Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21
Why Tether USDT, Stable Scam Coins Could COLLAPSE the Crypto Markets - Black Swan 2021 - 6th Jun 21
Stock Market: 4 Tips for Investing in Gold - 6th Jun 21
Apple (AAPL) Summer Correction Stock Trend Analysis - 5th Jun 21
Stock Market Sentiment Speaks: I 'Believe' We Rally Into A June Swoon - 5th Jun 21
Stock Market Russell 2000 After Reaching A Trend Channel High Flags Out - 5th Jun 21
Money Is Cheap, Own Gold - 5th Jun 21
Bitcoin and Ravencoin Cryptos CRASH Bear Market Buying Levels Price Targets - 4th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Yes, Virginia, There is a Legitimate Case Against Free Trade

Economics / Economic Theory Apr 13, 2010 - 02:25 AM GMT

By: Ian_Fletcher

Economics Best Financial Markets Analysis ArticleTHERE IS A MYTH in wide circulation that the superiority of free trade is simply a settled question on which all serious economists agree. The flip side of this myth, of course, is that anyone who criticizes free trade must either be ignorant of economics, or the spokesman of some special interest which hopes to benefit from trade restrictions. Such critics are not only wrong, the story continues with admittedly impeccable logic, but profoundly worthy of public contempt, as they are necessarily either dumb or corrupt.


Unfortunately, this myth is just that: a myth, promoted by special interests which benefit from free trade, whatever the harm to the rest of the economy. Serious economists actually recognize a number of very serious criticisms of free trade -- even economists who ultimately decide that free trade is better than the alternatives. They generally don't talk about the flaws of free trade too loudly, for fear of provoking the public into supporting stupid forms of protectionism, but they certainly know they are there.

Thanks to recent developments in economics (most visibly signaled by Paul Krugman's winning the 2009 Nobel Prize), these criticisms are becoming more serious every day. There is, in fact, an inexorable erosion of the credibility of free trade going on in the academy, not that you'd know it from watching the economists who show up on TV.

The rest of this article is just a wee bit technical. The point is not to baffle the reader, but to pry open the mysterious "black box" of free trade economics a little, and let non-economists in on the big secret that economists regard as dangerous to talk about too loudly: free trade economics is a package of mechanisms that, like any piece of machinery, can and do break down all the time. And when they break down, free trade ceases to be a good idea.

Let's crack open that intimidating black box, shall we, and have a look at the machinery inside? Free trade has roughly ten very serious problems.

The first problem is the assumption that trade is sustainable. But a nation exporting non-renewable resources may discover that its best move (in the short run) is to export until it runs out. The flip side of this problem is overconsumption, in which a nation (like the present-day U.S., maybe?) borrows from abroad in order to finance a short-term binge of imports that lowers its long-term living standard due to the accumulation of foreign debt and the sale of assets to foreigners.

The second problem is that free trade increases inequality even if it makes the economy grow overall (which is itself questionable). Because free trade tends to raise returns to the abundant input to production (in America, capital) and lower returns to the scarce input (in America, labor), it tends to benefit capital at labor's expense. Economists call this the Stolper-Samuelson theorem.

The third problem is so-called "negative externalities," the economists' term for when economic value is destroyed without a price tag being attached to the damage. Environmental damage is the most obvious example, but there are others, like the cost of writing off expensively-developed human capital (otherwise known as "people") when free trade wipes out entire American industries.

The fourth problem is positive externalities, like the way some industries (mainly high technology) open up paths of growth for the entire economy. All industries are not alike, and the profits of an industry today do not necessarily predict the industry's long-term value for the economy. Free trade can allow these industries to be wiped out because it ignores this hidden value, harming the rest of the economy for decades to come.

The next four problems concern the all-important Theory of Comparative Advantage, the theoretical keystone of free trade economics. This theory, invented by the British economist David Ricardo in 1817, says that free trade will automatically cause nations to specialize in producing whatever they are relatively best at, and that this will lead to the best of all possible worlds. To wit:

Problem number five is that Ricardo's theory assumes factors of production are mobile within nations. Unemployed autoworkers become aircraft workers, and abandoned

automobile plants turn into aircraft factories. But this doesn't always happen, and when it does, it is often at considerable cost.

Problem number six is the assumption, in Ricardo's theory, that the inputs used in production (like labor, capital, and technology) are not mobile between nations. His theory says that free trade automatically reshuffles a nation's factors of production to their most productive uses. But if factors of production are internationally mobile, and their most-productive use is in another country, then free trade will cause them to migrate there--which is not necessarily best for the nation they depart.

Problem number seven is that Ricardo's theory assumes the economy is always operating at full output--or at least that trade has no effect on its output level. But if trade puts people and factories out of action, this isn't true.

Problem number eight is that Ricardo's theory assumes short-term efficiency is the origin of long-term growth. But long-term economic growth is about turning from Burkina Faso into South Korea, not about being the most-efficient possible Burkina Faso forever. History has shown time and again that the short-term inefficiencies of a tariff, properly implemented, are more than compensated for by the long-term spur to industry growth it can provide, largely because growth has more to do with the industry externalities mentioned above (problem number four) than short-term efficiency per se.

Problem number nine is that Ricardo's theory merely guarantees (if true, which is itself questionable due to problems five through eight) there will be gains from free trade. It does not guarantee that changes induced by free trade, like rising productivity abroad, will cause these gains to grow rather than shrink. So if free trade strengthens our economic rivals, then it may harm us in the long run by stiffening international competition, even if it was advantageous for us to buy goods from these rivals in the short run.

The final problem is that, in the presence of scale economies, the perfectly-competitive international markets presumed by the theory of comparative advantage do not exist. Instead, industries tend to be imperfectly competitive and quasi-monopolistic. Under these conditions, outsize profits and wages accrue to nations that host such industries. And free trade will not necessarily assign any given nation these

Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95)  He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933.  He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.

© 2010 Copyright  Ian Fletcher - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in