The most recent edition of Free Trade under Fire was released in 2015. Though it is a couple of years old, it is worth reviewing now, as an avowed protectionist presides over what was once a trade-friendly United States, while European socialists and even the Chinese government are positioning themselves as defenders of free trade. The world, it seems, has turned upside down.
Free trade is intimately related to the ideal of individual liberty. It is probably impossible to cogently favor liberty and oppose free trade. As antebellum slavery advocate and protectionist George Fitzhugh once explained, “Admit liberty to be a good, and you leave no room to argue that free trade is an evil—because liberty is free trade.” (See “A Coherent Authoritarian,” Winter 2015–2016).
Free Trade under Fire is not a philosophical tract or a radical plea, but a book explaining the mainstream economic theory and empirical evidence behind the notion that free trade is good. In the first chapter alone the reader will learn useful and often surprising facts about foreign trade in America. For example, the proportion of American consumption expenditures devoted to Chinese goods is barely more than 1%, while some 90% of goods and services consumed in America are made here. This is easy to understand when one realizes that two-thirds of consumption expenditures go to nontradable services such as health care, education, and housing. But there is much more in Free Trade under Fire.
Trade theory / The book provides a good introduction to the theory of comparative advantage. Factories in poor countries like Vietnam or China can outcompete more efficient producers in rich countries because, in the areas where the poor country has a comparative advantage (say, clothing or labor-intensive manufacturing assembly), its low productivity is offset by even lower wages. Poor countries are not exploited by rich countries nor are rich countries exploited by poor; the two claims, which are often heard, could not both be true anyway. All countries—that is, most of their residents—benefit by producing whatever goods cost them less to produce relative to other things. By exchanging efficiently produced goods, the residents of each country end up with more total goods than they would otherwise have enjoyed—that is, their lives are materially improved.
Many other conclusions of trade theory are covered, including the crucial point that imports, not exports, are what benefits a country: “Exports are the goods a country must give up in order to acquire imports,” explains Irwin. Look at it from the other side: if a country exports more, it will normally also import more, at least over time—for what else can be done with the foreign currency earned from exports? The trade deficit is thus a non-problem.
Perhaps Irwin could have emphasized that when we speak of an exporting or importing country, we are speaking about individual exporters and importers in each country. This would not change his arguments, but would help opponents of free trade see through the collective metaphor.
Numerous empirical studies summarized by Irwin suggest that international trade increases a country’s level of income and its growth over time. This is not surprising. A country is rich to the extent that its labor productivity is high, and free trade increases labor productivity. Higher labor productivity brings higher wages. A graph that Irwin reproduces from a study by Kathryn Marshall of Oxford College of Business and California Polytechnic State University, San Luis Obispo vividly shows the tight correlation between labor productivity and wages in a sample of 33 countries.
It is true that a country’s international trade is not the only cause of high incomes. Property rights, the rule of law, and a general context of freedom of contract are also required. But, Irwin explains, international trade certainly “plays an important contributing role.”
Given those facts, why are so many American politicians now opposed to free trade? The answer is that some special interests benefit from protectionism, and politicians benefit from special interests’ support. Domestic producers want tariffs and other trade barriers (such as quotas or threats) because they raise the domestic price of what they sell. In poor countries, protectionism also allows the ruling elites to maintain their corrupt privileges, for instance by allocating import licenses among their favorites.
Irwin acknowledges the fact that, despite the net benefits of free trade, some workers are displaced by foreign competition and suffer unemployment or lower wages. Should the government help them, he asks. He answers, “What is the reason for providing more generous compensation to the apparel worker in Georgia who loses a job to imports than to the typewriter assembler at SmithCorona displaced because of computers or the Kellogg’s worker laid off because General Mills begins producing tastier cereals?”
Irwin observes that the current assistance program, Trade Adjustment Assistance, “has not worked as promised, and may even be an impediment to economic efficiency” because it reduces the incentives of displaced workers to find another job. He is not a radical libertarian and he is willing to consider the idea of wage insurance or other ideas, but he remains generally skeptical about the capacity of government to efficiently help displaced workers. There is, he writes, “no obvious government policy that can address all of the concerns of workers adversely affected by economic change.”
Free Trade under Fire provides multiple examples of the high cost of protectionism. During the 1980s, textile and clothing tariffs and quotas raised prices on American consumers, costing them $140,000 for each domestic textile job saved. The 2009 American tariff on car and truck tires cost $900,000 per gross job saved, but it may have actually reduced the net number of jobs because consumers spent less on other goods and services.
We may add—and Irwin could have emphasized this point—that the number of jobs created or saved by protectionist measures is a bad metric for income and welfare. If it were a good metric, banning chainsaws and computers would be good because that would result in the employment of more workers to cut trees and handle data. Banning tires would recreate a whole labor-intensive industry of buggies and slow transportation. But those bans would reduce welfare and certainly make America grate.
History and institutions / Free Trade under Fire also provides a masterful review of the history and institutions of the current system of international trade. Patiently built over the last seven decades around the multilateral rules of the World Trade Organization (WTO, successor to the General Agreement on Tariffs and Trade) and around bilateral or regional free trade agreements (FTAs), this system has been under attack since the 1990s.
Irwin notes that the FTAs signed by the U.S. government (14 are currently in force, involving Israel, Canada, Mexico, Chile, Columbia, Singapore, South Korea, and others) have more often resulted in larger cuts in foreign than in American tariffs simply because the latter were already lower. Those who claim that American producers have “lost” from free-trade agreements have generally got their data wrong.
As Irwin admits, the current multilateral system (under WTO rules) is far from perfect. A major problem lies in the “antidumping” exception, which allows domestic producers to request, and generally obtain, a protective tariff by claiming that foreign competitors charge less in foreign markets than in their home markets. But there are many good economic reasons to charge lower prices in one market than in another—for instance, charging less in more competitive markets or in markets where the elasticity of demand is higher—as happens all the time within a domestic market. “It is hard to avoid the conclusion,” Irwin writes, “that the antidumping laws are simply a popular means by which domestic firms can stifle foreign competition under the pretense of ‘fair trade.’ ”
Because of this and other exceptions, some industries have obtained “temporary” protection for decades. In the United States, “the steel industry has received nearly continuous protection for over thirty years and is still seeking limits on imports,” Irwin notes. Agriculture, clothing, and footwear remain heavily protected all over the world. And non-tariff barriers are not uncommon.
Yet, the current system is far preferable to the protectionism that reigned between the First World War and the end of the Second. A significant lowering of tariffs and non-tariff barriers has been achieved. WTO rules require that any specific protectionist measure be nondiscriminatory among countries. Both WTO membership and specific FTAs keep special interests in check by offering general packages that contain something for everybody. Trade rules give governments legal reasons to resist protectionist pressures. Dispute settlement mechanisms—especially the opportunity for investors to sue national governments—have been pushed by the American government as a protection against rogue states. I would add that they have the benefit of constraining all national Leviathans.
With the liberalization of trade, global supply chains have developed. Irwin describes how a Boeing 787 assembled in Washington state gets its center fuselage from Italy, its engines from the United Kingdom, its wings from Japan, its passenger doors from France, its cargo doors from Sweden, its wing tips from South Korea, and its landing gear from Canada. A certain car model assembled in South Korea by an American manufacturer had 27% of its value originating in America when it was imported by American consumers. Import statistics, which incorporate the whole value of an imported good, are thus often misleading.
Developing world / Over the past few decades, international trade has played a major role in the economic improvement of several poor countries. Free Trade under Fire includes a few striking graphs showing the growth of gross domestic product per capita in South Korea from the 1970s, in China since the 1980s, and in India since the 1990s. China’s share of world trade jumped from 1% in 1980 to more than 11% in 2013. There are many other examples. Honk Kong has followed “an almost pure free-market approach,” Irwin notes, and “greater trade openness … has been a feature of virtually all rapid-growth developing country experiences in the past fifty years.”
In contrast, interventionism and protectionism have been a plague for underdeveloped countries. He writes,
According to one quip, India suffered under four hundred years of British imperialism and fifty years of the Fabian socialism of the London School of Economics [which was long dominated by that brand of socialism and where many Indian students went to study] and it is not clear which did the most damage.
Free trade, according to comparative advantage, leads to higher wages. For example, hourly compensation in manufacturing doubled in India from 2002 to 2010. A previously elusive economic take-off has benefited large groups of humankind. Extreme poverty dropped from 36% to 15% of the world population between 1990 and 2011. The liberalization of internal markets helped, but so did foreign trade.
Another effect has been declining economic inequality. Irwin cites the work of economist Branko Milanovic showing that the escape of so many individuals from dire poverty reduced inequality at the world level.
Is reciprocity necessary? / Are WTO-type multilateral rules preferable to bilateral or regional free trade agreements? Irwin presents the arguments of both sides. The discriminatory benefits provided by bilateral or regional FTAs can generate trade diversions in favor of less efficient producers. Moreover, it is easier to burden FTAs with environmental and labor standards that not only shouldn’t be part of trade agreements but can also serve protectionism, for example, by protecting rich countries from the competition of poor, low-cost labor.
As I have argued elsewhere, some “free trade” agreements have a high content of managed trade. What passes for “free trade” is far from totally free trade.
Irwin does raise the question of whether multilateral, bilateral, or regional trade agreements—that is, reciprocity—are necessary at all for free trade. Can’t unilateral moves—one country dropping protectionist measures unconditioned on what other countries do—reap the benefits of free trade? Irwin reiterates mainstream economic theory when he writes:
Countries are better off pursuing a policy of free trade regardless of the trade policies pursued by others. … The case for free trade is a unilateral one: as economist Joan Robinson once put it, a country should not throw rocks in its harbors simply because other countries have rocks in theirs. The mercantilist language of international trade negotiations—that a reduction in one’s own trade barriers is a “concession” to others—is wrong from an economic standpoint.
The standard counterargument to unilateral free trade is that reciprocity forces governments to keep their commitments. It is easier for a government to cancel unilateral moves than to renege on an agreed system of rule-based trade. There is certainly something true in that. But interestingly, as data reported by Irwin suggest, much of the existing free trade appears to depend on unilateral moves to liberalize imports. The actual tariffs imposed are very often lower than the maximum allowed under reciprocal agreements. He points out:
Two-thirds of the tariff reductions in developing countries during the period 1983 to 2003 were due to unilateral reforms; just 25 percent were due to multilateral agreements (the Uruguay Round) and 10 percent due to regional agreements.
We should go further than Irwin on the road to unilateral free trade. It is true that a general declaration of unilateral free trade by the U.S. government—or by any other government in the world—is currently just a dream. Such a declaration would require government leaders who understand trade theory and citizens who support economic freedom, both of which are in short supply. But couldn’t the unilateral option become topical if the current wave of protectionism leads to the demise of the existing system, which could not be rapidly rebuilt? Economic stagnation would cry for the solution of unilateral free trade.
Any reader will have quibbles with such a wide-ranging book as Free Trade under Fire. I’ve mentioned my relatively minor ones on its substance. But I also have a grammatical grumble. I find very annoying the book’s adoption of the current fad to close compound nouns rather than hyphenate them, resulting in such unreadable words as “governmenttogovernment” and “timetested.” As if to illustrate the problem (a sort of reductio ad absurdum) the latter word was end-of-line hyphenated as “tim-etested”!
But don’t let this stop you from reading the book. Free Trade under Fire is a must-read for anybody interested in trade. It will teach a lot to the intelligent layman. The seasoned economist will also find it a useful overview.
Readings
- Against the Tide: An Intellectual History of Free Trade, by Douglas A. Irwin. Princeton University Press, 1996.
- “Free Trade and TPP,” by Pierre Lemieux. Library of Economics and Liberty (www.econlib.com), February 1, 2016.
- The Logic of Collective Action: Public Goods and the Theory of Groups, by Mancur Olson. Harvard University Press, 1966.
