state.

Greece's problem is not redistributive supports for people to access opportunity or to help those who for whatever reason are not presently (or at all) able to earn much income.

Greece's problem is that it's capacity in tax collection is too often corrupt, and that people expect to be able to retire on a public pension after a lifetime of tax evasion.

Simplistic. Discuss dumping and strategic industries please. Forget about welfare state. Red herring.

I have never heard a compelling argument in favor of anti-dumping / infant industry protection laws.

If China wants to give us free steel, maybe we should just take it?

Sadly, Foxconn does not give away phones and PCs. And America is unable to manufacture them. Still, Americans get the benefits, right?

It seems to me that the world is pretty big, both in terms of export targets and import sources. If we just taxed all imports at 3% at the docks, and forgot about it - would any import ever really dry up?

Phones and PCs do not come from one country only. (Even if one region now dominates.)

'Phones and PCs do not come from one country only'

Correct. They also basically do not come from America at all. Oddly, more than 2 decades ago, this broad area was considered a serious strategic concern, leading to this response -

Because back then, the U.S. government/military was concerned that it had become reliant on Japanese suppliers for critical components that could not be manufactured in the U.S.

Of course, one can be confident that a company like Foxconn will continue to allow the U.S. government to import the necessary components to continue an armed conflict with China, right?

Paranoia is easy, but is there any model for your implicit argument that every country (from Argentina to Zimbabwe) should make cell phones (and other "strategic" products)?

'Paranoia is easy'

Or realistic - the Chinese are no more interested in America retaining its global hegemony than the Russians. It is simply that the Chinese seem to have found a better method than ideology and wasteful military spending like the Soviets.

'your implicit argument' ...

Is that countries that are unable to manufacture a product are then reliant on those who can - and they also are forced to pay the price that the manufacturer charges. Isn't this sort of the foundation of mercantilism 101, by the way? Or have Americans forgot how that game is played? America's position on free trade is seen as amusingly naive by just about every country that has a significant export surplus.

It is not as if those exporting to the U.S. are being forced to, in comparison to the COMECON structure of the Sold War days - in the main, they are happy to take as much advantage of the U.S. as they can get away with. (This has nothing to do with Trump - this has been going on for decades.)

So there will still no model then. Only vague fears that in some unspecified and unlikely scenario the US and its other trading partners would not be able to adapt to a sudden self-imposed China blockade.

Jeez, in the specific example at hand we are talking about putting a tariff on the Canadians because they are too wild and unpredictable!

'Jeez, in the specific example at hand'

This the specific example at hand for my comment was this - 'If China wants to give us free steel, maybe we should just take it?'

You are good at links (with over-long excerpts).

Find one on the amount of Chinese ghost steel actually routed through Canada

Foxconn and Pegatron assemble the phones in China, very little is manufactured there. The components are manufactured around the world, and significant IP is created in the US. Import statistics do not currently account for this.

'very little is manufactured there'

Depends on what you mean by manufactured. From Forbes, Nov. 2017 - 'China’s semiconductor industry, one that will make the core components of smartphones and PCs, is growing fast. If you said "hey wait, supplying semiconductors for consumer electronics sounds like more of a Taiwan thing," you'd be right but outdated.

China’s semiconductor sector is thriving on investment from the Beijing government’s National IC Industry Investment Fund, Taipei-based market research firm TrendForce says in a media statement in October. China already has the world’s biggest semiconductor market, so more work on components helps perfect a domestic supply chain and reduces reliance on imports. Annual revenue from Chinese semiconductors this year will reach 517.6 billion yuan ($78 billion), up 19.4% over 2016, TrendForce forecasts. Revenue will grow 20% this year to a new record, the research firm says. Average growth worldwide is expected at just 3.4%.


China’s semiconductors will have arrived if they starts taking down the industry’s global standard bearer Taiwan Semiconductor Manufacturing Co., or TSMC.

“As Chinese brands are to prioritize Chinese suppliers, it would likely squeeze their orders placed with TSMC in the future,” Chou says.

The Taiwanese contract chipmaker, with 54% of the world’s market share and a growing net income of $11 billion last year, has led much of the industry in mastering ever smaller semiconductors, such as super-tiny 5-nanometer chips due to be produced in 2019 for mobile and high-speed computing.' '

Foxconn may rely on importing some things - lasers very much come to mind - but Foxconn is not precisely reliant on global markets to satisfy most of its component needs. But then, what do the Chinese know about directing government policies and resources to winning market share in world markets?

Are you making a parallel argument that other countries, say Germany, should put protective tariffs in place, until they produce half their cell phones and upstream components?

It will be very funny if the answer is "trade unions mean you don't have to make everything yourself."

'Are you making a parallel argument that other countries, say Germany, should put protective tariffs in place'

Infeneon is doing OK without protective tariffs - Not for cellphones, but for other products.

I think this is going quite off track. This started in relation to China 'giving away' products - the Chinese are not that stupid, they are looking to remove competitors. Protective tariffs are a normal part of life for most successful exporting nations (the Japanese and South Koreans are very skilled at it, for example). The EU has no ideological problem protecting its markets, either. The point is balance, that what is involved in mutual benefit, not a one way street where one side cleans up, and the other talks about how the real money is in being post-industrial or services or IP or whatever fantasy sells best. This has nothing to do with Trump, which is undoubtedly where the problem is coming from. This has been going on for a full generation in the U.S. after all

“trade unions mean you don’t have to make everything yourself.”


The joke (“trade unions mean you don’t have to make everything yourself") is that you feel safe in a trade union that does not allow member nations to play "strategic industry" games on each other .. while arguing that trade unions are no protection for the US.

But as I say, while trade unions or deals can improve the good times, I think the US and partners can respond dynamically to any likely shift in trade environment.

It is a big world, and we trade with pretty much everyone.

'trade union'

Ah, here I was thinking, that you meant a place where trade unions have true political power, like in Germany.

'to play “strategic industry” games on each other'

Of course the members of the EU play that game with each other - see the concrete examples of food and weapons.

'I think the US and partners can respond dynamically to any likely shift in trade environment'

And after watching what has happened to the U.S. over a generation, I disagree. But then, who cares about a generation long trade deficit?

'It is a big world, and we trade with pretty much everyone.'

At a basic loss, year after year. At some point, that game is not sustainable. The U.S. domestic auto industry is mainly foreign companies (just under 70% of the cars sold in the U.S. are made by non-American owned companies), and if you think that Mercedes cares more about Tuscaloosa than Stuttgart, for example, well, welcome to why people in Stuttgart are happy that Mercedes is headquartered where they live. And as a side note - GM has basically abandoned the EU market, selling its Opel and Vauxhall division(s) to PSA Peugeot Citroen, in the typical American style of dynamically responding to the big world.

Food (net of production not consumption) and (some) weapons sounds like more an emotional legacy that a serious strategic commitment.

What about tires? You can't withstand a long blockade without tires!

'You can’t withstand a long blockade without tires!'

Well, actually, you can (assuming tires is a stand in for rubber), at least if you are a modern industrial nation able to manufacture synthetic rubber - 'After 1910, lower natural rubber prices reduced the attractiveness of developing synthetic rubber, according to the IISRP. A pilot plant of methyl rubber from dimethylbutadiene started in 1911, but not until 1915 during World War I did commercial production take place in Germany.

"War was usually the catalyst for sparking interest in synthetic rubber," says Mark Michalovic, consulting historian for the Chemical Heritage Foundation (CHF). "Mechanized warfare requires lots of rubber hoses, belts, gaskets, tires, etc, for tanks, airplanes and such. In World War I, British naval blockades, however, kept Germany from getting natural rubber from Southeast Asia."

Over 24,000 tonnes of methyl rubber were produced between 1914 and 1918, according to the IISRP. The synthetic rubbers were still not very good, says Michalovic, and were only used during that war.

"The Germans knew the rubber was miserably inadequate, as did the rest of the world. With British restrictions on rubber supply and the determination of the US, Germany and the Soviet Union, the synthetic rubber quest was far from over," he says.'

Maybe you could an example that is not so simple? And you can then look at WWII and the U.S.synthetic rubber industry.

But this seems to be still going off on a tangent. The EU is explicitly about creating trade relations to prevent war - nonetheless, the EU has never permitted destructive race to the bottom trade among its members. And its members would never let such practices be used against them, regardless of the attraction of 'low, low prices' in the short term.

I have build a lot of PCs in my time and a log of key parts are not manufactured in America. I'm not aware of any US based motherboard, solid state drive, or GPU manufacturer. Most cases are also manufactured overseas. there is a lot of chip manufacturing still done in the US but even so, most of the Intel CPUs I have purchased in recent years were not made in the US.

Intel engineers based in America designed those chips. Chip manufacturing is just printing a million copies of something we designed. We Americans probably even designed the machines that print the chips and developed the manufacturing processes used to operate the machines that print the chips.

America could manufacture phones if we wanted to. It's not like we don't have the technological capability. We design the chips, and the boards, and write the software. Asia is just a big PCB printing and plastic molding factory for us.

You have no idea what you are talking about. Replacing supply chains and ancillary services associated with volume manufacturing takes a long time.

The argument is an implication that America needs to protect it's 'infant" chip manufacturing industry. Yes there would be a supply shock in the interim, but if trade conditons changed to make manufacturing chips more cost effective in the US, they would be built here.

If there was no ability to make steel in the US it could be compelling.

However, it's odd that to think that the US would strictly need additional capacity. Say, if war broke out, there's plenty of capacity to go around until facilities rapidly expanded. So ... why does the US need additional steel and aluminum capacity right now?

You could put it down to Trump being dumb, but who knows who else is up to what? It's not like there's much benefit for Russia in expanded US production in these industries. Or ... maybe he really cares about steelworker jobs?

Yes my thoughts exactly.

Explain to me, how after you go down the Strategic Industries rabbit hole, you stop? Do you end up with everything called Strategic? Tires to toothbrushes?

'after you go down the Strategic Industries rabbit hole'

You know what is one of the most amusing things about living in Europe? Every single country in Europe is basically able to feed itself, and would never, even for a second, think that buying cheaper food at the cost of losing that ability to feed itself, would be a good deal. But then, centuries of warfare provide a different perspective on things.

Oddly enough, the same applies to European arms manufacturers - not a single European country relies on another country to make basic weapons. Yes, complexity and cost mean that there are joint ventures for helicopters, fighter jets, etc. - but not a single government in Europe thinks that relying on a cheaper supplier at the expense of its own ability to manufacture what is necessary is a good idea.

A modern industrial nation can make whatever, when they need to. That includes things like food and guns.

How's that going?

"Thus, the total stock of Leopard 2 main battle tanks is 244th In 2017, an average of 176 were available, the remainder was in the repair or was stored in depots. Of these 176 tanks, 105 were actually ready for use, which makes a quota of on average 60 percent – and yet nothing is said about the extent to which maintenance and spare parts supply are actually sustainable…

In the Panzerhaubitze 2000 it is already close again: In the inventory of the Bundeswehr, there is this artillery gun 121 times. But only 75 are available, 42 operational (56 percent).

Even more dramatic looks at the army aviators. The total stock of the NH90 transport helicopter is 58. In 2017, 37 of these were available on average, while only 13 were available (35 percent). Four of them are in action in Mali – which incidentally means that hardly any staff is available for training at home. Failure to withdraw the NH90 from Mali in the middle of the year will stall the ability for years to come."

+1 ʕ •ᴥ•ʔ for arguing for free trade

'A modern industrial nation can make whatever, when they need to.'

And why are you so confident that the U.S. remains a modern industrial nation? And the Russians are concrete proof, assuming that you consider them a modern industrial nation (open to discussion, of course), that this is most definitely not true.

We really are coming at this from two very different directions - the U.S. has mainly been in the hands of a group of people interested in little but the rich getting richer, with stomping on unions thrown in for fun. Then Trump shows up, and laughably throws a tantrum which will change absolutely nothing concerning the long term. And many Americans will wonder why, at some point in the future, the rest of world is no longer playing by the rules that America followed, unconcerned about whether what is good for Toyota or Daimler trucks is good for America (yes, more than half of American trucks are manufactured by Daimler and Volvo). As if anyone in Toyota or Stuttgart thinks about America first when making corporate decisions relating to the future.

Ir you are using automatic translation, check out Rheinmetall's order books. The Bundeswehr may be in poor shape, but the German arms industry continues to do quite well - 'Where does Germany stand among the world's arms exporters?

You'll often hear Germany referred to as the world's third-leading weapons seller, but official statistics are usually neither completely reliable nor completely up-to-date. What seems certain is that Germany is in the top five, well behind the United States and Russia, with sales volumes more comparable to those of China and France.'

Follow the money - German companies do not generally rely on their home market to make money.

Well, if Europe wouldn't consider doing it, obviously it's a terrible idea.

The Jones Act should tell you exactly how beneficial protectionism is to "strategic industries".

Is there a way to tell the difference between a China mercantilist bot and a "free trader"?

And why is "free trade" the hoariest and tallest of conventional macroeconomic totems, genuflected to daily and sometimes with self-flagellation (we must lose our jobs for the larger good), while "free property development" is a pygmy statue, kept in a darkened corner?

We should have made a distinction between unrestricted trade and zero tariff trade 40 years ago.

"Free" is a word that leads people to believe unrestricted trade requires zero tariff, rather than say a low and uniform one.

A tax restricts access to a good. For example, someone with low income has restricted access to expensive things.

Whether from there tariffs may be argued as a good idea, is another question altogether. But to argue that a tax is not a restriction is either to express some lack of knowledge or to argue in bad faith.

Yes, cutting taxes on the rich and billionaires does create a welfare state as they receive government services such as roads, education, and military without paying any taxes into the system which funds them.

ExxonMobil, because of the collapse in oil prices, had an odd income statement in 2016, with EBIT of $4.2 billion, net income of $7.8 billion, and a $406 million income tax benefit.

It is sad and disturbing to see people who should know better favoring dismantling America's industrial power, the industrial power that won WW II and ultimately liberated Eastern Europe, and urging the American people to exchange their hard-won wages and pride for the mess of pottage of welfare. Some of us at least still belief in a honest day's pay for a honest day's work (and vice-versa).

Economists inhabiting their ivory towers, safely protected from the real world and its vagaries by ivy covered walls, may neither understand nor empathize with the plight of honest, hardworking Americans of all races, all genders, all creeds who see themselves, despite their best and most sincere efforts, displaced by foreign competition and the malefactors of great wealth who back them. We hope, however, that President Trump will really honor the votes he earned and leave no stone unturned and no avenue unexploited in the quest of bettering the fortunes and prospects of the proverbial men (an woman) on the street and lessen the weight of the Chinese-Japanese jackboots on their faces. It is time for action, for being tough and defend America's values and interests.

You realize the Russians won WW2 in Europe? 6 of them died for every 1 Allied soldier. They liberated the concentration camps. Marched into Berlin.

And is having the State protect your job from foreigners an honest days pay?

The way in which the Soviet army fought was definitely very heroic, but the supplies from Allies definitely played a very important role too.

For example, the USSR had a very big trouble producing a reliable truck. Studebakers sent from overseas were crucial for supplying the troups with materiels.

War is not won by the total carnage numbers. The art of victory is lost if the art of logistics does not deliver.

This is true but the vast majority of their weapons of war, tanks, planes, and all other equipment and supplies were produced domestically. Much of the Soviet industrial base was located behind the Ural Mountains, far away from the German occupation.

Like it or not, the Soviets would have had no chance if they didn't forcefully industrialize their country in a short period of time. The process was brutal and involved gross violation of human freedoms and lots of bloodshed, but it worked.

Betting on WWII-era technologies is a good bet.

And helping people is hurting people.

Any other good advice?

Tangentially, it strikes me that for a country with low level of competitive advantage (high wages, and not much of an education/productivity/technology/regulation advantage), combining Free Trade with workfare (subsidized low income employment via tax credits, minimum wage, etc.) will tend to shift the balance of employment towards non-traded sectors, and so possibly reinforce low competitiveness in traded sectors.

Any obvious reasons why am I wrong?

Trade is based on comparative advantage.

The idea (and this is an ideas web site) that humanity, if humanity could, would do nothing if the welfare state would support them is contrary to both the innate human condition for doing something useful and the evidence. Why would there be a populist uprising in Europe and America if the welfare state supports those who lose their industrial jobs to China and other low cost countries? The only thing normal about opposition to trade is the normal distribution (i.e., the bell curve) of humanity's abilities. No, not every child or adult in Wisconsin and Minnesota is above average, and that's normal. As Cowen indicates, trade makes us and the world richer, and better able to absorb the shocks brought about by the combination of trade and the normal distribution. But Cowen is being less than forthright about his attitude about what should be done to "absorb the shock". Cowen favors "disruption" and markets: disruption provides the incentives for growth and markets provide the most efficient means for getting there. In the long run, of course. It's that dreaded short run that stumps experts such as Cowen. As I have often expressed, I favor order and stability, but that doesn't mean I oppose disruption and markets. It means that I appreciate that we all live in the short run and that disruption and markets work in the long run. We can't arrive at Cowen's long run unless we are willing to absorb the shocks in the short run. How best to absorb the shocks would be a conversation worth having.

The questions stated seem like:

a) Under "Free Trade"(tm), are employment shocks likely to be higher?
b) Under "The Welfare State"(tm), is employment slower to recover (stickier) from shocks?
c) Assuming above are affirmative, are efficiency losses from Free Trade+Welfare still lower than Protectionism+No Welfare?

It seems like it is probably unanswerable in a strong sense, but a reasonable line of ideas to investigate.

Another, even more challenging line of inquiry (and less related to DM's questions), is whether using Protectionism+No Welfare as an instrument to retain full employment, results in a culture of industriousness that ultimately gives gains far beyond losses from the practice of protectionism itself.

In this formulation, maximum growth is more related to maintaining mass engagement with a country's internal market and with culture of business and enterprise, and this is worth a fractional loss of Smithian Growth to get there.

There is a fairly long read on political tribalism up at Politico, it might relate to this in two ways. First, a steel tariff (even if "bad") might be seen as "for" the populist affinity group.

And second, Tyler's academic argument (and Tyler himself!) might come across as elite (in the wrong way) and "for" the globalist affinity group.

Really, that explains nicely why Tyler is elite (on the wrong way) and Trump is not.

(I have to admit that my affinity group includes the many foreign-born engineers I worked with over the years, and that they did come to be "my people.")

This got no agreement or argument, but I think it is the most important thing going on here.

See today's tweets.

"If the E.U. wants to further increase their already massive tariffs and barriers on U.S. companies doing business there, we will simply apply a Tax on their Cars which freely pour into the U.S. They make it impossible for our cars (and more) to sell there. Big trade imbalance!"


If I were German Chancellor I'd worry about my car industry. It obviously sells lots of vehicles to customers abroad who cling to the outdated notion that German vehicles are better put together and more reliable than the competition. But the figures strongly suggest that they are not and haven't been for a good few years. If ever the penny drops for the customer, there could be rather rapid decline in sales.

Yeah, they should have all sold out to Tata of India.

So broad based taxes are fine (VAT, Sales, Labor) but taxes increasing the prices of goods from countries we think are not reciprocally treating us or others (dumping, IP), or have human issues are not? Aren't those kind of Pigovian?

That was the old regime (literally). The new proposal is to tax steel and aluminum from everywhere because .. that's easier?

I don't think this post is about the proposed aluminum tariff.

OK so when people say "free trade" that's as simplistic as people saying they are for "free market capitalism". In fact capitalism is structured and regulated as also trade should be.

“The new proposal is to tax steel and aluminum from everywhere because...that’s easier?” No. It is because under NAFTA, China can avoid tariffs and countervailing duties merely by transhipping through Mexico and Canada. Very little of the steel that Canada exports to the US is actually produced in Canada. Most of it is of Chinese origin. The same with aluminum from Mexico.

How much harder would it be to track output of Canadian plants, if we really cared?

But as I said, "easier."

You could just give Canada a pass-through for the first half of domestic production. That would be close enough and not penalize our friend and neighbor.

By the way, I tried googling for Chinese ghost steel coming through Canada and couldn't find any. Link?

Canada imports very little steel from China. In fact, they have numerous "trade remedies" toward Chinese steel that restricts trade with China.

The US is the most significant source of steel imports for Canada. Each country specializes in different forms of steel and we trade back and forth in steel products. Given how freely we trade in various types of steel with Canada, how a tariff on steel would work is hard to imagine.

VAT taxes are also de facto charged on inputs which are imported, at the time of sale of the final good.

You have to raise revenue somewhere (cigarettes, liquor) - why not taxing trade on countries you want to send a signal to? Aren't we forgetting about the revenue side of this?

Working toward easier ability to satisfy local procedures would more likely be useful to obtain market access, as compared to tariffs to prevent trade in the other direction.

How do we justify refusing to trade with countries at all (infinite tariff)? That must cost something as well.

Dear President Trump,

Please do not impose the tariffs you have proposed. In many of the communities that supported you, thousands of small and medium-sized firms will be hurt by this new tariff/tax. They lack the pricing power to pass the costs onto customers; they lack the profits to absorb the cost increase. These smaller firms are frequently vital to the towns and villages they serve. Politicians will often visit these firms when they are running for office, extolling the role they play in their community, but so quickly forget them after the votes are counted.

You pledged to drain the swamp. Politicians filled that swamp with one exclusive deal for some favored group, followed by another and then another. They usually had good intentions. But at the end of the day politicians only created a swamp of special deals where the interest of the average citizen just gets lost in the muck.

Mr. President these smaller firms, these smaller communities, are dying from a thousand small cuts. They are suffering. They do not need the burden of another tax to support some politically favored group. No matter how you frame it, you are asking thousands of small and medium-sized firms to bear a tax burden to support industries you want to help.

Please don't use the canard that this is for national defense. We have enough domestic production to meet the needs of the military. I find it hard to imagine that on the modern battlefield we will ever again need that type of rapid mass mobilzation. To be honest, that is the rhetoric of too many scoundrels in Washington.

If you must compromise, please negotiate to get some countries to stop subsidizing their industries and contributing to a glut of production. But please do not follow the protectionist's path. You might consider some narrowly targeted tariffs, but I would advise against ever entering that muck.

Free trade does often place a terrible hardship on some of our citizens, some of our communities. Your acknowledgment of this reality is appreciated and too often ignored. However what they most often need is tax and regulatory reform. They need the burden of government eased not increased.

God bless and protect us. Amen

So there is the market disciplining aspect of tarriffs due to unfair trade or human rights abuses Maybe that is not in dispute (is it?). On the idea of saving jobs in fairly traded but uncompetitive industries, do a thought experiment. Switch a bunch of your manufacturing to Country X to take advantage of lower wages, permanently unemploying a bunch of US workers. If these unemployed people in the US are paid back the same wages in safety net benefits as the Country X labor you now effectively employ, you just break even. Since you will need to pay them mcuh more in the US to live, you lose. Effectively you now employ both the Country X workers and the idle US workers if the US workers are unable to find new jobs and are on the dole. You have just taxed yourself the amount of the Country X labor cost.

This is simplistic in that is assumes that aside from labor cost, manufacturing is just as efficient in both countries. Also it assumes the US workers are not productivel employed doing anything after they lose their jobs. However the point is that given the welfare state as currently construed and lack of opportunities for these workers it is conceivable to lose through free trade with a welfare state.

In the US though, we don't have long term Welfare. We use the Earned Income Tax Credit to tip from idle workers to .. possibly under-employed ones.

So the dollar cost becomes the EITC, and a bit more affordable.

Do you actually live in America?

Of course we have long term welfare!

Disability, for example, is easily gamed. And its permanent. My "disabled" landlord re-roofed the rental house himself. How the F does someone be considered "disabled" but can do roofing? He also did the electrical, although poorly.

What about food stamps? Those run out, right? No, they really don't. The "rules" may say that but clever people find ways to get around the rules, for example get your kid labeled "disabled" and all those rules go away. Or you can just not check the box when applying. Remember that surfer guy who was buying lobster on his EBT card? That's what he did.

Note: I am not against welfare or disability, but if we had a more fearsome technocracy, we could direct MORE money to those who really need it, and guys who can do roofing and electrical work would not "retire" on disability to his horse ranch.

None of those things are Welfare in the pre-96 sense. There were 4.5 million families on Welfare then. There are 1.5 million on TANF now.

Disability is complicated.

There are 100 million people on Medicaid. I'd say it's all complicated.

Medicaid is not "welfare". Under the ACA it is becoming the last fall-back insurance program for people with no workplace benefits whose incomes cannot afford Exchange policies even with subsidies. Excluding children and persons in nursing homes, the majority of Medicaid recipients are in fact employed today.

Re: Disability, for example, is easily gamed.

Huh? No it is not. Have you ever applied for disability, or known someone who has? Outside of extreme cases (people who are already moribund, or catastrophically injured) the process is a long and difficult one involving multiple appeals. It's almost impossible to fake a disability: except for abrupt accidents (which of course must be well documented with X-rays, MRIs, police reports etc.) reams of medical records will be required: the system needs to establish that your condition is a long-standing one that has gradually gotten worse over time until it reached the point that precludes your customary employment (and of course you must have some employment history, as with collecting old age benefits). Sure, in principle someone could produce that sort of paper trail, but they would need to spend a good long while (years, basically) running back and forth to doctors. All of which means spending $$$, and ditto the necessary legal assistance with the appeals.

It is possible to be disabled in a way that prevents you from doing things that you are qualified in, at an age where retraining would not make much sense, but still be able to do some other activities.

For example, repetitive stress injuries related to computer usage could eventually prevent certain activities in an office, without preventing the ability to do reroofing.

However, my guess is that in the described scenario, that would most often be a generous assumption ...

Thank you for that courtesy, Mr C. In return I'd better reflect on what you say.

I think the more interesting question is whether the free trade model is valid in a world of fiat currency. I think it's great that we can export inflation but I don't know whether that model is sustainable. Maybe it is. The cost side appears to be enormous public deficits and declining labor force participation. My non-expert impression is retail services are all that's left for a subset of the population. Automation/mechanization and women (or men) choosing to stay at home are factors too.

Fiat currency has always existed in that governments have always had the choice how much to issue, by either hoarding gold/silver or debasing it at their will. Inflation (and deflation) most certainly did not begin with paper money.

TC's points are sort of valid with respect to the long run. In the short run, some people get screwed out of jobs so that others may enjoy lower prices.

Wouldn't tariffs mean that some people get screwed out of jobs (in industries that use steel and aluminium) so that others may benefit?

Its interesting that libertarian economists never look at tariffs as a form of tax and compare it to other taxes. Is $1 of tariff's really a lot worse than $1 of sales tax or gas tax or income tax? The federal government financed itself completely with tariffs for the entire 19th century. Was that not a time of relatively free trade and free markets?

Or, is it any different from transportation costs. Capital is far more mobile than labor, so capital gets to play tax and regulatory arbitrage. The libertarians would tell you that's why we need a globally mobile labor force, as if people are interchangeable cogs and the welfare state (and creeds, and tribes) don't exist.

It's a tax that is only applied to some people's goods. A general sales tax would apply to all steel equally, not just steep from other countries.

Huh kind of like how liquor and cigarettes are taxed or carbon taxes are proposed. Why are those targeted?

Cig and liquor taxes are just social engineering, and should be abolished.
A carbon tax might be the least bad option out of the varying proposal to deal with the externalities caused by carbon emissions.

Do Chinese grad students learn these lessons and go back and tell their leaders this?

And then the leaders ignore it and set up national champions, non-trade barriers, etc.

It would be nice if the free trade message were getting out to other know the ones who sterilize surpluses, and have many, many barriers to trade.

(and actually maybe it is. Taiwan, I know personally, has slowly improved for allowing imports.)

Apparently Trump's steel tariff is not a new idea:

What I find fascinating is the number of people who are suddenly feeling an impulse to revisit long-settled questions like the benefits of free trade, simply because a moron who is opposed to it happens to be flying their tribe's colors at the moment. Similarly, if Bernie Sanders had won the election, you can bet a lot of Democrats would suddenly start questioning our need for so many kinds of deoderant, and discovering the benefits of free college. Is this a case of "if you can't beat them, join them", or is it more that power is a very persuasive force?

It's simpler than that, partisanship is the persuasive force. It's tribe uber alles. The old joke was Obama could have gotten Republican support for anything he wanted if he pretended to oppose it. Trump could probably do the same, for Dem support.

It's more than just tribalism, tho. It's the effort to rationalize tribal impulses as objectively good.
A cynic might support Trump's policies on trade on the logic that anything which helps one's side win elections is ok. The cynic is honest with himself - he knows they are bad policies but is willing to support them anyway, since he thinks that greater good is helping his side win. It's a rationally calculated strategic decision. But the rationalizer is worse - the rationalizer doesn't want to admit he's only supporting those policies because they help his tribe. The rationalizer deceives himself into believing that bad policies are actually good.

Can you please define "free trade"?

Sound like "open market capitalism". Both are highly regulated.

You're not going to start arguing that because trade agreements have rules, they don't count as "free trade", are you?

Also I don't think this post is specifically about one particular proposal, is it?

Related question:. Is UBI compatible with free trade?

Wouldn't it allow some industries to undercut competition?

Re: So some workers will lose their jobs due to foreign competition, and find reemployment difficult or not sufficiently desirable relative to the dole.

Assuming they are without significant income from any other sources, I question whether anyone in the United States at least finds unemployment more lucrative than their previous employment, or even potential future employment. The unemployment insurance system is designed to pay no more than 2/3 of prior earnings, and as a practical matter it pays on the average about 40% of prior earnings.

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