Free trade: yay or not? (Review of Free Trade Doesn’t Work: What Should Replace It and Why)

Recently, I decided it was time for catching up on my to-read list. I try to read >=30 books a year, and I was behind, owing to spending a lot of time on company work. I also wanted to avoid reading too much of the same stuff. Two reasons. First, I want to avoid getting too much confirmation bias that inevitably happens from reading a lot of stuff that’s in high agreement with each other. Second, knowledge in general has strong diminishing returns. Knowing, say, 50% about physics is almost as practically useful as knowing 90%, But knowing 50% is a lot more useful than knowing 0%. Furthermore, there are diminishing returns to knowledge accumulation too because the material will inevitably cover some of the same stuff, meaning that you aren’t learning something new.

Taken together, I wanted to try reading something new to me. I decided on Big Politics, a topic I normally avoid because it’s full of feelings and the relevant data to decide the issues does not generally exist and in many cases could not even be realistically gathered if we were determined to do so.

I generally lean towards freedom on questions of policy, but I’m not a principled libertarian. What I have is a kind of libertarian default policy, which can be undermined by reasonable evidence that regulation/less freedom works better to further our collective goals. I’ve never really considered free trade, tariffs etc. (i.e. between-country trading) in detail so generally leaned towards free trade being good. On the other hand, macro economists — whose opinion people copy — tend to be not my cup of tea. Essentially basing their ideas on various mathematical models with totally unrealistic assumptions: everybody has only self-interest, consistent goals, perfect rationality, consistent time-preference, humans being substituteable (no individual differences), unrealistic beliefs in the causality of education in itself and so on.

So I looked around for a anti free trade book. There were several to pick from. I incidentally stumbled upon this article by the author of one such book: Free Trade Doesn’t Work by Ian Fletcher. It has reasonable reviews: 4.4/5 (n=69) on Amazon, 4.2/5 (n=59) on Goodreads. Good enough for me.

The book isn’t technical, but it gets the job done reasonably well. Since comparative advantage á la David Ricardo is the basic foundation for most claims about the benefits of free trade, naturally the author spends his time arguing against this argument. Because this argument is based on a lot of assumptions and some mathematical modeling, all one has to do is attack the assumptions. If they are shown to be very wrong, then the conclusion about free trade’s benefits won’t follow. This doesn’t establish that free trade is bad/protectionism is good, but it’s a start.

The criticism of free trade

Fletcher lists 7 dubious assumptions of free trade.

  1. Free trade is sustainable. One cannot keep a negative or positive trade balance forever. Keeping a negative one means importing more than one produces, which creates debt to foreigners. Not even keeping a positive one is always a good idea. If it’s based on selling off non-renewable property to foreigners such as natural resources. When they run out, there is nothing left for one’s ancestors.
  2. There are no externalities. These come in two kinds: negative and positive. The textbook negative externality are environmental pollution. If a country has lax environmental standards, one can import goods from it cheaply. However, this causes accumulated pollution in the production country. In the unlucky scenario where pollution is global in scope, it means that the world is essentially relying on the weakest environmental protection of any country. Because there are 200 countries or so in the world, probably some country or another will have misinformed, low protections. Free trade using this will cause global destruction of the environment.Positive externalities are the opposite: where some sectors of the economy produce spillover effects, like making it easy to break into another sector. For instance, production of materials used to manufacture computers makes it easier to break into the computer production sector because one can source locally. These factors are ignored in free trade. In the worst case, countries can get stuck in an agriculture sector. Agriculture doesn’t really lead easily to other sectors, but free trade will push a country towards it if wages are low and the climate warm. Ring any bells?
  3. Factors of production move easily between industries. The simplest example here are workers’ skills. While some workers are able to retrain, most are not or it is very costly. When the trade opportunities change, free trade forces a country to move its production into a new sector. However, since workers cannot adapt as fast as circumstances change, they will instead move into unemployment or underemployment.
  4. Trade does not raise income inequality. Comparative advantage, when it holds, implies that the economy as a whole will grow, not that it will grow equally. Fletcher gives a hypothetical example of importing clothing and exporting airplanes. Suppose we start with an economy that produces both. But then we find a trade partner with lower wagers that is able to produce clothes but not planes more efficiently. Great, so we start exporting planes and importing clothes. All good so far. But then, what’s the distribution of jobs required for producing planes and clothes? Maybe planes requires 3 high skill workers and 7 low skill, while clothes require 1 high skill and 9 low skill. So, by doing this, we’ve increased the demand for high skill workers and decreased that for low skill workers. Since workers can’t just change places (individual differences in basic traits + acquired skills), then this will cause lower wages or unemployment.
  5. Capital is not internationally mobile. Basically, capitalists won’t necessarily invest in creating jobs in your own country. Rather, if wages and free trade allows it, they will invest in other countries’ infrastructure. Fletches gives the example of British engineers building railroads in other countries instead of Britian. In 1914, 35% of British owned railroads were not in Britain. Furthermore, when capitalists move jobs to other countries, this will lower production costs (per free trade), which is good for consumers. But if they move too many jobs away, then it’s problematic too. Consumers and workers are the same people, and they can’t consume cheaper goods if they have no jobs, or can’t afford them if they have lower paying jobs. There is no theorem that says that these will necessarily balance out in favor of your country.
  6. Short-term efficiency causes long-term growth. Comparative advantage theory is a static model, about what would happen if things balanced out in an instant. It just so happens the world is not like that, things take time. Generally speaking, one wants growth, and change means positive change, be it skills, income or knowledge. Comparative advantage is about being the most efficient at what one currently does. If you work as a secretary, you don’t want to become the most efficient secretary. You want to build skills so you can move into a better job. Burkino Faso doesn’t want to be the most efficient Burkino Faso, it wants to become something like Denmark. Comparative advantage itself does not imply anything about how one would accomplish such goals.

    It goes back to Ricardo’s own example of wine and wool production. Britain produced wool and Portugal produced wine. Then they traded and everybody was happy. However, wine production did not spawn another useful sectors. Wine production has been essentially the same for hundreds or thousands of years. It has no node above it in the tech tree. Wool production, however, lead to mechanical treatment of wool, and then other mechanical parts and eventually a whole mechanical industry that lead to steam ships and trains. Lots of nodes in the tech tree above. If you’re a country, you want to move your production towards sectors with nodes in the tech tree above them.

    A personal example of this as applied to science. I have many co-authors. They almost inevitably want me to write the analysis because I’m so much better at it and much faster. This is the more effectively solution given the present distribution of abilities and results in us getting done with the study faster. Comparative advantage they say. However, as I keep telling them, if we keep splitting the work up like this, they will not learn to program, and this will have long-term consequences for their output. Programming ability is a force multiplier, allowing one person to do quickly what previously one person took a long time to do, many persons a long time, or was impossible before.

  7. Trade does not induce adverse productivity growth abroad. Trading with others might cause them to attain high growth rates, which changes their opportunity costs. These can become so high that they stop producing cheap products which you were previously importing. But now, you lost your own production in this sector, and it’s hard to start one up again. So you’ll have to keep importing more expensive products from the other country if they are necessary for you. If you had kept your own production on-going, then you would not have this problem because you would have kept the know-how in the country all along.

The prior

Seems pretty convincing to me, but we should be skeptical. The book itself has tons of footnotes: about 700 for the book or .about 2 per page. I did not generally check up on them, so maybe the references are not very convincing. Maybe they are like when Nisbett cites stuff.

What about the author? Is he a well known economist, so that we can be reasonably sure he knows his stuff? Seems not. His page lists no academic publications. He says he was educated at Columbia and the University of Chicago, but not in what. Might be a ‘Doctor’ Laura case. She speaks as if she’s a doctor of psychology or psychotherapy (a really low bar to pass!), but actually she has a ph.d. in physiology. On diabetes. In rats. I am of course not very hostile to outsiders (my degree is in linguistics, bachelor only!), but not taking the prior into account would be foolish.

Searching for publications of his does reveal some. Mostly in obscure outlets (associated with the post-autistic movement). (Sounds familiar?). On the other hand, regular economists do cite his book not just for criticism.

So, I’m not wholly convinced yet, but will read more. Naturally, next up I decided to read something in the totally other direction: Democracy, the God that failed. An Austrian economics book.