Foreign Trade

Trade on Trial, Again

from CATO Institute,

Not long ago, a group of Cato scholars entertained the question of whether the intellectual debate for free trade had been won. There was near consensus that it had — in 1776 with publication of The Wealth of Nations. In the 240 years to follow, efforts to poke substantive holes and refute Adam Smith’s treatise failed and, today, nearly all economists agree that free trade, by expanding the size of the market to enable greater specialization and economies of scale, generates more wealth than any system that restricts cross-border exchange. What that Cato confab failed to produce was agreement about whether the question under consideration was even pertinent. After all, how much does it really matter whether the intellectual debate has been won when, in practice, free trade remains stubbornly elusive, and the process of U.S. trade policy formulation is distinctly anti-intellectual?

Consider trade agreements. At the heart of negotiations that produce these deals rests the fallacy that domestic trade barriers are assets to be dispensed with only if reciprocated, in roughly equal measure, by negotiators on the other side of the table. That’s not Adam Smith. That’s neo-mercantilism, which posits that policy should aim to maximize exports and minimize imports. Yet Smith is credited with vanquishing mercantilism, which held sway in his day — and apparently still does today. If the free trade consensus were truly meaningful, trade negotiations would be unnecessary. If free trade were the rule, trade policy would have a purely domestic orientation and U.S. barriers would be removed without need for negotiation because they would be recognized for what they are: taxes on consumers and businesses that impede the global division of labor and the creation of wealth. Apparently, the intellectual consensus for free trade coexists with an absence of free trade and a persistence of protectionism in practice. For example, in the United States, there are “Buy American” rules that restrict most government procurement spending to U.S. suppliers, ensuring that taxpayers get the smallest bang for their buck; heavily protected services industries, such as transportation and shipping, that drive up the cost of everything; apparently interminable farm subsidies; quotas and high tariffs on imported sugar; high tariffs on basic consumer products, such as clothing and footwear; energy export restrictions; the market-distorting cronyism of the Export-Import bank; antidumping duties that strangle downstream industries and tax consumers; regulatory protectionism masquerading as public health and safety precautions; rules of origin and local content requirements that limit trade’s benefits; restrictions on foreign investment, and so on. If an intellectual consensus for free trade exists, policy doesn’t reflect it and politicians appear to abhor it. If anything, the 2016 presidential election season reveals an American public — pitchforks and scythes in hands — ready to storm the ivory tower.

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