Trade Should Not Be Free as a Matter of Dogmatism

In the mainstream economic thought there is hardly any place for constructive criticism of free trade. But, while the idea of free trade is not wrong in itself, it has become a dogma – no matter what it looks like in reality, in the eyes of many free trade is of unquestionable benefit. It was not always so. John Maynard Keynes once made a highly interesting remark that, regrettably, seems almost forgotten:

I sympathize therefore, with those who would minimize, rather than those who would maximize, economic entanglement between nations. Ideas, knowledge, art, hospitality, travel – these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible; and, above all, let finance be primarily national.

I already wrote a little bit on the latter part (finance) here. The recent global financial crisis has shown powerfully that Keynes was right on that. But his general skepticism about trade, as expressed in the quotation above, is justified as well.

The so called market fundamentalists, or neoliberals (but many so called keynesians as well), represented in this case especially by the World Trade Organization, see free trade as the cure for all maladies of the world economy. They oversee the fact that the comparative advantage some countries have – and this is the main reason for the occurance of trade – is due to low standards: economic, environmental, social. Under the current trade regime it is very hard (in many important areas quite impossible) for any country with higher standards to curtail imports from countries with lower ones. It is not that complicated when there are problems with product design. But what about the environment? Social standards? Many of the products we buy are imported from developing countries, especially emerging markets. We are claiming that this is good for them – they produce goods they can export, and we buy them cheaply. Win-win, isn’t it? They get jobs, we get cheap products.

But these low prices are often primarily representations of low social and environmental standards in the producing countries or due to externalities not accounted for. An example: of course, frozen strawberries from China are cheap. But this is only so because their price doesn’t reflect the true cost of their transport. All the emissions of greenhouse gases due to cooling, shipping etc. are not accounted for.

Another example: clothing. The cloths we buy are cheap – because they are often produced by workers in the Third World, where social policies are non-existent, there are no trade unions, no minimum wages, working conditions are terrible (due to non-existent or poorly enforced labour legislation), where substances are used in the production chain we don’t want to be aware of.

So, is free trade good by itself? It is not. When low environmental or social standards (or externalities) are the main source of comparative advantage, free trade is bad for the countries where the products under consideration come from. And because the environmental externalities (mainly greenhouse gas emissions) have global consequences, it also is bad for us (though not in a straightforward way). We are not helping the poor in the Third World by buying cheap imported products we could (and should) produce ourselves. And even if we can’t reasonably do it by ourselves, we should be able to force producers (they often are not from “there”, they are rich multinational corporations from “here” – so there is no reason for having any “compassion” with them) – through quotas, tariffs, taxes, import bans – to meet the standards we (would) impose over our own producers. Then we would really help the poor.

 

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