19 Nov 2010

A Model Free Trade Law

  • X is produced, consumed and exchanged worldwide as a commodity;
  • US citizens are best served by prices that affect and reflect global supply and demand;
  • X from any origin can be certified safe for consumption by a simple test.
NOW LET IT BE KNOWN THAT, the United States declares all prior rules and laws restricting the production, consumption and exchange of X null and void.
As my first X, I suggest sugar.

Bottom Line: Free trade is easy but often thwarted by politicians eager to protect producers in exchange for bribes. Luckily, it's easy to detect its absence: The more words in the "free trade agreement," the less free trade is happening.


  1. Why not first pick manufactured goods and in-country employment?

  2. @FC -- tariffs on manu goods are VERY low; labor is not the topic of a FTA. Agricultural trade barriers are VERY distorted.

  3. Brazil imposed import duties on computers in the 1980's, to protect in-country employment and to foster the growth of a domestic computer industry. Predictably, the effect was to cripple domestic productivity by making computers too expensive for businesses and consumers.

    As far as trade is concerned, governments have a legitimate role in making sure imported goods are sanitary, properly labeled, and not in violation of the importing country's property laws and bilateral treaties. That's about it, I think.

  4. The problem comes in when our government puts tons of obstacles in place for domestic producers (hello, California?) without any form of protection for those producers.

    If X is produced, consumed and exchanged worldwide as a commodity, that means that domestic producers are competing globally to sell their product.

    Inputs are clearly going to be more expensive in the U.S. than in most other areas due to higher labor and regulatory costs, so domestic producers are at a disadvantage from the starting gate. The result is that we are either going to import all X from areas that do not pay their employees as well and don't comply with all the regulations that domestic producers have to comply with, or we are going to level the playing field somehow.

    The only ways to level the playing field are: (1) do away with the domestic regulatory controls; (2) require all imports to comply with the same regulatory controls and labor/wage standards as domestic producers; or (3) tariff the imports so domestic producers can compete, at least in domestic markets.

    So we have to weigh the benefit/disadvantage of those options against the need for domestic production of X. Do we need those jobs? Is there a security or safety issue with relying on imports for our supply of X? Is there an ethical or moral issue with supporting X producers who pay employees little / don't care for the environment / don't provide safe workplaces / etc? (and if there isn't an ethical or moral issue with supporting producers who don't abide by these, then why on earth do we have these laws in place?)

  5. I need to agree with Mr. Kurtz's first statement and suggest that your second tenet is flawed, or at least insufficiently supported. US citizens may indeed be best served by market pricing, but would prefer not to pay that much if they can get away with a lower cost.

    For commodity goods with inflated prices we often wish that (1) the market was open--no stockpiling allowed-- and (2) a supply/demand market pricing mechanism was in place. This would bring the price of the commodity in line with true "free trade" principles.

    For commodity goods that are stockpiled or are not priced according to use or replacement value, such as sugar and water, the market price determined by supply and demand may be "too much" (though who decides that, we can never seem to determine) so we ask for subsidies to reimburse the producer and thus bring down consumer costs.

    I am not an economist, so I could have it all mixed up here, of course...

  6. @CRG -- your caricature of the different choices confuses competition with equality. Cheaper labor is a legitimate comparative advantage that *should* result in lower prices and greater sales. Bad regulations that increase costs should NOT be imposed on others. Your scheme would destroy trade and prosperity. Compare self-sufficient (safety for workers!) countries with those that engage in massive free trade (NL, HK, NZ).

    @M Garcia -- yes, everyone loves a subsidy, but that's no reason to have one (let alone the way they waste money and resources). I don't understand most of your comment on prices. Water is NOT mispriced due to market forces, but bureaucratic regulations, for example.

  7. @DZ, sorry I was too vague. I agree that it's bureaucratic regulation that forces water mis-pricing. I attempted to look at the alternatives, by market and by command. Though free market pricing is, I agree, ultimately desirable for commodities, whether the people want that will depend on which side of the price structure they will be coming from. If prices are already lower than free-market pricing, because of bureaucratic regulations and subsidies, then the shift will be opposed, no matter how good the arguments are to try to convince the people. If water is already over-priced, for whatever reason (bureaucratic regulation, corporate profit, the cost of infrastructure replacement when someone finally decides to commit to that), then the people will welcome a shift to free-market prices because the cost to consumers will drop.

    I agree with your second tenet, I just think it's tough to find the path from its idealistic basis to on-the-ground implementation because the are arguments to complicate both sides of the approach.

  8. @M Garcia -- two things: people in their communities are the ones who determine their water prices, so up or down is their call. Second, they should be willing to end subsidies if low prices make shortage more likely.

  9. @DZ, I don't mean to belabor the conversation, we can take it off-line if you prefer or keep it here for others to comment on as well--your call. However, I think we're getting to the meat of something that I am hoping your book will help me understand better. Specifically, what aspects of water allocation and valuation are determined locally, regionally, and on a larger scale? All three scales may have governmental involvement, as in the U.S. with many water sub-regions and, within those, many local water "service areas" with overlapping jurisdiction. Consider a city like Denver, drawing from multiple watersheds, or a community like the western Ozarks in which multiple water service providers draw from a single major watershed (the White River, among others) over a large area. This is what I meant by the ideal meeting the real implementation. At the local scale, there are issues of both cost and availability, infrastructure costs, treatment at both ends of the domestic supply chain, etc. At the regional scale, there are issues of availability and, if controls are present (reservoirs, dams, etc.) then costs of those, as well pooled funding for local infrastructure development and renewal. At the federal scale, there is the bureaucratic desire for influence and control, the initiative for subsidies, pooled funding for regional infrastructure development, etc. I had hoped to blog on the many efforts toward a National Water Policy, especially the challenges inherent in that broad effort over such diverse regional issues in the U.S. I wouldn't mind at all your beating me to that, and maybe we can develop a discourse of point-counterpoint in that regard? MG

  10. @MG -- we can keep it here (and you're welcome to write a guest post), but my views are that *water* should be managed/allocated within a watershed. Infrastructure costs should be divided among users (no subsidies), no matter where they get their water. I see little role for the Feds, except in the gathering, cleaning and redistribution of national data (e.g., USGS).

  11. California (and the US in general) certainly has a lot more worker and environmental protection laws than most places. Yes, they raise the cost of doing business, but are for the most part reasonable and praiseworthy. It does not follow that the way to make the rest of the world rise to our standards is to stop importing their products. That only makes everybody poorer. Further, these schemes, no matter how nobly conceived, rapidly degenerate into special deals for special people, with no regard at all for consumers, workers, the environment, or anything else. For instance, Japan still hides behind bogus phytosanitary regulations to protect its agriculture, using a legitimate issue as a stalking horse for an illegitimate one. Everybody loses except a handful of politically connected farmers and co-ops.

  12. I wasn't campaigning for any of the options I brought up. I think that every commodity is different. No matter which choices are made, though, there are consequences. That was my point.

    You can't fully embrace free trade without harming domestic producers.
    You can't strictly limit or hinder trade without harming consumers.
    You can't increase pay/benefits for workers without increasing the cost of the goods those workers produce (otherwise we could just make minimum wage $100/hour and we'd all be rich).

    Are we better off with a positive export-to-import balance or a negative export-to-import balance? I think that depends.

    Importing most of our electronics has been overwhelmingly positive, as it has allowed for an explosion of technology that is attainable to pretty much everyone.

    On the other hand, importing most of our energy/oil has put us in a rather precarious situation where we're at war with the people who control the supply of a commodity that is critical to our economy's function.

    I'm not trying to convince anyone that trade barriers are inherently good or that regulatory controls are inherently bad. The point is simply that none of these happen in a vacuum, and each change affects consumers, producers, and employees in different ways.


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