Decision ‘08

When This Blog Engages Barack Obama…

…you can be sure it will be on the issues. This is not the home for slanderous rumors of the sort that are swirling around his candidacy, nor will I allow these sorts of items to go unchallenged in the comments. You know the kind of nonsense I’m talking about - there’s no need to invite discussion by talking about specifics.

This doesn’t mean Obama gets a free pass, just that we will focus on items of substance. Yesterday, I posted on Iraq. Today, it’s the economy, stupid! In particular, I’m troubled by Obama’s (and much of the left’s) continued attacks on NAFTA. NAFTA is one of the cornerstones of the Clinton administration - it’s a highlight, for cryin’ out loud, not something to duck from. And yet we get items like this:

Democratic presidential hopeful Barack Obama assured U.S. trading partners on Sunday that he did not oppose free trade despite making increasingly critical comments about multilateral deals such as NAFTA.

Obama, an Illinois senator, has turned trade into a centerpiece of his campaign in Ohio, where trade agreements are particularly unpopular as domestic manufacturing jobs disappear.

Texas and Ohio hold nominating contests on March 4, and Obama has criticized the North American Free Trade Agreement at campaign stops in both states.

He has pounded rival Hillary Clinton, a New York senator, for switching positions on NAFTA and said repeatedly that he would revisit that pact to instill environmental and labor standards.

But Obama, who would enter the White House with only four years of experience as a U.S. senator in addition to several years in the Illinois legislature, said his misgivings about NAFTA did not mean he was opposed to such accords in general.

Asked how other countries should interpret his position, Obama responded that he supported free trade but wanted it to be fair.

“What the world should interpret is my consistent position, which is I believe in trade,” he said after meeting with workers at a manufacturing plant in Ohio.

Well, that’s nonsense of the highest order. You might as well try to convince me that up is down. One of the biggest progressive lies is that ‘fair trade’ and ‘free trade’ are synonymous. Nothing could be further from the truth. ‘Fair trade’ is in fact a euphemism for protectionism, and the only reason it’s not challenged more vigorously is because your average American is economically illiterate.

The manufacturing jobs that left this country are not coming back, at least not anytime soon. That applies no matter who the President is and what party controls Congress. The reason the manufacturing jobs left America is because we lost our comparative advantage in manufacturing. But this is not a cause for depression, but rather celebration, if you understand the free market. When countries produce those goods and services that others can produce more readily, they harm the cumulative good of themselves and their trading partners. It is when capital is free to employ itself in its most productive use that all parties benefit.

Translation: other countries make manufactured goods because they can do it more cheaply. The American consumer benefits - but so does the Mexican consumer (to use a NAFTA-related example), because American labor and capital is then free to work in areas where Americans have the comparative advantage…and because both sides are producing more of each type of good or service, both sides benefit, where free trade applies. Further, this applies even if Mexico or America has an absolute advantage in all goods and services, because of the notion of opportunity costs of production.

Indeed, the workings of the market will supply the very conditions that ‘fair trade’ proponents confess to be so concerned about. As Mexican factories produce more goods, and the state of the Mexican economy improves, more factories will open. There will be a great demand for workers in these new factories, and wage increases will be necessary to entice the newcomers. Workers want benefits, too, like paid time off and health coverage - so the factories that offer these benefits will be in a greater bargaining position in attracting labor…and so forth and so on.

It’s basic economics, really. It’s remarkable to me how little faith many Americans have in the capitalistic society that has made the American consumer the engine of world economic growth. To the extent that we employ free trade, society will benefit - and to the extent that we employ ‘fair trade’, society will suffer.

Ah, but what about the individual workers? All those autoworkers in Detroit that are out of work? Well, the hard answer is that we live in a global economy, and free trade is the system that provides the greatest benefit to the greatest number. There will always be winners and losers in a capitalistic society - but the overall prosperity of society as a whole will continue to rise. Yet we temper our free market with socialistic ideas such as a safety net (Social Security, Medicare, CHIP, WIC, etc.) because we do not wish to see needless suffering. That’s a trade-off that most in our society are willing to make, even ardent free-market types like myself…but that’s an internal decision made with the consent of the governed.

In other words, leave the social policy to our trading partners themselves. That’s the realm of politics, not economics…

34 Responses to “When This Blog Engages Barack Obama…”

1 Peter Says:
February 25th, 2008 at 11:58 pm
1) I think that free trade is great in the abstract — but what should trade policy be with a country which manipulates its currency (China), restricts foreign companies from participating in its domestic economy (India), or has a managed economy which creates elaborate bureaucratic obstacles to American companies (Japan until recently)?

If your trading partner is a capitalist haven like Hong Kong, then free and unrestricted trade benefits everyone. What do you do when your trading partner stacks the deck in their favor.

2) America has protected a number of industries, under both Democratic and Republican administrations: sugar, tobacco, big pharma, oil, agriculture, and cotton, to name a few. Are there any domestic industries which ought to be protected? (My answer would be that the only industries which ought to be protected are those which concern national defense.)
2 Fargus Says:
February 26th, 2008 at 12:00 am
I see your points, Mark, but I think that the difference isn’t so much in economic theory as it is in how the players are viewed on either side. You and those on the right seem to me to view “the workforce” as a single mass whereas Obama seems to be responding to the concerns of the individual people who make up “the workforce.” You may say it’s impossible for everybody to get a fair shake, and you may be right. But I think it’s a little more nuanced than mere protectionism. There are people who are genuinely concerned when we seem to be telling the members of our workforce, “Hey, you lost your job, but it’s a good thing! And now you can get what I tell you is a better job, the skills for which you don’t at all have after 20 years of working in a factory!”

Oversimplified? Obviously. But like I said, I think this is more a forest/trees dichotomy than anything else.
3 Mark Says:
February 26th, 2008 at 12:07 am
Peter, I agree that only industries that concern national defense should be protected - and even those are far fewer than most people think. But your point number one is a great argument for MORE free trade and less ‘fair trade’ - we don’t want to trade with countries that don’t offer free trade, so let’s bring more of ‘em into the fold!

Fargus, the problem with the view of the individual is that you miss the forest for the trees. By focusing on protectionist measures that you may think protect a certain individual, class of individuals, or industries, you actually create MORE of those out-of-work individuals you were so concerned about in the first place…
4 Aaron Says:
February 26th, 2008 at 12:08 am
Peter, insofar as NAFTA — the primary focus of Mark’s post — is concerned, China, India, and Japan are irrelevant.

But I wholeheartedly agree with you about minimizing our protected industries to national security-related ones.
5 Ryan Says:
February 26th, 2008 at 7:23 am
1) What China, India, and Japan do is irrelevant. The United States cannot be made worse off by being more open to trade. The benefits to the world could be made greater if China didn’t manipulate its currency, etc. But the simple fact is that even unilaterally ending all of our trade barriers is better for us than having them in the first place. That’s the beauty of the model involved here.

2) We spend a lot of time bemoaning the plights of displaced workers who “lose” from free trade. That’s an honorable sentiment, but it’s worth at least thinking about how much those workers benefit too. Is temporary unemployment a cost that is to high that it outweighs the dramatically lower consumption-good prices faced by the worker in question? I am inclined to believe the answer is “no”. That is, even people who lose their jobs are better off because Wal-Mart exists than they would be in a closed economy with a protected job. Obviously this requires some empirical work, which I don’t have handy. And, in either case, I also favor a fairly large social safety net with a fair amount of income redistribution. My preference is for fairly high marginal tax rates and a pretty completely unregulated economy. I think that would give us the best of both worlds.

Hey Mark, when’s the last time we agreed that the Democrats are wrong?
6 Mark Says:
February 26th, 2008 at 8:41 am
We’ll always have Paris…er, economics, I mean…
7 Peter Says:
February 26th, 2008 at 9:05 am
Ryan: I disagree that unilateral free trade is a good thing. I lonce worked for Time Warner in Asia, and I saw how our movies were copied and sold on the street in China. I found cultural and bureaucratic obstacles to doing business in Japan which were mind-bogggling: basically if they didn’t absolutely need what you are selling, they would find a way not to buy it. I think it is wrong for Pfizer to develop drugs and have them replicated in India, or for IBM to develop products and have them reverse engineered in China. Wal-Mart and Citibank should be able to open stores/branches in India.

These aren’t just fairness issues: I think the government has the right (and obligation) to protect its economic interests when the playing field is tilted, using sanctions and tariffs when necessary.
8 Mark Says:
February 26th, 2008 at 10:20 am
Peter, what good do your sanctions and tariffs do in the scenario you described? They raise the cost of goods for American consumers, while doing nothing to lower the costs of the goods you are trying to export - and they antagonize your trading partners, who will go elsewhere, in all likelihood, with their trade. I’m with Ryan on this one, though I appreciate your personal perspective…
9 mikebdot Says:
February 26th, 2008 at 10:36 am
…”who will go elsewhere, in all likelihood, with their trade”…

Isn’t that kind of the whole point? To find a country that will trade with you in a manner that is more fair to your workers…

As for factors that DO relate to NAFTA, Mexico is exploited for cheap labor by American corporations who have become “global” in order to make their shareholders happy. Free trade is all well and good, but if the country in question (Mexico) doesn’t actually have products to trade you before they are raped for cheap labor, the “free trade” mantra just rings hollow. It’s basically a slave trade, except the workers are not killed or beaten and they stay there. Actually, it forces many to consider moving to the US because they can make better wages doing the same thing. Or open a Mexican restaurant…
10 Mark Says:
February 26th, 2008 at 11:53 am
Ummm, Mike, with all due respect, I don’t have a clue what you are talking about. That may play in a Michael Moore movie, but it is not an argument, it is an assertion. There is no economics in what you are saying, but rather, loaded terminology and rhetorical flourishes. Of course, Mexico has goods we want. And of course, our exporters don’t wish our trading partners to look elsewhere for their needs…
11 peter Says:
February 26th, 2008 at 11:57 am
Mark: one of the advantages of having trade sanctions and tariffs in your arsenal is that you then also have the credible threat of imposing them. Hence there is a kind of multiplier effect: sometimes you have to use them, and other times you are able to achieve a desired result by merely threatening to use them.

Also, I don’t think that the cost of goods is the only criterion which is worth looking at. We all recognize that the shift of manufacturing to developing markets is because they can produce cheaper or more efficiently. However, the flip side of that is that our economy is based on products and services developed with American intellectual property. Apple may manufacture iPods in Taiwan, but they were designed down the road from me in Cupertino. They deserve to be the sole beneficiary from having the design skills to come up with something as cool as iPods. If they are deprived of sales because someone in Asia can reverse engineer them and sell them for less, I think protecting them trumps the consumer’s interest.

Some of the intellectual property is subject to copyright – movies, electronics, pharmaceuticals – and other property comes from the experience of running a business (e.g., Wal-Mart knows things that others don’t know). In my view, if you allow other countries to diminish the value of what we bring to the table – i.e., intellectual property – then you have committed a strategic blunder which far outweighs the delta in cost of goods.
12 mikebdot Says:
February 26th, 2008 at 12:09 pm
Mark: Mexico didn’t have (as many) goods that we wanted until NAFTA was created, then many American corporations moved there to reap the rewards of cheap labor. It, literally, instantly removed billions of dollars of corporate capital over the border (possibly trillions), which in turn has caused many older manufacturing plants to suffer and thus look poorer by comparison so they have an excuse to close said older manufacturing plants. “Oh, well the Mexico plant is doing much better”…well, that’s because the building is 50 years younger and they’ve built in all the efficiencies the plant in the US has discovered of those 50 years, you dolts. Duh.
13 Jacques Distler Says:
February 26th, 2008 at 12:17 pm
Let me start by listing a few of the issues raised by various commenters

1) Non-tariff trade barriers, imposed by our trading partners
2) Lack of (or failure to enforce) environmental regulations, worker-safety rules, etc, in those countries
3) Low wages in those countries

1) and 2) are things that can (and I believe should) be dealt with in trade agreements. Of course, they hurt American manufacturers (by making it hard for them to compete), but more importantly, they hurt workers and consumers in those countries.

3) is more tricky. Whether it’s a factory in rural China, or a maquiladora on the Mexican border, you can pretty much be assured that the workers there earn higher wages than they otherwise could. With proper health and safety regulations, those workers are unquestionably better off than they would be if the factory weren’t there. Lower wages is the “comparative advantage” that those countries have to offer. Clumsily trying to remove it hurts both them and us.

But let’s talk about the elephant in the room.

When Mark talks about “all those autoworkers in Detroit that are out of work,” he’s talking about jobs lost to Japan and Korea (not low-wage countries). Even within the context of NAFTA, far more auto jobs went north to Canada, than south to Mexico. Not because the Canadian have low wages, or lax worker-safety regulations, but because national healthcare gives GM a $2000/car cost advantage for building it over there.
14 Mark Says:
February 26th, 2008 at 12:27 pm
Well, if the jobs went to Japan and Korea, it was still because they had a comparative advantage - if it’s not low wages, it HAS to be something…more efficient factories, perhaps?…
15 Mark Says:
February 26th, 2008 at 12:29 pm
But let me bring the point home again - the Democratic presidential candidates are talking about NAFTA is if it were a bad thing. THAT is the real elephant in the room. NAFTA was and is an undeniable boon to America, Mexico, and Canada. It is a desperate ploy to pander to a state (Ohio) that has been hit hard by the shift in manufacturing, and it plays on economic ignorance when the candidates themselves know better. I can assure you that here in Texas (well, outside of Austin, anyway) NAFTA is considered a very good thing indeed…
16 Mark Says:
February 26th, 2008 at 12:34 pm
Mike, the mechanics you describe as a consequence of NAFTA (cheaper goods in Mexico, meaning more manufacturing moved there) are precisely the point. That’s a bad thing?…
17 peter Says:
February 26th, 2008 at 12:47 pm
Nissan and Toyota manufacture cars in Tennessee — BMW makes cars in South Carolina — the Japanese car companies all have large corporate offices in Southern California and the European ones in the North East — it would be interesting to know if there is a net gain in automotive employment in the US, with jobs shifting from Michigan to other (mostly non-union) states.
18 mikebdot Says:
February 26th, 2008 at 1:18 pm
Mark: To me, the “end” should not be “cheaper good”. That’s why I hated economics. The “end” should be a satisfied work force and thus, nation. Cheaper goods actually have very little do with that. People can choose to buy less if goods are more expensive, they have no choice if they have no job.

As far as the auto industry goes, my opinion is what hurt them the most was the pension agreements they made. You can’t blame the unions for that though, the corporations agreed to those frameworks and it ended up hurting their cash flow quite a bit. I’m not sure if they thought less people would opt for the lump-sum payments, but somewhere a serious mis-calculation was made.

Toyota (and other newcomers) don’t have to worry about health care or pensions for their retired workers. They obviously have a competitive advantage there.
19 Mark Says:
February 26th, 2008 at 1:33 pm
Well, there are the OTHER big elephants in the room (that makes four now, right?) - union-negotiated pension obligations that are through the roof, and unions in general. Still, before we get too far afield, let me respond again to Mike - cheaper goods have EVERYTHING to do with a satisfied work force. Money is not an end - it is a means to purchase the things a person cares about. And free trade employs far more people in the aggregate than it throws out of work…so workers get a double dose of good news - more jobs, and more goods at a cheaper price to purchase with their pay…
20 mikebdot Says:
February 26th, 2008 at 2:24 pm
Mark: Let me rephrase. Cheaper goods don’t NECESSARILY have anything to do with satisfaction. “cheaper goods have EVERYTHING to do with a satisfied work force” is a mantra, not a truth. What I should have said was “cheaper goods don’t have to have anything to do with that, but that is what the economics professors tell us”.

Cheaper goods are almost always the product of making them less durable. Therefore, you end up buying more of the cheaper goods over and over instead of a few of the not as cheap goods. Refrigerators used to last much longer. That is no accident.
21 Mark Says:
February 26th, 2008 at 3:06 pm
Cheaper good means less durable? You own a computer? Did you ever own a TRS-80, Atari 800, or Apple II?

By your own admission, you hate economics (an odd statement, given economics is an area of legitimate study, and not a doctrine). You and I are far apart on this issue, and I see no middle ground. You speak of economics and economics professors and the working of the market with complete disdain, whereas I believe that the free market underpins almost everything good about modern life…
22 mikebdot Says:
February 26th, 2008 at 3:31 pm
Computers are a very big exception to that rule, well, pretty much all electronics. As for my hatred of economics, I was referring to formalized economics class and the status quo of what people believe to be true even with very little data to support their thoughts (or no data, only theory, as opposed to, say, something like evolution, but that’s another argument I guess). In any event, the free market only works if all parties involved are playing by the same rules and they clearly aren’t, as Peter has said. My beef with NAFTA though has little to do with the agreement itself, but the behavoir it spurred from corporations in general. Moving to Mexico and investing very large sums of money there when it could have invested the same amount of money in the states and reaped far greater rewards. I believe our work force is far superior to Mexico’s, but that’s just my opinion, but that is the prism through which I view things.
23 Mark Says:
February 26th, 2008 at 3:48 pm
Well, the whole point is they couldn’t have invested the same money in the States and reaped far greater rewards, or they would have…but I think we have officially reached an impasse here…that’s my last word…
24 Becca Says:
February 27th, 2008 at 12:33 am
I am interested in your arguments in favor of NAFTA. I am pretty much against NAFTA, why should we make it more profitable to mistreat anyone American or not? Sure, when things start out the companies rule and take all the advantage they can of their workforce, I mean at one time child labor was the norm right? Before the government and the courts stepped in conditions were compeletely intolerable, and precisely because we have a large middle class and a democracy we have made laws to restrict the ability of the corporations to mistreat the average person. I don’t think that it is right for us to financially reward these corporations for finding a way around these rules, especially to the extent that they apply to the environment and worker safety. I feel like it is just offensive for us to not only look the other way but to sanction such actions. I was especially interested in your opinions about the way that capitalism will correct itself because there will be more factories and competition for jobs. Obviously capitalism is the best way to go, but in order to prevent companies from taking advantage of workers there must be checks and balances such as collective bargaining, preventing monopolies, and controls for safety and environmental issues. I mean even with these regulations, American workers are still taken advantage of, just look at Wal-Mart. As far as I understand, the only thing Obama wants to do is institute a minimum of this protection (the safety and environmental issues) for the workers under NAFTA.
25 Mark Says:
February 27th, 2008 at 8:46 pm
And I am interested in why you think Barack Obama, as president of the United States, should take it upon himself to try to dictate labor policies in Mexico and Canada. Do they have a vote in the American election, too? If not, I repeat the conclusion of the piece above: leave the social policy to our trading partners themselves to solve, politically, through their own systems, as we have done for ourselves….
26 Jacques Distler Says:
February 27th, 2008 at 9:50 pm
For argument’s sake, let’s concede your point that Mexico is a democracy, and so we should not be imposing “our” labour standards on Mexico, thereby short-circuiting the political process there. (Forgetting, of course, about the long and somewhat porous border that Mexico shares with us.)

What about China, then? It’s not, even remotely, a democracy. Can we attempt to “dictate” labour policies there?
27 mikebdot Says:
February 28th, 2008 at 11:00 am
Mark: Why do you think president Bush, as president of the United States, should take it upon himself to try to dictate the entirety of the political situation in Iraq by going to war with them and removing Hussein? Surely something as simple as environmental and human rights issues should be grounds for a president to dictate to another nation, especially when it is basically just nothing more than renegotiating a 14 year old contract. It is something that has been discussed since its inception and I see no reason not to address it, or at least try to address it.
28 mikebdot Says:
February 28th, 2008 at 11:04 am
And you know, I’m not going to even buy that frame either, we wouldn’t be “dictating” anything. Canada and Mexico would either agree or not and then either trade under the new framework or not. There is no “dictating” involved. It’s called exerting pressure, something a president is allowed, and expected, to do.
29 Mark Says:
February 28th, 2008 at 7:54 pm
Jacques, Mike, I concede that ‘dictate’ is a loaded word in the context I used it, and Mike, I anticipated that someone would raise Iraq as a counterexample - but then again, that’s a story in and of itself. Lefties who would never dream of ‘imposing’ the American way of life on the Arab world are more than happy to pile onto NAFTA because it benefits ‘evil corporations’ (composed, of course, of everyday Americans as employees and shareholders).

Look, there’s nothing wrong with using our cultural and diplomatic ties to pressure, for example, China. Foreign relations are a proper political activity. Where I differ with Mike and, presumably, Jacques, is that I don’t think free trade, an unalloyed good for Americans and our trading partners, should be held hostage while we try to teach the world to sing in perfect harmony with a Coke and a smile…
30 Jacques Distler Says:
March 1st, 2008 at 12:42 am
Look, there’s nothing wrong with using our cultural and diplomatic ties to pressure, for example, China. Foreign relations are a proper political activity. Where I differ with Mike and, presumably, Jacques, is that I don’t think free trade, an unalloyed good for Americans and our trading partners, should be held hostage while we try to teach the world to sing in perfect harmony with a Coke and a smile…

1) Trade deals take years to negotiate. I don’t think adding labour and environmental standards to the list of issues to be discussed drastically lengthens the process.
2) Failing to establish, or failing to enforce such standards can, arguably, be construed as every bit as much an “unfair trade practice” as the other matters that occupy the attention of trade negotiators. Why should government export subsidies be subject to retaliatory sanctions, but not, say, flagrant disregard for worker-safety rules?
3) Surely, even you would draw the line somewhere (products of factories employing slave labour? Organs harvested from executed prisoners?).
4) Why is using “cultural and diplomatic ties” an acceptable way to exert pressure, but not using the power of the purse? Could it be because using the “carrot” of a prospective trade deal would actually be more effective?
31 Mark Says:
March 1st, 2008 at 6:44 pm
Well, I don’t know about more effective. I suspect such conditions would result in less trade deals, and hence, less favorable trade. Nevertheless, let’s presume I concede that labor standards should be part of a ‘free trade’ pact (an oxymoron, and my acceptance of such a condition is only for the sake of argument - I accept no such thing, because now you’re talking ‘fair trade’ and not ‘free trade’).

What conditions should we insist on? UAW-style labor standards? Worked great for Detroit…

Maybe you mean something less drastic, as in your #3 (i.e., no slave labor used to make sneakers, no harvested organs from executed prisoners used to lubricate ball bearings). Okay, fine, sure…I concede there is a line which no one wants to cross. I wouldn’t have traded with the Nazis, for example, if they offered me the most favorable conditions in the world.

But these conditions are not what ‘fair trade’ proponents are talking about - they want us to be on a ‘level playing field’ with the other countries, so my UAW example is far more pertinent…and I would further assert that extreme conditions are better handled with multilateral institution such as the WTO than in narrowly focused free trade agreements.

Indeed, to truly be a free trade agreement, there can only be one fundamental format:

Country X and Y (and maybe Z and W) agree to eliminate all restrictions to trade between themselves, whether in the form of quotas, tarrifs, taxes, or subsidies.

That is the very definition of free trade, is it not?…
32 Jacques Distler Says:
March 1st, 2008 at 7:46 pm
OK, Mark, what we need is a little theoretical disgression.

You’ve a background in Economics, so you’ll recognize that the following is a bit of a caricature of the argument for the benefits of free trade. But bear with me; there’s a point I want to make towards the end.

Markets, as we know, are a very powerful method (by far, the most powerful we have) for finding the optimal allocation of resources in an economy. For simplicity, consider two economies, A and B, with an infinitely-high tariff wall between them (so that no goods and services flow between them). We could use market mechanisms to find the optimal allocation of resources, in each of A and B separately. But this globally-optimal?

Almost certainly not. If it were, then when we removed the tariff walls between A and B, no goods or services would flow between them. That’s certainly possible, but more likely, a better allocation of resources will result from some nonzero level of trade between them.

Since the original solution (no trade) is still possible, we can only improve things by lowering trade barriers. In a nutshell, that’s the argument for why free trade is always good.

OK, that’s fine as far as it goes. But there’s something we are forgetting about: market failures.

The classic example is pollution. The benefits (lower operating costs) of a factory emitting more pollution are concentrated (they accrue to the factory owner), whereas the costs are diffuse (borne by society as a whole). So markets, left to their own devices, will not lead to an optimal level of pollution. That’s why we have government step in, and impose regulations (or, in fancier versions, cap-and-trade pollution credits), which raise the cost of polluting borne by the factory-owner.

Another example: say the goverment decides to provide subsidies to one particular (or a group of) manufacturer(s). This lowers his cost of production, perhaps enough (since the government is such a big player), that he can drive his competitors out of business. But this example of the government “putting its thumb on the scale” almost surely leads to economic inefficiency.

Both of these things (and more, besides) can occur both within a single economy (where you’ve probably seen them discussed), but also between economies.

It is the purpose of trade agreements, not simply to eliminate tariffs (that’s the trivial part), but to ensure that these instances of market failure don’t occur. You don’t want Government A providing subsidies to its industries (even if they provide a net benefit domestically), because the result, when the effects on Economy B are taken into account, are sub-optimal.

When you think about what issues trade agreements should cover, and what things they should regulate, the question you are asking is: what are the possible sources of market failure, and what do we need to do to counteract them?

Of course, not all market failures are relevant. A market failure which only affects Economy A, and not the level of trade between A and B, is probably best handled domestically. But anything that impacts the level of trade between the two economies is the purview of the trade agreement between the two governments.

The things I’ve listed (pollution and safety standards, labour laws, …) are considered classic examples where governments typically step in to prevent market failures, domestically. For the reasons explained above, they are also the proper purview of trade agreements between the two countries.

I know you wanted specific answers (what labour laws? what safety standards?). What I’m offering you, instead, is a framework for thinking about such questions.

What the actual outcome of negotiations turns out to be is another matter. But, at least we can talk coherently about what we’re shooting for …
33 Mark Says:
March 1st, 2008 at 11:24 pm
Well, I did specifically list subsidies as being one of the things free trade agreements should eliminate…

You framework is intelligibly presented (as usual)…but you’re on a far higher plane, intellectually, than those who are bashing NAFTA.

You and I both know that the Democratic presidential candidates are pandering for votes in economically hard-hit Ohio by pretending that NAFTA caused their jobs to go away, rather than the global economy.

Pollution, safety standards, labor laws - this are things you mention as market failures. Perhaps so, in the immediate sense. But the market itself will insist on creating solutions to these problems. As Mexico grows more prosperous, her workers will DEMAND better labor and safety policies and they will get them, too. After all, there are other economic markets at play - in this case, the supply and demand of labor. Indeed, I would argue that the single best guarantor of rising safety and labor standards is a growing economy that demands ever more labor - because a growing economy puts the worker in a stronger bargaining position with respect to his employer, because of higher demand for his services.

China’s factories are getting more advanced by the day…and they are making quality merchandise, to boot. All the Apple gadgets that people know and love - IPhones, IPods, you name it - made by Chinese labor. Those Chinese laborers are extremely poor by American standards - but by Chinese standards, working in a factory is so attractive that people leave rural China for 3-5 year stretches to make enough money to get their start in life…and many Chinese factories are now housing their workers dormitory-style and giving them 3 free square meals a day.

Chinese factories are also polluting up a storm, and pollution is a tougher nut to crack, but government solutions to pollution are often counterproductive (ethanol subsidies, anyone?). I’m not sure I buy the preferred “market-based” solution of cap-and-trade, either (I’ve read articles lately, seems like maybe one from the Economist, though I don’t have a link handy, that suggest it’s a bit of a smoke-and-mirrors game that isn’t really panning out in reality as well as it did theoretically). Domestic political pressure is rising in China to do something about the pollution, however, and will probably have a far greater effect than any trade agreement would.

I’m a hard-core free-trader, but I’m also a realist. I know we don’t live in a completely capitalistic society and I’m okay with that. As you know, I’m not a conservative who denies global warming, and of course, I’m concerned. I’m also on the record as being in favor of a safety net (but I also feel we are promising more than we will be able to deliver to future retirees). But what, realistically, would a renegotiated NAFTA do to address global warming, lost jobs in Ohio or Detroit, or any other consequence of market shifts that are inevitable when a mature, rich, Western economy pretends it can compete in low-skill manufacturing positions with third-world nations with a per-capita income of mere hundreds of dollars annually?

Which brings me full circle again - eventually, China, India, and Mexico’s own rising standards of living and income levels will cause them to lose THEIR comparative advantage in manufacturing, but in the meantime, they (and we, as their trading partners) will have become vastly more wealthy and better off…
34 Jacques Distler Says:
March 2nd, 2008 at 12:52 am
Mark,

You and I know that NAFTA was not the cause of job losses in Ohio, and ‘renegotiating’ it is not going to bring those jobs back, either.

So I’m embarrassed that the Democratic candidates stooped to pandering to the misconceptions of Ohio voters on the subject.

But I do maintain that the terms that they said they wished to renegotiate (environmental standards, worker safety standards, … ) are a legitimate part of many (if not all) international trade agreements. So Obama and Clinton are not off-the-wall anti-free-traders for simply raising them as issues to be negotiated.

You can believe in free trade, and believe that free trade agreements need to have strong provisions on those issues (by the reasoning I sketched in my previous comment).

With that caveat, I wholeheartedly agree with you on the mutual benefits of free trade.