Ideal Taxes Association

Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog



Free Trade Policy Is Not Good Economics
Raymond Richman, 7/3/2015

As Prof. Milton Friedman has written, “Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world.” I disagree with my former mentor but that there are circumstances when free trade is a suicidal policy, as is currently the case with the U.S. A Keynesian, Prof. Alan Blinder of Princeton University, is quoted as having written as recently as 2007:  "Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes."  This is a foolish observation since the trade deficits that the U.S. was experiencing when he wrote had converted the U.S. from the world’s leading creditor to the world’s leading debtor and caused the loss of millions of U.S. jobs in manufacturing. These statements reflect discredit on the economics profession which asserts that Economics is a science.  

There are circumstances in which free trade is a country’s appropriate policy, e.g., when the conditions for a free trade policy exist, namely a common currency and free movement of labor and capital. These conditions hold among the states of the USA so free trade is an appropriate policy for the USA. But where these conditions do not exist, free trade is likely not to be a good policy. Prof. J. M. Keynes must have been among Prof. Blinder’s one percent of economists who question free trade as an appropriate policy.. He wrote that when a trading partner uses mercantilist practices to keep trade unbalanced in its favor, he would recommend that Britain take counter-measures.

One of the effects of so-called free trade agreements, as Prof, Schott of Yale University has pointed out, is that U.S. manufacturers are encouraged to move their production to factories overseas secure in the knowledge that they can import their foreign-produced products duty-free. Economists have assumed, contrary to fact, that consumers always benefit from the lower prices of imported goods. They often do. But there is little evidence that the American consumer benefits at all from the re-location of American factories abroad. The prices charged by Apple, Nike, Hewlett-Packard and hundreds of others who have located their factories abroad are as high as they would have been had the products been produced in the U.S..

Only when a country experiences a balance of trade is free trade an appropriate policy.

Economics, as a science, can tell you what the effects will be of free trade in a given set of circumstance. Most examples in text books of the effects on trade tell you that if one country imposes tariffs or other impediments to trade, the other is advised not to retaliate but to assure a balance of trade. With balanced trade all trading partners benefit but not as much as they would if there were no impediments to trade. That is the case for free trade but the required conditions must exist, namely, a common currency and free movement of labor and capital.

Countries may benefit from unbalanced trade for a period of years. This is the case of developing countries which experience trade deficits while foreign direct investment – investment in factories and equipment – is taking place in their countries. These direct investments benefit them while the investment is taking place and with increased job opportunities when the factories start operating. Of course, as the Asian Tigers learned, financial investment is not direct investment and may not be beneficial at all.

The U.S. policy of free trade has raised corporate profits of multi-nationals while causing the loss of millions of manufacturing jobs. The trade deficits have been a drag on economic growth. Economists attribute the decline in U.S. manufacturing as a percent of GDP to trends toward the consumption of services. But the reality is that the U.S. is the leading consumer of industrial products in the world. The reality is that much of the manufactures we consume are made abroad.

Free trade is always an appropriate policy when trade is in balance, as my colleagues and I pointed out in our book Balanced Trade (Lexington Books, 2014). And we point out that balance is easy to achieve without the intervention of international organizations, which never or hardly ever support the U.S. in its disputes with other nations. We proposed a single-country-variable-tariff, which we call the “Scaled Tariff”, which would be imposed when a country experiences a chronic trade deficit with an important trading partner. For example, the U.S. has been experiencing chronic trade deficits with China, Japan, and Germany. These deficits may or may not be the result of their employment of mercantilist practices, trade barriers, subsidies to exporters, manipulation of exchange rates, etc.. But there is no need to prove it is the result of illegal practices. We need to balance trade. The scaled tariff rises if the trade deficit increases and disappears when trade nears balance.

Announcement by the U.S. that it will impose the scaled tariff will have an additional beneficial effect. Firms that relocate their factories abroad will be put on notice that if they invest in a country with which we are experiencing a chronic trade deficit, their imports from their factories located abroad may be subjected to the scaled tariff. This may tend to offset the encouragement to located factories abroad which exists currently.

Many journal articles have been written by economists showing that when other countries impose tariffs, employ non-tariff barriers, manipulate exchange rates, trade is still beneficial so long as trade is in balance. Of course, all would be better off if there were fewer barriers to trade and trade was in balance. 

Your Name:

Post a Comment:




  • Richmans' Blog    RSS
  • Our New Book - Balanced Trade
  • Buy Trading Away Our Future
  • Read Trading Away Our Future
  • Richmans' Commentaries
  • ITA Working Papers
  • ITA on Facebook
  • Contact Us

    Archive
    Aug 2017
    Jul 2017
    Jun 2017
    May 2017
    Apr 2017
    Mar 2017
    Feb 2017
    Jan 2017
    Dec 2016
    Nov 2016
    Oct 2016
    Sep 2016
    Aug 2016
    Jul 2016
    Jun 2016
    May 2016
    Apr 2016
    Mar 2016
    Feb 2016
    Jan 2016
    Dec 2015
    Nov 2015
    Oct 2015
    Sep 2015
    Aug 2015
    Jul 2015

    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013
    July 2013
    June 2013
    May 2013
    April 2013
    March 2013
    February 2013
    January 2013
    December 2012
    November 2012
    October 2012
    September 2012
    August 2012
    July 2012
    June 2012
    May 2012
    April 2012
    March 2012
    February 2012
    January 2012
    December 2011
    November 2011
    October 2011
    September 2011
    August 2011
    July 2011
    June 2011
    May 2011
    April 2011
    March 2011
    February 2011
    January 2011
    December 2010
    November 2010
    October 2010
    September 2010
    August 2010
    July 2010
    June 2010
    May 2010
    April 2010
    March 2010
    February 2010
    January 2010

    Categories:
    Book Reviews
    Capital Gains Taxation
    Corporate Income Tax
    Consumption Taxes
    Economy - Long Term
    Economy - Short Term
    Environmental Regulation
    Real Estate Taxation
    Trade

    Miscellaneous

    Outside Links:

  • American Economic Alert
  • American Jobs Alliance
  • Angry Bear Blog
  • Economy in Crisis
  • Econbrowser
  • Emmanuel Goldstein's Blog
  • Levy Economics Institute
  • McKeever Institute
  • Michael Pettis Blog
  • Naked Capitalism
  • Natural Born Conservative
  • Science & Public Policy Inst.
  • TradeReform.org
  • Votersway Blog
  • Watt's Up With That


    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]