Free trade over fair trade

Fair trade is often an excuse to raise more protectionist barriers to serve domestic special interest groups

October 31, 2019 12:15 am | Updated 01:35 am IST

Photo: Special Arrangement

Photo: Special Arrangement

Free trade, which enjoys almost unanimous support among economists, has come under severe attack from politicians across the world. According to the Managing Director of the International Monetary Fund, Kristalina Georgieva, the U.S.-China trade war has brought global trade “to a near standstill”. Yet it seems unlikely that politicians will listen to the advice of economists, which is to bring down barriers to international trade rather than raise them further. The protectionist politician’s argument is that increasing tariffs on foreign goods protects domestic industries from unfair trade practices adopted by foreign governments. For instance, U.S. President Donald Trump has accused China of ripping off the U.S. by, among other things, imposing high tariffs on American goods that are imported into China, artificially lowering the value of the yuan against the U.S. dollar in order to encourage Chinese exports, and adopting domestic policies that favour local Chinese companies over American ones. Retaliatory tariffs, it is believed, will help level the playing field and ensure “fair trade”.

Dropping trade barriers

Yet the case for free trade does not depend simply on the condition that all countries must engage in “fair trade” practices. Trade does not have to be “fair” for countries to benefit from it. In fact, a country that drops all trade barriers on its side can benefit from such trade liberalisation even when other countries refuse to do the same. As the economist Paul Krugman wrote, “The economist’s case for free trade is essentially a unilateral case: A country serves its own interests by pursuing free trade regardless of what other countries may do”. This is because countries that remove trade barriers unilaterally, like Hong Kong and Singapore did, benefit their consumers, whose standard of living is improved greatly by access to foreign goods. By the same token, a country that raises trade barriers works against the interests of its own consumers. Of course, if all countries tore down their respective trade barriers, the world would be a richer place as goods can freely move around. But in the meantime, unilateral free trade can at least benefit consumers in countries that decide to fully adopt it.

Despite this, tariffs and other trade barriers are extremely popular among politicians. This can be attributed to the misconception that trade policy must be judged based on what good it does to a country’s producers rather than consumers. But as the economist Claude-Frederic Bastiat noted, “All economic phenomena, whether their effects be good or bad, must be judged by the advantages and disadvantages they bring to the consumer.” Competition between producers is usually considered good because, even though it could cause some of them to lose out, it benefits consumers who can buy cheaper and better goods. Yet when such competition comes from producers in foreign countries, it is opposed for no valid economic reason. Some argue that retaliatory tariffs are warranted since foreign governments heavily subsidise domestic producers. Mr. Trump has criticised India and China for misusing their “developing country” status at the World Trade Organization to subsidise domestic producers, thus putting American producers at a terrible disadvantage. However, using retaliatory tariffs in a desperate attempt to protect domestic producers is misguided because it stops American consumers from enjoying the benefits of subsidies offered by foreign governments.

Trade deficit

Another economic statistic that is misused to gather support for protectionist trade policies is the trade deficit. A trade deficit is seen as a bad thing since it indicates that the value of a country’s imports is greater than the value of its exports. But economists such as Milton Friedman have argued against the view that a country loses wealth when it experiences a trade deficit. A trade deficit or surplus merely shows that people in different countries prefer to buy different things from one another. Americans, for instance, may prefer Chinese goods over Chinese real estate assets while the Chinese may prefer American financial assets over American goods. This will cause the U.S. to experience a trade deficit with China as it buys more goods than it sells to China. And at the same time, it will enjoy a capital surplus as it receives more capital than it sends across to China. So a trade deficit in no way reflects which side loses or wins in a trade. In fact, voluntary trade both within and between countries happens only because both sides believe that they gain from it. Fair trade is often just an excuse to raise more protectionist barriers to serve domestic special interest groups. The world would be a richer place if leaders chose free trade over “fair trade”.

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