By JR on Wednesday, February 22, 2017
Are there costs which outweigh the benefits of free trade?
Below is an argument from a prominent British libertarian -- Sean Gabb -- which argues for trade policies similar to those advocated by President Trump. It is in a sense Trumpian economics -- though it does not make one mention of Trump and uses British examples exclusively.
Gabb writes very simply but he does to a degree assume a knowledge of economics and its language. Trump has a degree in economics too. Nonetheless, a careful reading should make Gabb's arguments comprehensible. In any case, I think I should highlight a few points.
For many years now, economists have pointed out that free trade increases wealth. It does so by making everything cost less. Older Wal-Mart customers will be acutely aware of that. I remember when an electric fan cost around $100. Now they can be had for around $10 -- because they are now made in China.
So the assumption on both sides of politics has long been that we should free up trade as much as possible. And it took the Donald to question that. He hasn't shattered the consensus yet but his is a huge innovation in policy and a big sign of unconventional thinking. Trump as innovator! And now that Trump has challenged the consensus by talking of higher tariffs and other policies designed to increase the "Made in USA" label on goods sold in the USA, other people are beginning to say: "Hey! Maybe he has got a point". And Sean Gabb below makes a very erudite argument in favour of broadly Trumpian policies.
So an argument now being made by many is that price is not the only test of how good or wise a policy is. There may be benefits of making a good in the USA that justfies a higher price for that good. Money is not everything.
That is not an entirely new argument. Economists have always allowed some exceptions to the benefits of free trade, The infant industry argument and the defence industry argument are well known and there also the less known but equally cogent case known as the Australian case. And Gabb gives further examples of potential non-price benefits from home manufacture. I think he makes the best argument yet for that case, in fact.
Much more innovatively, he makes an argument that I have not seen before which downplays the price disadvantage from home manufacture. He points to what is the undoubtedly high cost of transporting goods. A farmer can get 10c for an apple he has grown which retails in the shops for $1.00. Why? There are several reasons but a major one is the cost of transporting it to your local supermarket. The transport industry can easily take a bite out of the $1.00 that you pay which is 2 or 3 times what the farmer gets. And there is no escaping that. Truck drivers are not usually highly paid unless they work very long hours and most of what could be done to make cheaper trucks has been done.
Gabb takes up that situation and notes something that is seldom mentioned but which is quite extraordinary when you think about it. He says that transport costs are heavily subsidized by governments. Almost all of the costs of freeways, railroads, local roads and defence against piracy at sea are borne by taxpayers, not the users of those facilities. Trucking firms do pay road use levies of various sorts but such levies are tiny compared with the huge cost of building just one mile of freeway, for instance. So from that, Gabb argues that the high costs of transprt would be even higher without the extensive government provision of almost "free" transport infrastrucure.
So in an ideal world where everybody paid for what they used, high transport costs would encourage goods to be made at home. A thing might be made cheaper in China but the costs of getting it to you might make its total final cost dearer. It is an innovative and clever argument and there is undoubtedly some truth in it -- but I don't fully buy it. I am not in a position to do the numbers but I doubt that transport costs could account for the recent reduction in costs of electric fans (for instance). Most of the transport of goods from China is seaborne and that is very cheap per cubic meter on today's huge container ships. And containerization makes most of the remaining trip (on land) pretty cheap too.
But there is clearly SOME "unfair" advantage given to remote manufacturers by subsidized transport, so the remaining question is how do we account for or allow for that advantage given to those manufacturers? It would take some sophisticated econometrics to find out but there is clearly no likelihood that national trade policy will be set by econometricians. We may simply have to hope that whatever tariff Mr Trump and Congress decide on will not be too far wide of that mark.
From all the considerations given below, however, it is clear that Mr Trump's tariff proposals have substantial intellectual support. They are in no way the sheer ignorance that Leftists claim
Briefly stated, the claim is that, since about 1970, shifts in comparative advantage [under freeish trade] have brought about a swift and fundamental deindustrialisation of Britain; and that this has impoverished millions of working class people.
There is the separate claim that the globalisation of which free trade has been made a part has subjected us to a New World Order that is openly working for our destruction as a free people, or as any people at all. However, since I and many other libertarians accept this claim in full, there is no point in discussing it. I will only add that free trade has existed without a supranational government, and that opposition to the latter has no bearing on the desirability of the former. Free trade is the uncontrolled movement of goods and services across borders. It does not need treaties to harmonise the sale of Vitamin C, or armies of bureaucrats to enforce the treaties. I will move, then, to the primary claim, which is mostly in dispute – though for which there is an arguable case.
Until the 1970s, almost every manufactured good sold in this country was made in this country. In terms of price and quality, these goods were often inferior to those made abroad, and had a market only because of the trade barriers that had grown up since the 1930s. On the other hand, British manufacturing firms gave jobs, directly or indirectly, to millions. These jobs were reasonably well-paid and reasonably secure. They gave those holding them the confidence to speak their minds, and to combine in defence of their collective interests as they perceived them. No doubt, these perceived collective interests were often false, and often defended with an absence of forethought. If there was also bad management, strikes and restrictive practices had their part in the ruin of British manufacturing. But I am old enough to remember when doctors and architects did not earn incomparably more than working class people, and when it was common to believe that we were all part of one nation.
Freer trade since the late 1970s has given us manufactured goods about as good and cheap as they can presently be. Most of these are made abroad. If the extent of British deindustrialisation can be overstated – we remain one of the main manufacturing countries; and some of our manufacturing exports have no competition – mass-employment in manufacturing is a thing of the past. Unless they have the skills to make it as sole traders, working class people nowadays have three options. In the private sector, they can take jobs in which the main qualities required seem to be obedience and a pretence of enthusiasm for employers whose own sense of obligation is limited to the contractual. They can become petty functionaries in state and quasi-state bureaucracies that should not exist. They can sink into an underclass that is kept alive by a combination of welfare handouts and crime.
The progress of the past forty years has been so great, that everyone benefits to some extent. Holidays in the sun can be had for the price of a thousand cigarettes, as can 50 inch television sets. Property, though, is increasingly difficult to buy; and rents can take up half the average income after tax. Working class people are insecure in their jobs. They are usually in debt. They are easily tyrannised over. They know they cannot speak freely on a range of subjects they think important. Unless on welfare, they have fewer children than their grandparents had. They are credulous. They are superstitious. They are feared by those above them, but easily managed, and therefore despised.
The main beneficiaries of what has happened since the 1970s are those in the professions or the senior reaches of an expanded financial sector. Our incomes have risen most impressively. And far above us floats the new elite of the super rich. Men like Richard Branson and the Mittal Brothers and the hedge fund managers, and the Russian billionaires who have settled here, have been raised up by the growing importance of London as a financial centre. Whether or not they share our nationality, they live among us, but are in no sense with us. The policies they are able to buy from our rulers will have only an accidental congruence with our interests. They find Britain convenient as a trading platform and shopping centre. Unlike the rest of us, who may have little else, these rich have no country.
In part, these changes are an effect of mass-immigration. You need to be a ruling class intellectual to deny the laws of demand and supply in labour markets. But the main cause has been a shift in the pattern of comparative advantage. Even without the twenty or thirty million immigrants of the past half century, mass-employment in manufacturing would have declined. Without the newcomers, the fall in working class living standards would have been greatly moderated. But there would still be no cotton mills in Lancashire, and no computer factories to take their place. The centre of London would still be packed with rich aliens of every nationality, including our own. Free trade necessarily expands output. It does not necessarily produce benefits that are equally shared.
The depression of our working classes is a legitimate concern. These are our people. Any libertarian who rolls his eyes at the phrase “our people” is a fool. Any who starts parroting the self-righteous cant of our rulers is a villain. All else aside, free institutions are unworkable in a society where large numbers of people are going visibly down the toilet. Does this mean that free trade is no longer in our national interest? Does it mean that, if still undeniable as an abstract proposition, the Law of Comparative Advantage no longer applies in the interests of our nation as a whole?
The answer to the question may be yes. If so, I as a libertarian must choose to stand up as a wooden ideologue or as a man of sense. I have always tried to be the latter. I believe in a world where everyone has the right to do with himself and his own as he pleases – a right bounded only by the equal right of everyone else to do the same. I look forward to a world without governments, and therefore without national borders and border controls. This does not mean, however, that I believe in the immediate and unordered throwing off of the present restraints. I see no value in arguing for specific freedoms, the exercise of which would undermine the existence of liberty in general. A sensible libertarian should argue for the present enjoyment only of those liberties that can be sustained.
I give the example of a restraint that I have already gone out of my way to support. There are good reasons for letting people settle anywhere on this planet where they can, by free bargaining, find jobs and accommodation. And there are better reasons why most people should not be allowed to settle in Britain. To be blunt, I accept the need for strict immigration control, and for even stricter controls on citizenship and its resulting membership of the political nation. I am not impressed by any of the apologetics by which some libertarians claim that this acceptance is other than it is. It is a clear breach of the non-aggression principle, and should be seen as such. But not to breach it in this case strikes me as lunacy. Unlimited immigration would lead to the erasure of one of the few nations and political orders in which the non-aggression principle has been even partially accepted.
This being so, free trade cannot be immune from reconsideration. It suited us very well in the nineteenth century. We emerged as the first industrial nation in a world where we controlled the seas and much territory outside Europe. Despite claims that it did not, it continued to suit us down to the Great War; and it would have continued to suit us right into the 1980s. But times may now have altered. If they have, we must consider some form of protection. I repeat that I am not rejecting the Law of Comparative Advantage. Protection always involves costs. Even assuming better management and less obstructive trade unions, prices of manufactured good would be higher – sometimes much higher. The compensation must be higher median living standards in both the material and the immaterial sense.
Nevertheless, before throwing up the case for free trade, there are three further considerations to discuss. The first is a harder look at the costs of protection. For as long as I have known him, Robert Henderson has been arguing for a “judicious” home preference. The assumption behind this is a belief that trade policy can easily be set in the national interest. But politics is at best a dirty business. Politicians and officials are always for sale; and the acceptance of trade protection would bring a cataract of bribes from every manufacturing company with money to spend. Robert believes that protection should cover things like steel and aeroplanes and electronics – things in which we have no present comparative advantage, but which are otherwise suited to our national abilities. The reality might be the equivalent of growing grapes in Scotland. Protection might give us a trade policy not in any national interest, but in the interest of a cartel of skilled bribe-givers and experts in public relations. We may differ in regarding Imperial Germany with admiration or distaste. But the men who built up those great cartels in steel and machinery and chemicals before 1914 were broadly pro-German. In present circumstances, and for the foreseeable future, protection would add to the number of the powerful and unaccountable interest groups that are busily enslaving us.
Nor in a protected economy need there be the same incentives as under free trade to innovation and product development and the control of costs. Whatever we think of their industrial achievement, the Germans did lose the Great War; and they lost in part because their industry was less responsive and less innovative than our own. Or, for the main current example of what can happen under protection, there is India before the liberalisations of the 1990s. There is also our own example. British manufacturing suffered from the opening of trade in the late 1970s compelled by the EEC and the GATT treaties. One of the reasons it was so damaged was that it had enjoyed nearly half a century of protection in its home markets, and this had enabled the growth of bad management and bad union practices. Before it could be nearly destroyed, British manufacturing was already nearly ruined. Can we really be sure that the same would not happen again? Do we want to go to all the trouble of uncoupling ourselves from a system that brings some benefits to some people, and end up with a repeat of the British Leyland fiasco?
The second consideration is that comparative advantage is not something beyond our control. It is not like the climate, which heats and cools in time with changes inside the Sun, or with variations in our orbit about it. I have mentioned the unions and the quality of management. Luckier in both, the Germans have kept more of their manufacturing despite broad similarities of trading environment. Traditionalists and libertarians usually agree that business in this country is both over-taxed and over-regulated. Well, the health and safety laws alone may have cost us half a million jobs. Our environmental laws and energy policy may have done the same. When it was introduced in the 1960s, capital gains tax is said to have ended most non-institutional investment – that is, much investment into small manufacturing. The overall burden of tax, plus inflation, has diverted most saving and investment into the City casino banks.
Looking at opposite tendencies, comparatively free prospecting for oil and gas in the United States has brought down energy prices there; and this is bringing back manufacturing industry previously lost to China. If we were to cut taxes and regulations at least to American levels, we might have more factories and jobs in the north of England. We could do this without losing the benefits of free trade. It might mean breaking a few treaties, but would not require a siege economy.
The third consideration follows from the second, but takes a more radical path. I have argued so far on the assumption that the economic structure of this country as it emerged a couple of centuries ago is worth defending or restoring. I do not share the view taken by many traditionalists that this structure was an abusive breach with immemorial and better ways of life. The enclosures had already worked a destructive revolution in the countryside. Most people there, by about 1815, had been reduced to a rural proletariat. Industrial society, as it emerged during the nineteenth century, enabled a quadrupling of population by 1914 with a strong upward movement in living standards. But, though better than most of the alternatives, I do not think our country, as it came into the twentieth century, was living in the best of possible worlds. I believe that we, and every other country that has followed our path, took a wrong approach to the Industrial Revolution.
In every industrial country, there has been a tendency for large organisations to outcompete smaller on price, and for goods to emerge at competitive prices from supply chains that may begin on the far side of the world. For example, I live in Kent, which is one of the main apple growing areas in England. My local Sainsbury sells apples from China for less than the local farm shops can sell their own apples. Is this a triumph of free market capitalism, for libertarians to celebrate and traditionalists to deplore? Or is it the outcome of a thoroughly interventionist order, from which the big and the distant gain illegitimate advantages over the small and local?
I think the latter is the case. There are still many libertarians – and these determine how the movement as a whole is seen – for whom utopia is Tesco minus the State. They believe that doing away with taxes and regulations and privilege for the well-connected would bring into being a world recognisably similar to our own. It would be richer and more peaceful and more just. But it would have much the same structures of centralised production and widespread distribution, and of wage labour. There are other libertarians – Kevin Carson, for example – who take a fundamentally different view of what might emerge in the absence of distortions by the State. And, for all they denounce traditionalism, and see themselves as on the “left,” they are elaborating a version of libertarianism that few traditionalists might see as hostile to their own concerns.
During the past few hundred years, the British State, among others, has been subsidising road and rail and, more recently, air transport. These subsidies take the form of direct building, or of financial underwriting or other assistance, or of compulsory purchase and incorporation laws that externalise many of the private costs of construction and use and maintenance. Without subsidy, roads and railways would still have been built. But there would have been fewer of them, and full-cost charging for use would have directed a higher proportion of investment into local networks.
The subsidised infrastructure that we have is biased towards transport over long distances. It raises the maximum scale of production. Internal economies of scale in a factory are worthless if distribution costs make the price of output uncompetitive in all but very local markets. Centralised production for a national market may be worthwhile in a country where distribution costs must be reflected in price. It will be far more worthwhile in a country where distribution costs are partly met by the taxpayers.
What is true of national distribution networks is also true at the level of international trade. British and then American control of the seas has made shipping safe from piracy. British and American control of the Middle East has externalised many of the costs of oil drilling and movement. British and American armed interventions stabilised less powerful countries for the sale of our industrial output, and then for the development of manufacturing industry in places where the local ruling classes could be bribed and assisted into making labour both cheap and docile.
These facts go far to explaining why Chinese apples undercut Kentish apples in Kent, and why it is worth concentrating the manufacture of virtually all electronic goods in a few coastal regions of China, and why most of the clothes we buy are put together in Turkish and Bangladeshi sweatshops. It goes far to explaining why, when I drive home every summer from the family trip to Slovakia, I share fabulously expensive motorways with lorries that pay a pittance per mile, and burn diesel at prices – even allowing for taxes – far below the real cost of extraction and transport, and that are carrying goods to places like Manchester and Leeds where once whole armies were employed in their manufacture.
In short, the manufacturing side of the globalisation that traditionalists denounce proceeds from a pattern of comparative advantage that makes sense only on the basis of systematic externalisations of cost. This is not a natural order. It is not free market capitalism. It is instead a global mercantilism in which a cartel of ruling classes has decided that certain regions should specialise in certain activities. If notebook computers are not made in Basingstoke, it may be less because firms in Canton are better at making them than because their final prices all over the world do not take fully into account their costs of manufacture and distribution.
It may be that these interventions lead to positive externalities that outweigh the externalised costs. But this is to put a faith in the wisdom of politicians and bureaucrats that is not supported by our everyday experience. More likely, costs are not merely shifted from those incurring them, but also magnified before they are dispersed, if in ways that none of us can fully understand.
Let us try to imagine the shape of a world in which these interventions had not begun. It might now be a place of largely independent communities, with much production of food and energy and manufactured goods close to market. There would have been an industrial revolution. But it would have taken a different path. There would be advanced technology. But it would be different in its objects. There would be some centralised production, but only where its full distribution costs were reflected in price. There would be some international specialisation and trade on the basis of comparative advantage. But this would not be so omnipresent, nor so able to produce vast and sudden dislocations. There would be neither corrupt, free-floating elites nor an alienated proletariat. But there would be much freedom and much regard for tradition.
In the world as it is, the British working classes have been smashed not by free trade, but by systematic state interventions so longstanding that we are liable to take them as inevitable. The answer is not to call for the State to make up sliding scale tariffs or to set quotas on South Korean washing machines. Rather, it is for the initial interventions to be swept away. Two centuries of the world as it is cannot be undone at once. But we can hope that a root and branch attack on the enabler of that world will allow something more natural to take its place.
I have said that there are differences between libertarians and traditionalists over what constitutes the substance of the good society. Rightly considered, I increasingly wonder where the real differences need to be about the form of that society, and over how to get there.