Free Trade: Here We Go Again

I don't intend here today to try to prove the case for free trade all over again. It's been done many times before, but it doesn't seem to stick. For academic types, I simply refer you to the absolute advantage arguments of Adam Smith, and their refinement into comparative advantage by David Ricardo. Somewhere in there we should place Frederic Bastiat, whose arguments for free trade were not only correct, but fun to read. If he were alive today, he would be a frequent guest on Kudlow and Company.

Briefly and simply, absolute advantage says we benefit if we do what we do best and trade for the rest. Smith said the cause of the wealth of nations was the division and specialization of labor, which is limited by the extent of the market. International trade extends the market enhances the benefits of specialization.

Comparative advantage carries the argument a step further and says that it pays to specialize and trade even if one party can produce everything more cheaply than the other. My favorite example from school was the executive and his secretary (showing my age with that word). Even if he can type faster and more accurately than she can, it probably still pays for him to leave the typing to her since his advantage over her as a typist is not likely as great as his advantage as an executive. Comparative advantage is a most-best or least-worst phenomenon.

Notice I haven't mentioned jobs or trade balances. The benefits of opening up trade are indicated more by the increased volume of trade than which party develops a surplus or deficit. It's hard to predict the net impact on jobs initially, but over time it will tend to even out since more imports tend to stimulate exports and more exports tend to stimulate imports. The net number will tend to end up the same, but presumably they will be in areas of comparative advantage instead of areas protected by barriers to trade.

Bastiat's Petition on behalf of the candle makers to the French Parliament is the classic defense of free trade. He points out how unfair it is for the French candle makers to have to compete with the sun for the provision of light and argues for a law requiring the shutting of blinds and shutters to level the playing field. He goes into great detail about the secondary benefits that spread from the candle makers to other related industries and create a general prosperity. (See Why Bastiat is my Hero in 2001 speeches at http://www.bobmcteer.com/.)

While Bastiat's arguments for free trade are more fun, a more succinct statement was provided by Henry George, who pointed out that protectionists want to do to their country during peacetime (close its borders to imports) what the country's enemy would want to do to it during wartime.

Most educated people understand the benefits of free trade, and that probably includes educated politicians. However, many who understand are only too willing to pander to the many more that don't. The reason many don't is that the benefits of free trade are widely dispersed while the costs are more concentrated. Free trade helps almost everyone a little bit, but hurts a few a lot. Furthermore, the higher standard of living associated with, and attributable to, free trade is not easily identified — while a job lost at a plant moving to China is easily associated with it.

Theoretically, those benefited could use a portion of those benefits to help those harmed get trained for the new jobs created by trade. But, alas, it's easier for politicians to feed the ignorance than to try to educate their constituents, and that seems true for two-thirds of our presidential candidates.