Minding Ag's Business

Failing at Free Trade: Why Economists Haven't Won the Debate

Katie Micik Dehlinger
By  Katie Micik Dehlinger , Farm Business Editor

Free trade is not a new concept.

More than 200 years ago, economists like Adam Smith and David Ricardo argued fewer barriers to international trade resulted in greater wealth and economic wellbeing.

Economists' inability to convince the greater populace of free trade's benefits is the field's greatest failure, according to former economic advisor to President Clinton and current Princeton economics professor Alan Blinder, who gave a keynote speech at the Kansas City Federal Reserve Bank's annual Agricultural Symposium last week.

The reasons are far from simple, and Blinder spreads the blame around. Part of it is on how politicians use economics, while other aspects of blame fall on economic theories that don't translate into real life very well. At its heart, consumers and economists have different views on the function of the economy that complicate the perspective.

Blinder said he thinks the most obvious reason is that unlike most economic theories, which are intuitive, the theory of comparative advantage isn't. Say there are two trading partners, Country A and Country B, and Country A can make everything more efficiently than Country B. Even though it has a advantage in making everything, there are still sectors Country A excels in. Under the theory of comparative advantage, County A would be better off specializing in its most competitive sectors and trading with Country B for the items it's less efficient in producing, even though it's better at producing them. Country A ends up ahead by focusing on its biggest strengths.

"It still pays to trade and exploit comparative, rather than absolute, advantage. It's a counter intuitive notion," Blinder said. It's a tough concept to grasp, and one that he said usually takes Princeton student a full hour-long lecture (or more) to grasp. You can find a deeper explanation of this concept, as well as examples here: https://www.investopedia.com/…

Secondly, trade always results in winners and losers. Blinder said there's hardly ever an exception, and the losers have a vested interested in blocking the opening of trade. Back in 1935, Upton Sinclair wrote: "It's difficult to get a man to understand something when his salary depends on not understanding it."

Economists look at the net results of trade, which almost always outstrip the drawbacks, but gains are often diffuse, barely visible and small to the average person.

"So think about trade with China in toys. Millions and millions of Americans buy toys cheaper at Walmart because of trade with China," Blinder said. "Do they know it? Probably not. Even if they know it, what do they save? Probably a $1.25 on a toy. That is not going to move them to political action."

By contrast, losses are usually highly concentrated, visible and fall on small, well-defined groups. Think of steel, a market the Trump administration is trying to protect with new tariffs. Steel manufacturers and companies lost a lot to open, global trade. "Some of the workers might lose their jobs, so that's worth going to the political bastions to fight."

Blinder said economists' way of calculating the cost of trade -- add up all of the gains and add up all of the losses to see if the country comes out ahead -- doesn't translate well to the political arena.

"If you're a politician standing for election, you want to weight the gains and losses by the likelihood and ferocity of political action. So if you have a relatively small number of people that will really go to the ramparts and spend a lot of money to vote you out of office, that's a real threat. And if the other 640,000 constituents aren't paying attention, they count for zero in the political calculus, but not the economic calculus." Blinder was referring to the average population of a House of Representatives' district.

To make matters worse, the United States doesn't have a good system for compensating those that lose out in a trade war. It's called trade adjustment assistance, and it's difficult to qualify for because it has to affect a large group of people whose work has been displaced. Blinder said some unions have taken to calling it burial insurance. They'd rather have the jobs, so if you're offering assistance that's going unused, it's akin to nothing.

Another factor is that mercantilism prevails. Mercantilism is a policy of trade designed to maximize the accumulation of monetary reserves through a positive trade balance. Sound familiar? It's driving White House trade policy. The goal is, ideally, to trade everything at a surplus, and it often employs high tariffs to keep unwanted imports out. President Trump's focus reducing the U.S.'s trade deficit with China is one example.

"The mercantilist idea sounds silly to economists," Blinder said. "That we should put high value on our ability to do work for other people, and shun other people that want to do work for us. We want to work and export, but we don't want to import the fruits of somebody else's labor at a good price."

There's another reason why free trade has been hard to sell, and Blinder said it's a principle of doing no direct harm, especially when it comes to the government.

"Trade agreements, unlike trade overall, are things that are identifiably 'Made in Washington,' or 'Made in London,' or 'Made in Paris.' The government does something. It's identifiable. And as I said, openings of trade always have winners and losers, so these trade agreements, when they're trade openers, do hurt people, and that harm is identifiable by the losers as having been made in Washington, whether that's true or not."

Trade and technology are two sides of the same coin, which each facilitating the growth of the other, yet are viewed entirely differently by non-economists. In terms of job killers, technology's taken a far greater toll. "The paradox here is Luddites don't get much support these days. If you go on the political stump and rail against technological progress, I don't think you'd get very far. If you go on the political stump and rail against trade, you can get pretty far," he said. And in President Trump's case, it carried him all the way to the White House.

Blinder said economists and ordinary citizens have different views on the purpose of an economy, and that's why economists haven't been able to convince the broader majority to pursue a policy of free trade. Economists believe the basic purpose of an economy is to bring goods and services that consumers desire to them as cheaply and efficiently as possible.

"A free market economy is a very good engine for getting this done," he said. "To many, many non-economists, that's not quite right. What they see is it's a way to create jobs. When you think about that for a little, you can understand that. Toys at Walmart may be cheaper, and that's nice, but compared to losing your job, that's trivial."

Katie Dehlinger can be reached at Katie.dehlinger@dtn.com

Follow Katie Dehlinger on Twitter @KatieD_DTN

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DARYLL RAY
8/13/2018 | 10:11 AM CDT
Great article! There is also an important disconnect, which you allude to, between economic theory and the free traders (whether they be economists, politicians, business leaders or others). Economic theory posits that a policy can/should be pursued if the gainers CAN compensate the losers making both the losers and gainers better off. Ardent free traders most often ignore, or fail to adequately implement, the compensation part. This tends to catch up with them in the long run.
JMoseley1710676991
7/28/2018 | 10:14 AM CDT
Katie: Excellent article and coverage of Blinder's talk about economics. I don't know how you would, or if one could, define the bright line difference between economists and non-economists in the US population. However, it would be interesting to know the percentage of US voting adults that would grasp the various economic principles in the article.