US President Donald Trump’s new protectionism is populist, wrong and dangerous. Sadly, that does not mean that his loudest opponents can automatically claim the moral high ground.
Since David Ricardo explained in 1817 why countries trading with each other are always better off without trade restrictions, the economics profession has been in favour of free trade.
History has since provided plenty of examples to support Ricardo’s theory of comparative advantage.
Neither theory nor practice prevented Trump’s attack on trade over the past weeks. First, he imposed steel and aluminium tariffs. Now, he has threatened European carmakers with high import duties.
Ironically, as a politician President Trump behaves differently from the property entrepreneur he once was. When his own company once needed aluminium for the façade of a new hotel in Chicago, he was all too happy to accept a bargain price and imported the materials from China.
Trump is hypocritical as he now opposes the same trade practices he personally benefitted from.
But Trump’s opponents do not lack in hypocrisy, either. The same people now crying the loudest about Trump’s war on free trade could do with a look in the mirror.
For a start, the European Union has been vocal in its opposition to Trump’s new tariffs. How dare Trump threaten Mercedes and BMW with new import duties, they complain.
Well, the Europeans’ own track record on car imports is not that impressive either. Tariffs on imported cars are 2.5 percent in the US – but 10 percent in the EU.
If the Europeans cared for their credibility and economic efficiency, they should slash their own car import duties to 2.5 percent (or, better still, to zero).
Trump’s attack on steel and aluminium imports should also sound familiar to the Europeans. Their own anti-dumping department has been busy shielding the European market from allegedly unfair competition for more than a decade.
On most measures, the EU is more protectionist than the US, with an average weighted tariff of 3 percent compared with the US’ 2.4 percent.
Even here in New Zealand, we should be careful with critiquing Trump’s protectionism. Though generally free-trading, we still charge duties on items such as shoes, accessories and clothing for no good reason.
When discussing free trade, most governments sit in their own glasshouses.
Trump’s protectionism deserves a response. But it should be an even greater commitment to free trade, not retaliation.
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Oliver Hartwich is the Executive Director of the NZ Initiative, and the recipient of then UK PM David Cameron's jibe that "The sooner he gets on the ship the better."
14 comments:
Doesn't Ricardo's require a "comparative" advantage?
There could be non-ideal situations where trade does not ÄLWAYS benefit both parties. For example, if a country traded away its capital assets for a consumable product that its own population could have produced instead of doing nothing.
Odd isn't it that countries are threatening retaliatory tariffs in response to Trump's, so as to doubly disadvantage themselves?
Like Say's Law, the comparative advantage involves what is *produced.* And, like the law of supply and demand, it assumes both consumers and producers on each side.
If the population produces nothing, then it's only *advantage* lies in being able to bludge off the production of the past. (Either their own or, if they're simply parasites, someone else's.)
If the population is doing nothing, then it's trade that's keeping them alive.
But if it persists in doing nothing, except to consume its capital, it won't last long.
PS: Your example reminds me of this note: "But, in fact, consumers qua consumers are not part of anyone’s market; qua consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of 'consumer'; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market’s 'supply'; in the role of consumers, they represent a market’s 'demand.' The law of supply and demand has an implicit subclause: that it involves the same people in both capacities.
"When this subclause is forgotten, ignored or evaded—you get the economic situation of today."
Or that of your example.
"But if it persists in doing nothing, except to consume its capital, it won't last long."
So, if there is an insurmountable resistance to production, or variations thereof, one option to ensure survival is to stop (or vary the terms of) trading. It is simply an illustrative example of trade not ALWAYS benefiting the trader. Or if this can't be called "trade" because the text-book assumptions are not satisfied, call it something else. Rightly or wrongly, Trump calls it "unfair trade".
1817 is a long time ago. David Ricardo couldn’t have considered the fixed costs per citizen in a modern liberal democracy; health care, pensions, unemployment benefits etc. Nor could he have contemplated the ‘stickiness’ of a modern specialised employment market. There are considerable costs in transitioning from say skilled forestry worker in the country to paramedic in the city - in time, money and sundry externalities. Ricardo’s simple model remains elegant and generally compelling. And most proposals for ‘protection’ and misguided and self defeating. But there are situations where (hopefully only temporary) trade restrictions are sensible. Some politicians need to be reminded that there options other than to always be driven by price signals by supposedly rational markets.
Andrew
We agree, I think. Besides, Ricardo's model requires a comparative advantage to both parties (the production of something more efficiently than the trading partner by both parties.) Different matter presents if one country produces everything less efficiently than its trading partners.
It is glib to say trade is always beneficial to both parties, regardless of circumstances.
It's still trade. And it's the trade that's keeping them alive, for the moment.
But consider what would happen if a protectionist Watchman were to be elected in this place who convinced them that trade was bad. Given that their capital is unconsumable (you don't specify its make-up, but let's at least assume it's inedible), what then are they going to eat?
Andrew, it doesn't matter whether it's 18107, 2017, or 17AD. Neither stickiness not high fixed costs changes the simple fact that trading what you're best at producing brings you more of what you value. To simplify, if you're Swiss, you get your bread by making watches. If you're Canadian, you get your cars by growing wheat. And if you're Japanese, you get your timber by making cars. (Not sure what the point of mentioning transitioning costs is? Don't think it's relevant.)
Watchman, actually what you're talking about here is a different thing than *comparative advantage,* which underpins everything we know about the advantages of the division of labour. You're taking instead about *absolute advantage*, when it's pointless to produce rum at the North Pole and ice at the equator -- the absolute advantage of each group in each place would be in doing the opposite.
But that's obvious, and it's not what comparative advantage is about: comparative advantage instead recognises the much more important point that *even if those with whom they are trading could do it better* every person/group/company/nation is still much better off (as are their trading partners and the wider world) to produce whatever he/she/they *are* best at, .
Indeed, what it says even further, is that those with whom they are trading are better off if they let them, *even if they could produce the stuff more efficiently themselves.*
Paul Samuelson once called this economic law the truest yet most counter-intuitive economic principle of all time, and he's probably right.“ This law holds that human cooperation in a division of labour is mutually advantageous even when one party is productively superior to the other in every way; because it allows the superior party to concentrate on those areas of his superiority which are greater and more important—i.e., on his areas of comparative advantage. By the same token, the inferior party concentrates on those areas in which his inferiority is less or less important, which represents his comparative advantage.” ~ George Reisman, Capitalism, pg. 350
Ludwig Von Mises called the wider principle the Law of Association, in that it explains not just trade between countries, but *the reason anybody trades with anybody else at all* -- the very reason that explains the economic advantage of more widespread human cooperation. It explains why we associate, and why that association both allows and encourages specialisation, which acts to everybody's advantage.
It's the reason that a Jack-of-all trades for example might be highly valued, but generally not anywhere near as much as a specialist in one of those trades would be: because the gains from specialisation in Jack's very best area outweigh whatever Jack might gain from just being very good in lots of areas.
(That's not to say Jack wouldn't enjoy being a generalist more, but in that case he's still pursuing his highest value, even if he produces (and acquires) less. But being part of the worldwide division of labour, he can still acquire the little he does want materially with less time and effort than he otherwise would.)
You might think about this Law of Association as explaining what the cleaning lady or cook does for Madame Curie. Marie Curie could have been an exceptional cook or cleaner, but she (and we, and the cook) were all better off that Marie explored radium (at which she was a genius) while her cook explored her kitchen (in which her cooking allowed Marie to maintain her focus on her work). Same goes for Steve Jobs and his barista, Einstein and his secretary, and Trent Boult and his shoe maker.
In the same way, both nurse and doctor (and all of us) are better off that each concentrates on *their* specialist areas, as we all are when do the likes of inventors and their draughtsmen, carpenters and their handymen, coaches and their assistants, and even baristas and their grinders of coffee.
If it still seems counterintuitive, PJ O'Rourke explains it using Courtney Love and John Grisham.
And this Desert Island Game allows you to plug in whatever values you like into all sorts of parameters to see how it all works.
Enjoy!
PS: It also explains why Usain Bolt ran the third leg in the Jamaican relay instead of the last one. True story.
PC,
thanks for the info, appreciated. But my rudimentary understanding of Ricardo's Law of Comparative Advantage (at least the simple illustrations I have come across) don't work if there is no comparative advantage.
In the example below, the maths show that trade is to the benefit of both countries.
Hours of work necessary to produce one unit
Cloth Wine
England 100 120
Portugal 90 80
But if the figures are switched thus so that there is now no comparative advantage:
Hours of work necessary to produce one unit
Cloth Wine
England 120 100
Portugal 90 80
the benefit no longer accrues to both parties?
Happy to be proved wrong :)
The issue I have is not whether Ricardo
's Law mostly applies, but whether it always applies.
...or, to use the game
it works when using the ratios provided
Your ability Ricardo's ability
Fish 1 10
Coconuts 3 5
But does it work if the ratios are reversed?
Your ability Ricardo's ability
Fish 1 5
Coconuts 3 10
.. as for the long-winded tautological Ricardian analysis of the Jamaican relay tactics....
isn't it easier and more intuitive to just add the respective leg times for Bolt and Powell for the two scenarios (Bolt runs 3rd, Bolt runs 4th), and choose the combination with the fastest time?
A win for all fair traders which subsumes free traders:
"China’s President Xi Jinping Offers To Lower Tariffs On Imported American Cars"
https://www.youtube.com/watch?v=X4rycDnFBAA
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