Wednesday, 20 April 2016

New arguments against free trade

Earlier in the month, The Economist reported on the rise of anti-dumping tariffs:
Dumping is the practice of selling goods in foreign markets at an unfairly low price—typically, one lower than the going rate in the exporter’s home market. Anti-dumping measures are intended to prevent a company from selling goods below cost in order to drive competitors out of business, before using the resulting market power to gouge customers.
So countries create additional tariffs to apply when foreign firms are thought to be using otherwise free trade to 'dump' their products into the domestic market. However, as Gary Becker has noted (for example, in this book), this type of predatory pricing is probably not sustainable. If you drive competitors out of the market and raise your prices, then new competitors will enter, assuming that the fixed costs of production aren't high enough to constitute a barrier to entry (which is arguable for some industries, such as steel production). However, even if there are high fixed costs, if you have relatively free trade then competitors from other countries can also step in when the predatory pricing stops.

There are other arguments put forward in favour of anti-dumping tariffs (from the same Economist article):
In Britain, where rock-bottom global steel prices now threaten Tata Steel, the owner of the country’s biggest surviving mill, proponents of tariffs argue that it is important to preserve domestic steelmaking to ensure supplies for the defence industry, among others.
The 'national security' argument is an old favourite of some anti-free-trade groups, particularly those that stand to benefit directly from trade barriers. The Economist points out the folly of the argument: is hard to see how the use of French steel in British submarines harms Britain’s security (its pride is another matter). For manufacturers of all sorts, most notably carmakers, cheap steel is a boon.
In other words, the gains (to domestic consumers, and to domestic manufacturers using steel in production) from free trade in steel probably outweigh the losses (to domestic steel producers). And national security isn't much of a consideration.

But is it always the case that the gains from freer trade outweigh the losses? In another interesting blog piece from earlier this month, Tim Harford writes:
Fifteen years ago, the conventional economic wisdom was that free trade was almost unambiguously a good idea. Here’s the basic logic. There are two ways for the British to get hold of wine. We can grow and press our own grapes, or we can make something that the French want and trade with them. If we’re good at making, say, computer games and the French are good at making wine, then trading is the better way to get what we want...
I’ve been phrasing all this “conventional wisdom” in the past tense but, for the most part, it stands up. However, it is acquiring an important and depressing footnote. A new research paper, “The China Shock”, from David Autor, David Dorn and Gordon Hanson, is part of a rethink under way in the economics profession...
Autor, Dorn and Hanson conclude that the American workers who have been hurt by competition with China have been hurt more deeply, and for a longer period, than many economists predicted. Employment has fallen in industries exposed to trade competition, as expected. But it has not shown much signs of rising in export-oriented sectors.
The research paper by Autor et al. is here (ungated here). Economists recognise that there are gains from trade. In fact, it is one of the things that economists most agree on. However, although there are gains from trade, and therefore gains from making trade freer, those gains are not obtained without cost. When we open our markets to international trade, our export industries (the industries in which we have a comparative advantage) will produce more, while other industries (in which we have a comparative disadvantage) will shut down. In New Zealand we experienced this - which is why we no longer have much in the way of car assembly plants, whereas there were previously several large plants around the country. The conventional wisdom is that there is some short-term pain (workers losing jobs in the industries with comparative disadvantage) for long-term gain (additional jobs in the industries with comparative advantage).

The Autor et al. paper demonstrates that the short-term pain can last much longer than previously thought (the paper is mostly very readable - I encourage you to do so). Although the 'national security' argument is weak, perhaps the so-called 'jobs argument' against free trade has some truth to it after all? Which might give us reason to pause on free trade agreements, particularly when the gains are marginal at best, or occur far in the future (while the costs are incurred in the short-term).

No comments:

Post a Comment