More Challenges to “More ‘Free Trade’ is Always Better” Orthodoxy

One way to induce a Pavlovian reflex in mainstream economists is to invoke the expression “free trade”. Conventional wisdom holds that more trade is always better; only Luddites and protectionists are against it. That’s one big reason why the toxic TransPacific Partnership and its evil twin, the Transatlantic Trade and Investment Partnership, have gotten virtually no critical scrutiny, save from more free-thinking economists like Dean Baker. They have been sold as “free trade” deals and no Serious Economist wants to besmirch his reputation by appearing to be opposed to more liberalized trade.

“Free trade” boosterism runs two parallel arguments: the “’free trade’ increases wealth and therefore we should all go along” and and the “more open trade is inevitable, you better be on this bus or you will be under the bus.” Too often, these arguments rest on the assumption that coming close to the economists’ fantasy of frictionless ‘free trade’ is better. But that was debunked in 1953, in the Lipsey-Lancaster theorem, which demonstrated that trying to move to closer to an unattainable state was not only not assured to produce better outcomes, it could very well produce worse ones. You actually need to do the work of evaluating various “second best” alternatives, rather than assuming more is better. But even though economists know about Lipsey/Lancaster, they dismiss its inconvenient implications.

Moreover, there are other sound critiques of our “more ‘free trade’ is every and always better” regime. William Greider has long pointed out that we do not operate under a free trade regime, but a managed trade system, and virtually all of our trading partners negotiate them from a mercantilist perspective: that they aim to run trade surpluses and protect their workers. Dani Rodrik has described a trilemma: that you can’t simultaneously have deep integration of markets, national sovereignity, and democracy. At least one of them has to give. And we can see in Europe that it is democracy that is being sacrificed.

But these criticisms have been treated as fringe phenomena. What is noteworthy, however, that it is suddenly acceptable to question the ‘free trade’ orthodoxy, although the critics take great care to distance themselves from any populist or labor-favoring taint.

We took note of one last week, of a hand-wringing piece in that bastion of correct economic thinking, Project Syndicate, in which Ian Goldin lamented that globalization had increased systemic risk on numerous fronts: environmental, financial, political, technological. Goldin wasn’t willing to buck conventional wisdom and use his observation to suggest that “free trade” may have gone past its point of maximum advantage. But the fact that the only solution he could envision was the pipe-dream of better governance was telling.

A fresh article, again at Project Syndicate, has the former head of the FSA, Adair Turner, making a more direct, but short of head-on, challenge to “free trade” orthodoxy. Turner’s point is that trade is unlikely to do much to drive further growth, and economists and policymakers have much better focuses for their energies. He also points out that to the extent that further liberalization of trade does increase GDP, it is likely to come at a cost.

Key sections of his article (hat tip David L):

[F]or 65 years, rapid trade growth has played a vital role in economic development…

But there is no reason why trade should grow faster than GDP forever. Indeed, even if there were no trade barriers at all, trade might grow significantly more slowly than GDP in some periods. Several factors make it possible that we are entering such a period.

For starters, there is the changing pattern of consumption in the advanced economies. Richer people spend an increasing share of their income on services that are either impossible to trade (for example, restaurant meals) or difficult to trade (such as health services)…

In addition, as the economists Erik Brynjolfsson and Andrew McAfee of MIT have argued in their book The Second Machine Age…the advantages of proximity to customers and lower transport costs outweigh decreasingly important differences in labor costs…

With industrial tariffs already dramatically reduced most potential benefits of trade liberalization have already been grasped. Estimates of the benefits of further trade liberalization are often surprisingly low – no more than a few percentage points of global GDP..

The main reason for slow progress in trade negotiations is not increasing protectionism; it is the fact that further liberalization entails complex trade-offs no longer offset by very large potential benefits. The Doha Round’s failure has been decried as a setback for developing countries. And some liberalization – say, of advanced economies’ cotton imports – would undoubtedly benefit some low-income economies. But full trade liberalization would have a complex impact on the least developed economies, some of which would benefit only if compensated for the loss of the preferential access to advanced-economy markets that they currently enjoy.

This implies that further progress in trade liberalization will be slow. But slow progress is a far less important challenge to growth prospects than the debt overhang in developed economies, or infrastructure and educational deficiencies in many developing economies. That reality often goes unacknowledged. The importance of past trade liberalization has left the global policy establishment with a bias toward assuming that further liberalization would bring similar benefits.

This is an important argument, which sadly is likely to get little traction: at this stage of economic development, trade deals are largely beside the point. And that reality is perversely acknowledged in the TTP and the TTIP. They are not about “free trade”. They are, in the case of the TTP, to advance US geopolitical aims by isolating China, and in the case of both proposed pacts, to weaken national sovereignity to make the world safer for multinationals. The revolving door payoffs for the members of the US Trade Representative’s office must be really juicy for them to be so eager to engage in treason.

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  1. John

    The MH17 disaster brings home our (EU) mercantilist (free-market) delima. There is a coincidence there has been an upsurge in right-wing nationalism, anti-European populism and a robust Russian nationalism.

    Even after the disaster, there are pockets of political leadership who want to go soft on Russia. The reason for this is because monied interests from Russia has deeply upended our so called Democracies. Energy and money have taken over. We talk up a good game so we can quietly manage our mercantilist (free-trade) governance, all the while we face our own 9/11, and Russia is behind the scenes is successfully dividing the Continent. We are financing the operation by paying premiums for Russian gas.

    We tolerate invading forces on the Continent and then send out weak press releases telling them to stop without repercussions.

    Oh, yea, by the way, we are on vacation so MEP discussions will have to wait until we are ready to get back to work. Pathetic.

    1. Pepsi Girl

      Thanks for that fascist whine. Oh no we aren’t sending tanks across the fulda gap to punish russia for doing the same thing we’re doing in the same country? Woe betide us!

      1. Generalfeldmarschall von Hindenburg

        The Fulda Gap is in central Germany- now the Panzers are lined up where they were last go round- pretty nearly on the Nazi-Soviet Pact frontier. Is anyone really surprised by the Russian anxiety?

  2. David Lentini

    “[TTP and TTIP] are not about ‘free trade’. They are . . . [about weakening] national sovereignity to make the world safer for multinationals. The revolving door payoffs for the members of the US Trade Representative’s office must be really juicy for them to be so eager to engage in treason. ”

    I’ve come to think it’s even worse than that. As you Rodrik quote pointed out, “you can’t simultaneously have deep integration of markets, national sovereignity, and democracy. At least one of them has to give.” The trade agreements are really attacking both sovereignty and democracy, certainly to make the world safer or multinationals—which means destroying popular government and justice—but also to fulfill the utopian neo-classical economic theories that run our governments, businesses, and academic institutions in order to keep our financial overlords in power.

    What’s getting more scary are the growing references to linking large scale (as in “big data”) jobs and educational databases that will cover people from cradle to at least college and likely beyond, and the relentless push for testing. The overarching goal seems to be the creation of a global labor pool managed by various government agencies. In short, we seem to be heading toward a age in which the entire planet will be transformed into a giant factory and company store.

    I use to think these ideas were just the stuff of the tinfoil had crowed. But after looking more at the nature of so many policies and legislation, I’m not so sure.

    1. John

      The USTR has started pushing the word ‘environment’ lately into his public statements. He’s trying to convince the world a better, cleaner environment can co-exist with ‘free-trade.’ Nothing could be further from the truth. With the advent of trade globalization, C02 fossil fuel emissions has exploded with no end in sight in to the escalating damage to the environment. The USTR’s track record on the environment is zero.

      At some point in the near future, the USTR worldview of giant global factories will be all for naught because the world will not be able to support it. Large coastal areas will be under water and major climate events will increase causing a lot of people and property damage. ‘Treason’ goes too easy on the USTR.

      1. Mel

        It’s all about advertising. “Free” and “trade” were good words to have associated with TPP, but now everybody right up to Krugman has realized that this pact won’t do much of anything to increase free trade. USTR needs different good words. “Environment” seems like a good word.

        1. mellon

          Except that these FTAs are literally waging war on the environment in a way which NO administration has ever done before, on dozens of fronts. Do people realize that they want to freeze regulations on the environment, chemicals and agribusiness/food safety, which has got to be the most insane thing – because US chemical regs have basically stood still for 25 years – even as we have learned about numerous, dozens of chemicals that desperately need regulation, some of which are manufactured in large quantities, that are causing big problems, like endocrine disruption And they want to expand fracking, irreversibly, even as new information has come out that its releasing a lot of methane, which is a far more potent greenhouse gas than CO2. Also, fracking waste water sometimes contains contains endocrine disruptors, – heavy metals and radiation.

          But, thats not why i came here, I came here to point out something I just saw, another bombshell, if its true. I missed this last month… This is about TiSA – which may be the most devastating for American public service workers- like teachers, hospital workers and construction workers.. as well as computer people and financial services industry workers..

          The pro-transparency group WikiLeaks has released the secret draft text for the Trade in Services Agreement, TISA, a trade agreement covering 50 countries and more than 68 percent of world trade in service. Until now, the draft has been classified to keep it clandestine not only during the negotiations but also for five years post-enactment. … The draft Financial Services Annex would also establish rules favorable to the expansion of financial multinationals into other nations by preventing regulatory obstacles. The draft text comes from the April 2014 negotiation round. We discuss the leaked text with Lori Wallach, director of Public Citizen’s Global Trade Watch and author of “The Rise and Fall of Fast Track Trade Authority.”

          When asked by host Juan Gonzalez what Wallach found most objectionable about the plan, she responded:

          Well, the single most glaring and easy-to-understand piece of it, if you want to—if viewers want to take a look at it, is a provision that’s literally called “standstill.” And what it means is you have to have your regulations stand still as to where they were. And practically, it means—let’s say you want to ban a certain kind of derivative that gets created, and it’s a disaster—it causes speculation and instability. You’re forbidden from having new financial regulations. But the tricky part about this is, if you look at the way the different versions of that provision are written, it may require countries to stand still relative to where they were when the WTO services agreement was established in the 1990s, and that would mean all of these new regulations that were put into effect after the global financial crisis would automatically be violations. So the way the language is written, maybe it’s standstill from 1994. And if that’s the case, it would automatically reverse—would make trade violations out of—wouldn’t automatically reverse, would make trade violations out of all of these new re-regulations. Certainly it would not allow you to do anything new, going forward. But the way the different versions of the text are written, I think it refers back to the old commitments from the ‘90s, and that’s where you’re frozen. That’s perhaps the most pernicious.”

          its not just financial regulations.. it would be everything that corporations didn’t like that referred to services of all kinds.. For example, all the much hyped “improvements” in the ACA would be dumped, as well as the limit on profits.. (I think that will be challenged and will fall, also the limit on medical underwriting.. Anyway, they can pick and choose.. ) People should look at the Slovakia decision.

          Also, do people realize that all government services procurement will be “liberalised” and subjected to national treatment rules? Which means put up for competitive bidding in the international arena?

          <a href=" “>here is a good video on TiSA i saw last month.

          1. redleg

            Allow me to point out that bathroom water contains endocrine disruptors, heavy metals and radiation – it comes out of people and the products we use and are not removed in wastewater treatment processes. And we produce many orders of magnitude more municipal wastewater than fracking wastewater. Also lawn watering is the single largest water use outside of industrial cooling (which isn’t consumed). So if you are going to complain about how fracking ruins the environment, and it does in most places, there are bigger (enormous, actually) targets out there that have a far wider impact than fracking. If you are going to protest about pollution, fracking waste is but a tiny contributor in the big picture. It drives me crazy when the focus is misdirected towards sideshows and away from the big top full of polluters (performers AND crowds).

    2. Uahsena

      I’m not sure this form of tracking for labor was ever all that tinfoil hatty, it’s just that it was more widely practiced among non-white populations. The Indian schools engaged in a form of mass population control, and it was a matter of constant debate among the black community in the late 19th/early 20th centuries whether “negro schools” ought to be more vocationally or liberal arts oriented. DuBois in particular took issue with how rigorously black children were tracked in vocational schools, identifying skills early and funneling them into established labor tracks, and felt that a more complete, well-rounded liberal arts education would lead toward the kind of liberation that the end of slavery supposedly promised.

      We all know how well that worked out…

    3. fresno dan

      Davos man.
      Probably for the first time in history, there seems to me to be a plutocracy that is not tied to the well being of a particular nation state, and indeed profits are increased by the weakening of the political power of the state they are “associated” with.
      It wasn’t false to say that at least what is good for GM isn’t bad for America (it might be better for GM than the average American, but as a whole the country wasn’t worse off if GM pospered). We have reached the point that what is good for Facebook in its tax avoidance, labor leveraging, and who knows all the schemes they come up with, is undoubtedly bad for America.

  3. The Dork of Cork

    World trade is a product of banks in each country extracting local purchasing power and using this latent energy to build overcapacity elsewhere.
    This forces you to export so as to afford imported products perhaps previously produced in the local area.
    A classic in your face example of this is beer consumption in Ireland.
    More and more of the stuff is shipped in from overseas.
    During the euro years Guinness stopped moving the stuff via rail.
    Beer is heavy.
    The real losses from this long distance scarcity economy is beyond absurd.
    Despite massive drops in consumption as a result of its real cost relative to cash flow each company must continue to destroy its market by becoming competitive in a artifical money ecosystem.

    Its not a Jungle out there – we live inside a glasshouse of the big banks making and they have been at it for many hundreds of years.
    The objective – they want you to live inside a Industrial system without any chips.
    Agrarian poverty was a much better deal for most

    Mercator by Nick Crane
    Chapter 1 :A little town called Gangelt

    “In Gangelt they were locked into the fate of the peasant, who was currently enduring rural Europe transition from an ancient feudal system to a money economy ,where the freedom to work for a wage came at the cost of dispossession from the land , as owners consolidated their estates for commercial production”
    The rising prices of farm produce benefited the large farmers and estate owners,but crippled the peasants who were forced to work more ,for lower wages for crops that were not theirs.
    As larger farms became more viable ,the ancient privileges which gave peasants the wherewithal to live off the land was eroded.
    A new term emerged ,”roboten” , meaning drudge ,toil ,fag , sweat.

    The peasant became a wage slave ,a Robot.
    To the daily drudgery was added punitive taxes and periodic demands for men and horses to fight the emperors campaigns”

  4. susan the other

    Thank you Yves for this post. I hope you keep it up for easy reference all week long. “Treason” is the word we need, to keep a clear head.

    1. savedbyirony

      Yes, i do as well. Plus, i send people to this site all the time when speaking with them about the TPP/TTIP (along with the Bill Moyers interview last fall) because the general press coverage is so terrible and it would be helpful if they were listed separately from “globalization” under the topics to the right. They seem important enough to warrant their own listing.

  5. impermanence

    When you see the word “free” attached to anything, you already know it is total bs. No such thing as free in any sense of the word, so those who would use it are Madison Avenue types who are simply attempting to commit verbal fraud.

    As the popular ’60’s bumper sticker once proclaimed, “Gas, grass, or ass, nobody rides for free.”

  6. fresno dan

    I remember well the Perot Gore debate on free trade and NAFTA, and the universal pillorying of Perot – that being against Free Trade was worse than being a child molester. Everybody in the media said so…..
    It INCREASES GDP!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
    and it probably does….they just forgot to mention only for a few, and makes many, many much worse off……
    The free trade “debate” or more accurately, lack of in depth debate and complete lack of follow up is pretty much why I lost all faith in the honor, integrity, and insight of the MSM. I imagine its the same for an awful lot of people…

    1. Art Eclectic

      That’s always the way they sell this stuff, it will increase everybody’s wealth!!!
      Never the way it actually plays out, though. Increases wealth for a very small group and screws everyone else.

      I’m highly entertained that the Red Team faithful have finally caught on that their beloved “Job Creators” are actively pro-immigration because they want cheaper labor. They’ve also caught on that the establishment wing has no interest in tackling the social topics near and dear to their hearts – hence the raging internal war. It took a while, but they finally caught on that they’ve been played by business interests for years.

      1. RUKidding

        Now if only we could get the Blue Team faithful to realize how badly abused they’ve been by their “dear leaders,” then we might be able to get somewhere. Typically, though, the 99s – sporting whichever Team Jersey – appear to me to still indulge themselves in blaming other 99s for their trevails. Until we all can past that and focus on the 1s, we’re getting nowhere fast, imo.

  7. Fíréan

    TTIP, or the lack of transparancy of the negotiations, was debated in the European Pariliment last week, tuesday 15th july 2014. The whole debate, lasting 2hrs and 50 mins. (approx) was recorded and can be viewed direct, or downloaded and viewed, at :
    in WMV or MPG4 format, with voice over translation to english were language of the speaker is not english.

    There were more than one hundred speakers taking part in the debate so each Member had only a couple of minutes or less to make their statement and hence remained precise and to the point. The general mood of the debate was not supportive of the lack of transparency of the negotiations whether the Members were supportive or against the principle or (unknown) content of the agreements being secretly negotiated.
    I would have posted previous yet wished to view the whole debate before recommending.

    .nb. note that the recording available at the above link over-laps with the end of the previous debate by a couple of minutes.

  8. Paul Tioxon

    What’s Wrong with Mainstream Economics? by Richard A. Werner

    Just why is it that, while science is constantly making visible progress, economics seems to be stuck in a time warp, without making any visible advances? Here we are in the 21st century, with man having been on the moon, and with the most advanced telecommunications technology spreading knowledge faster than ever before. Yet, the financial markets are allowed to generate the same kind of boom–bust cycle as in earlier centuries.

    Could it be that mainstream economics suffers from adhering to some fundamental errors that must compromise all its results? The most familiar diagram in economics is that of a downward-sloping demand and an upward-sloping supply curve. Most observers, but also most economists believe that economics has shown that prices move to equalize demand and supply so that, thanks to the working of the markets, we experience “equilibrium” or market clearing. But, actually, economics has done no such thing. Quite to the contrary, it has shown that such market clearing would only be possible if and only if we lived in a world of perfect information, complete markets, and where many other unrealistic assumptions held—all of which are necessary to achieve this textbook outcome. Since it is evident to everyone that these assumptions do not hold on the planet we live on, it should be clear that economics really has proven that in our world we cannot expect any market ever to clear. But instead of learning from this finding that equilibrium cannot exist, and hence any economics based on equilibrium needs to be discarded, the unrealistic fictional equilibrium models have become the mainstream. Economists are obliged to pretend that the emperor is not naked, that markets clear, that there is equilibrium, and, even more preposterous, that markets deliver the best possible outcome for society.

    For Dr Greenspan it took over 40 years to have his eyes opened. Let’s hope that others will be quicker. But how is it possible that theories that have no bearing on reality could become the foundation of an entire approach that in turn becomes the dominant ideology globally, influencing government policy and even the thinking of ordinary people?

    The theoretical sleight of hand is that economics, as virtually the only discipline, has got away with arguing that its theories do not need to be based on the fundamentals of economic reality (a methodology called “inductive”), but can exclusively be based on “axioms” and assumptions (the deductive methodology) that have been assembled as it suited best to obtain a predetermined ideological goal—the goal to present market outcomes as supreme. No surprise, then, that the performance of such economics has been dismal.

    So what would nonfiction economics look like? Markets cannot clear, because information, time, and money are rationed. So what happens in the world we live in, where markets do not clear? Demand does not equal supply. And such rationed markets are determined by quantities, not prices. Their outcome follows the “short-side principle:” whichever is smaller, demand or supply, that quantity will be transacted. And that short side can extract additional, nonmarket benefits.

    This has far-reaching political implications. While the rhetoric is of a globalized world, dominated by anonymous market forces, which decide the flow of goods, services, and capital across the globe, the reality is that the majority of trade flows are decided by planners—bureaucrats or bureaucrat-like managers at large-scale corporations, who make discrete allocation decisions. The reality of “market capitalism” is therefore that the market plays a much smaller role than is widely claimed. Recognizing pervasive rationing and lack of market clearing implies that instead of the dream-world of efficient (and hence politically neutral) markets, we live in a reality of powerful allocators who make decisions that suit them, but which are in no way linked to what is best for the overall economy or society. This sharply lowers the hurdle for government intervention to be beneficial to society.

      1. TheCatSaid

        That is, Richard Werner’s article makes some great posts.
        Thanks for passing it on.

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