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 Richmans' Trade and Taxes Blog

Are Trade Agreements Necessary?
Raymond Richman, 11/29/2016

Most economists are believers in free trade but there is nothing in economic theory that justifies a free trade policy. There is plenty of international trade theory that shows that balanced trade is beneficial to trading partners but there is no economic theory that justifies free trade and then only when special conditions apply. Chronic trade deficits are to be avoided because they usually involve loss of jobs and growth in the trade deficit country in favor or gains in jobs and growth in the trade surplus country. Free trade between countries is justified only when the countries have the same monetary unit, labor and capital are freely mobile between the countries, and none of the countries impose barriers to the free movement of goods. In effect, all the countries involved are in a common market. This is the case in the U.S. where the Constitution imposes these obligations on the States.

U.S. economists have always favored increased trade between nations. When the U.S. experienced     chronic trade surpluses, American economists opposed protective tariffs arguing for free trade. But they failed to distinguish between free trade and balanced trade. Prof. Milton Friedman is often quoted as favoring free trade but that was when the U.S. enjoyed chronic trade surpluses. Another great economist, Prof. John Maynard Keynes was an advocate of free trade but when the U.K. experienced chronic deficits, he stated that Britain should not tolerate being the victim of beggar-one’s neighbor policies pursued by countries to gain chronic trade surpluses at the U.K.’s expense.

The movement toward freer trade gained impetus with the inauguration of the series of General Agreements  on Tariffs and Trade in 1947 culminating in the conclusion of the Uruguay round in 1994, and the creation of  a new international agency, the World Trade Organization in 1995. What characterized these agreements is that they were all called “free trade” agreements even though countries continued to levy tariffs and impose non-tariff barriers on imports and to subsidize exports. As a result of the trade agreements, the U.S. in particular began to experience chronic trade deficits. In a paper written in 1995, I wrote:

The log-rolling negotiations that accompanied the revision of the GATT treaty gave substantial benefits to some American firms but sacrificed others. Owners of intellectual property and American companies             that have established manufacturing facilities abroad are clearly the big winners. …The big losers are the employees of companies that do their manufacturing in the U.S. and the U.S. taxpayers who will have           to make up the billions in lost tariff revenues and smaller taxes paid by displaced U.S. workers. Nor will these costs be compensated by benefits to the American consumers of imported goods. ..  Because                   capital is free to move anywhere in the world, capital moves to where it can get the best return. Labor is much less mobile but as we see in the flood of legal and illegal immigrants and refugees to the                       U.S., people will move to higher wage countries if they can. Europe, Japan, and the U.S. would be inundated if labor were free to move in response to wage differences.

International trade agreements are examples of crony capitalism, each country favoring particular sectors or industries of its economy at the expense of other sectors and industries.

According to its preamble, the purpose of the General Agreement on Tariffs and Trade was the "substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis”, each country reducing some of its formal barriers to imports from the others in exchange for their reducing some of their formal barriers to its exports. It ended up creating a new institution, the World Trade Organization, with super-national powers and consequent reduced sovereignty of its member countries. For example, the U.S. Congress cannot require the country of origin to be labeled on imported products and had to repeal a law, under threat of a WTO fine, that it had passed requiring the labeling of meat products. The trade agreements required some countries to change their domestic laws and practices with respect to working age and work conditions, global warming, and other political issues including wages and hours.

Of course, a country need not balance its trade with every one of its trading partners; it must avoid an imbalance of its trade with the rest of the world. Countries may often import more than it exports for good economic policy reasons, for example to import capital goods to more rapidly increase its rate of growth. But there is no reason for the U.S. to tolerate trade deficits with such countries as China, Germany, Japan, Korea, and Mexico.

All of the above raises the question of whether international trade agreements are really necessary at all? In our opinion, trade agreements are unnecessary. They are negotiated by lawyers often have no understanding of the economic consequences of the agreements. The Office of the United States Trade Representative (USTR), created in 1962, is an agency of more than 200 professionals headed by a lawyer. It is a political body. They consult business groups but are also required to consult political advisory groups. Recently, a federal district court judge ordered the United States Trade Representative to name at least one representative from the environmental community to each of two panels that advise her on negotiating strategy and other matters involving international trade in wood products and paper products. The Federal Advisory Council Act requires that the advisory panels represent a "fair balance" of viewpoints. There are more than twenty that advise the U.S. government on international trade.

Trade is a commercial activity and should be determined by the offers of potential buyers and sellers. Government’s only role is to ensure a balance of trade with the rest of the world in order to avoid harm to its own economy and avoid harming the economies of other nations. It has the power to accomplish this by trade-balancing single-country tariffs that rise and fall with the rise and fall of trade deficits with particular countries. Such a tariff is proposed in our book, Balanced Trade (Lexington Books, 2014). A great virtue of the single-country variable tariff is that it does not matter who and what is at fault in causing the trade imbalance, whether it is mercantilist practices or imbalanced budgets, or insufficient savings, or whatever. No need for international agencies to be created that supercede a country’s right to self-government