Obama on Fair Trade

Barack Obama’s recent statement on fair trade, a statement applauded by some leading Republicans, contains some easily recognizable errors in international trade theory. The central problem with his remarks is seen in his following position:

Now, one of the things that I talked about during the State of the Union address was making America more competitive in the global economy. The good news is that we have the best workers and the best businesses in the world. They turn out the best products. And when the playing field is level, they’ll always be able to compete and succeed against every other country on Earth.

But the key is to make sure that the playing field is level. And frankly, sometimes it’s not.

Here we see the view, commonly held by the media and non-economists in our universities, that international trade is a competition, analogous to sports or military competition (sometimes, “trade competition” is compared to the Cold War). If the playing field is not level, then the trade is not fair. Economists, and this view is not limited to Austrians, understand that international trade is the fruit of cooperation, not competition. America and China are not trade competitors. Paul Krugman thoroughly demolishes this fallacy in “The Illusion of Conflict in International Trade” (reprinted in Krugman’s Pop Internationalism). Krugman explains that in international trade “it is the illusion of economic conflict, which bears virtually no resemblance to the reality, that poses the real threat.”

The danger in Obama’s position is that he pledges to do something about China’s trade practices:

Since I took office, we’ve brought trade cases against China at nearly twice the rate as the last administration, and these actions are making a difference. For example, we halted an unfair surge in Chinese tires, which has helped put over 1,000 American workers back on the job. But we haven’t stopped there.

Two weeks ago, I created a Trade Enforcement Unit to aggressively investigate any unfair trade practices taking place anywhere in the world. And as they ramp up their efforts, our competitors should be on notice: You will not get away with skirting the rules. When we can, we will rally support from our allies. And when it makes sense to act on our own, we will.

Obama is threatening China. Our government will “aggressively investigate,” other government’s actions, other countries “should be put on notice,” governments that obey Obama’s decrees are our “allies,” and he’s willing to take actions against those that refuse to bow down to the U.S. state. Fortunately, Obama does say that “we prefer dialogue” to more aggressive actions, but he doesn’t limit his actions to negotiations. Government managed trade in the name of fair trade reduces our gains from trade, but the danger in Obama’s position is that it could lead to real conflict with China that goes beyond the illusion of conflict seen by our political leaders.

For some sound reasoning on this issue, see Krugman’s Pop Internationalism. In addition to the paper mentioned above, I recommend “Competitiveness: A Dangerous Obsession” and my favorite chapter “What Do Undergrads Need to Know About Trade?”

 

Comments

  1. The U.S. is brilliant….they don’t have jobs,…they don’t produce anything…but,…..the Country can take by voluntary trade all of the goods produced by the rest of the world in exchange for thier dollar (a dollar that can be printed in limitless amounts)….what’s the point of producing anything when you can do that????….and to pull off a scam like that you definitely require co-operation!!!

    • The problem is that this only works for the privileged people who receive newly-printed money. The rest of us Americans have to work for our money, newly-printed or not.

  2. The important point about international trade is that it doesn’t take place between countries, but between the people of those countries. They’re the real victims of tariffs and trade treaties that limit what they can trade and at what price.

  3. The problem with viewing international trade as competition between countries (admittedly, the firms in the countries involved in trade are in competition with one another) is that it tends to lead to policies that are harmful. In order to be competitive, governments tend to fear imports and encourage exports. Henry Hazlitt says it best, “Exceeded only by the pathological dread of imports that affects all nations is a pathological yearning for exports” (in “The Drive for Exports,” Economics in One Lesson).

    In his remarks, Obama complained that China is competing against the U.S. by subsidizing Chinese exports to the U.S. Such policies harm China and help our economy. Such subsidies transfer wealth from Chinese taxpayers to U.S. consumers. The Chinese view of trade as competition results in Chinese policies that hurt China. However, Obama also regards trade as competition and demands that the Chinese stop these practices. Obama, in thinking of trade as competition, supports U.S. policies that will hurt the U.S. economy in that they will increase U.S. exports and restrict imports.

    Hazlitt, of course, explains this much better than I have.

    • I thought part of Hazlitt’s argument was that when we import, we pay in dollars for cheaper goods than we can make here. By getting paid in dollars, the country with those dollar reserves will be more inclined to purchase US exports in the future. (A comparative advantage argument?)

      But the excess dollars are largely used to buy US government debt. Doesn’t that help keep interest rates low, feeding into malinvestment and asset bubbles? Additionally, won’t China eventually use dollars to buy real US assets, like farms, mines, corporations, etc.? So I can understand that we benefit in the short term, but perhaps not the long term.

      It would also seem the trade imbalance reflects low a US savings rate and a high Chinese savings rate.

  4. “America and China are not trade competitors.”

    But doesn’t someone need to tell China that? If they are practicing mercantilism to some degree, doesn’t that mean they view us as competitors? It seems if someone views you as a competitors, and you don’t view him as such, he may gain more from the relationship than you do.

    • Noah,

      You are right on. Like all good college professors, “talking” is the solution to all problem, just like surgery is the answer to all health problems faced by the surgeon.

      If China is engaging in merchantilism, by manipulating its currency, for example, even if it does so to the detriment of all but the most elite of the population, we are not going to “level the playing field” by talking them out of their scheme, any more than we are going to talk Iran out of its imperial designs of their nuclear weapons program.

      Get real.

  5. Uderlying theoretical errors notwithstanding, Obamas reference to a ‘level playing field’ rings rather hollow, frankly. A casual look at the outcomes of American foreign policies, to say nothing of trade or domestic sectoral support policies, suggests to me that ‘Level’ is used as a synonym for ‘biased in our favour’.

    And of course in their imerialistic approach to Iran with the recent imposition of sanctions thereon has unilaterally imposed colossal additional energy and trade costs in the untold billions, on scores of developing-world nations.

  6. I am surprised to see that Krugman makes such a good comment. Firstly we are spoon fed the idea that capitalism is “dog eat dog” and thus the term “survival of the fittest” seems appropriate. If the fittest are inderstood by the majority to be the most aggressive, powerful, coercive and to have supreme bully power, then the idea of regulation to protect “the weak” from the ravages of such power will be easily sold to a voting public. On the other hand as Rothbard indicates, the “fittest” under free market capitalism is the most able to serve. Such protection is therefore irrational. We need no “anti dog eat dog” act. Obama’s plan is based on a fallacy. Sounds like the bully, the coercive one and the aggresor is him.

    • @ Brendanc: part of the problem with the misleading dog eat dog/survival of the fittest/red in tooth and claw image of the free market is our own doing: we overplay the virtues of ‘competition’ and give it undeserved prominence, conflating the ‘competitive’ market with wars or sports contests in the minds of those who we would seek to enlighten. But it is an erroneous impression: In a market, you dont even engage directly with your competitors. Indeed, you dont even know who who most of them are!
      It is much more accurate to characterise the market as inherently co-operative( and therefore NOT competitive), because the primary actvity defining market transaction is always seller A and buyer B co-operating to mutual benefit by choice. Such ‘competition’ as may be said to exist between successful seller A and unsuccessful seller C is no more than the residual consequence of B’s election to to co-operate with A instead of C.

      In my opinion, calling that state of affairs ‘competition’ is nothing short of Orwellian – inversely analogous to calling the War Department the Ministry of Peace. Market-leaning neoclassicists like the chicago school (with whom Austrians still share much ideologically nws fundamental theory differences) are particularly guilty of this inadvertant hatchet-job on capitalism ( along with overplaying the ‘virtues’ of extreme self-interest as the ultimate trump card), But Austrians are not blameless either. It amounts to an own goal in debating against those well-meaning but misguided ideologues on the left, whose woolly sentimentality would find it so much harder to object to an argument manifestly rooted in the concept of ‘co-operation’.

      • While I think much of our problem lies in an unfortunate shift in the connotation of the word “competition” — it’s taken on an increasingly “bad” one since at least the early 20th century — you make a great case here.

        I think I’ll borrow this next time I’m speaking to one of my left leaning acquaintances.

      • The value of competition in the marketplace is an important one, and needs a name of some sort. But yes, the marketplace incorporates both competition and cooperation to function smoothly.

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