A Sincere Change of Heart?

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The old adage wisely instructs us to “give credit where credit is due.” I am about to give credit to someone to whom I have given extremely scant credit before: our current president. Obama is apparently doing something I want him to do: he is advocating more FTAs — free trade agreements.

This is a surprising — nay, mindboggling — reversal of the course he took during his first four years. In his first term, he started trade wars with Mexico, Canada, and other places. He stalled, until late in that term, any action on the three residual FTAs that President Bush had left him (with Colombia, Panama, and South Korea). And he generally mouthed the labor union line that free trade “steals” “American” jobs.

But shortly before his reelection, he caved. In the face of a clearly stagnant economy he signed the three FTAs. He has now gone farther. In some of his recent speeches, he has advocated two new large FTA deals — one with the EU, and one — initially proposed by Bush — called the Trans-Pacific Partnership (TPP). He is in favor of concluding those deals quickly. (The US started participating in the TPP negotiations under Bush in 2008.)

Obama backed the notion of an EU deal in his state of the union address, saying, “Tonight, I’m announcing that we will launch talks on a comprehensive trans-Atlantic trade and investment partnership with the European Union . . . because trade that is fair and free across the Atlantic supports millions of good-paying American jobs.”

Of course, free trade with anywhere supports millions of “good-paying” jobs. This proposition has been urged by mainstream economists ever since the debacle of the Smoot-Hawley tariffs — or for that matter since Adam Smith. It has recently been brilliantly explored by Daniel Griswold in his primer on the subject, Mad about Trade (which I have reviewed for these pages). Obama is, it seems, only just learning this.

The trade deal with the EU would be huge. The economies of the EU and the US together constitute over half of world GDP, and the trade between them already accounts for one-third of all trade flows.Not commonly known in the US, but explored in detail in Griswold’s book, is the fact that as of 2010, US private investment in France and Belgium (combined) exceeded US private investment in China and India (combined). According to some estimates, an EU-USA FTA would likely add as much as 1.5% to GDP growth in both regions.

Of course, free trade with anywhere supports millions of “good-paying” jobs. President Obama is, it seems, only just learning this.

Concluding the TPP would also be huge. It would greatly expand the current, modest FTA called the Trans-Pacific Strategic Economic Partnership (“P4” or “TPSEP”), which includes Brunei, Chile, New Zealand, and Singapore. The proposed TPP would embrace Australia, Canada, Malaysia, Mexico, Peru, Vietnam, and us. Japan has just announced that it will join the TPP talks as well. Obama hasn’t commented on the Japanese dimension, but he has indicated that he favors the TPP, viewing it as his “pivot” toward Asia.

There would be great advantage to including Japan in a large free trade zone with the US. The other nations with whom we are negotiating either have FTAs already (Australia, Canada, Chile, and Mexico), or are very small potatoes economically (Brunei, New Zealand, Malaysia, Peru, and so on). Japan, by contrast, is a country with which we have no FTA, and is the third largest economy on earth.

But as happy as I am that Obama seems to be seeing the light, I find myself filled with doubts.

Start with the fact that the president is a notorious liar and dissembler. As a senator, he feigned support for immigration reform but covertly helped kill Bush’s bill, and in the two years in which his party controlled both houses of Congress he refused to introduce a bill of his own. Yet he campaigned for reelection promising — comprehensive immigration reform!

Similarly, as a senator and during his first term (to which he was elected with enormous contributions from union funds) he fought off or stalled all free trade measures. Now he favors free trade? One can be forgiven for wondering whether his conversion is sincere.

Doubt also arises from the question of how persuasive Obama can be on the issue. The opponents of the new FTAs will use his own past arguments against him — the canards about free trade costing jobs, about its resulting in the famous “race to the bottom,” and so on.

Most importantly, the new FTAs are fraught with special difficulties. Let’s begin with the EU. The problem lies with countries such as France, which is highly unlikely to open its domestic manufacturing sector to true competition. The French are notorious for protecting their film and other “cultural” industries by import quotas and direct subsidies. They are famed for their inventiveness in erecting “non-tariff barriers” to trade. And they just elected a Socialist government that loathes free-market economics (which leftist Europeans disparagingly call “neoliberal economic theory”).

The opponents of the new free trade agreements will use Obama's own past arguments against him — the canards about free trade costing jobs, about its resulting in the famous “race to the bottom,” and so on.

Especially contentious is the issue of agricultural imports. America has always been an agricultural hyperpower, thanks to the vast expanse of its arable land and the incredible productivity of its farmers. American farmers have been at the forefront of agronomic invention, from the use of tractors to the use of GPS (global positioning satellite location finding) to the genetic manipulation of grains. France, in particular, and Europe, in general, oppose the sale of genetically modified foods, and are lavish in their subsidization of their farmers.

With unemployment running high in many EU countries — especially Greece and Spain, where it approaches 25%, or about what the US suffered during the Great Depression — an FTA with America will be a tough sell. The average European is as much a believer in populist economic fallacies as the average American, and especially in the myth that free trade costs domestic jobs. (It’s always funny how opponents on both sides of an FTA can argue that it will send jobs over to the other side).

You can catch a glimmer of the difficulty in clenching this deal when you hear Karel De Gucht, no less than the EU trade commissioner, who is pitching an FTA with the US to lower the automobile tariffs that make cars so expensive in Europe, hasten to assure France that it would never be required to dismantle its subsidies and quotas on cultural industries.

Even more problematic will be an FTA that involves Japan. The Japanese certainly want the benefits an FTA with America would bring, such as an end to the tariff we impose on their automobiles — a tariff that runs as high as 25%. If these tariffs were eliminated, Japan’s auto imports alone would jump by perhaps 6%. (No doubt this is why the UAW, the AFL-CIO, and the domestic automakers are alarmed at the very idea of ending those tariffs). But Japan is erecting large obstacles to an early deal for true free trade. They are aggressively “pulling a Bernanke,” that is, weakening the value of the yen, so that Japanese manufactured goods will drop in price compared to American goods. This would rather quickly reduce the impact of our tariff barriers.

An even more significant problem is the fact that a real FTA that included Japan would immediately open Japanese farmers to massive competition by America’s vastly more efficient agriculture. To cite one example: Japan imposes a stunning 778% tariff on imported rice. In other words, Japan’s rice farmers are so comparatively inefficient that they need to be protected by a tariff of nearly eight-fold the American price — a whole new meaning for the Eightfold Way!

Japanese Prime Minister Shinzo Abe, who decided to join the TPP talks, already faces opposition to his move, and has promised, “I will protect Japan’s agriculture and its food at all costs.” That doesn’t make it sound as if there were much chance of a major deal to open trade on both sides.

Over the long term, of course, competition would be good, very good, for Japan. Its citizens would get cheaper food, enabling them to buy more of other things or save more capital to create or expand competitive industries. Free trade would free up people from the farms, enabling them to work more creatively and productively in knowledge-based industries. This would be a major advantage, given that Japan’s population is aging rapidly.

But economics is not the same as culture. In a nation as socially cohesive and static as if Japan, it will be very difficult to convince people to allow their farm industry to shrink. Yet you don’t need to be Japanese to succumb to the myths of protectionism. Populist economics is popular all over the world because, well, the populace is basically the same all over the world. As Hayek noted, our evolution from hunter-gatherers has left us with instincts that are often counterproductive.

If Obama really has seen the light — about which, again, I am skeptical — he would do better to emulate Bush. Go for bilateral FTAs with countries with whom we have a better chance of success. I would urge him to focus on just two countries: Brazil and India. I will be brief here, having discussed the possibility of an FTA with Brazil elsewhere.

Start with the fact that bilateral FTAs are inherently easier to negotiate, since the special interest groups, those omnipresent rentseekers, are easier to hold in check, being fewer than those aroused by action on a broader front.

In a nation as socially cohesive and static as if Japan, it will be very difficult to convince people to allow their farm industry to shrink.

Second, note that while countries such as Japan and France are very culturally homogeneous, Brazil and India are, like the US, ethnically and culturally diverse. Such diversity tends to lessen (though not to eliminate) the tribalist-populist impulse to fear trade with the Other.

Third, Brazil and India are big countries. Brazil, with 200 million citizens, is the fifth largest country in population, and India is the second largest. Unlike Japan and most of Europe, Brazil and India are still growing in population, so they will have a young labor force for decades to come. They are likelier than other countries to allow the importation of food, and more eager to gain access to our manufactured goods markets.

Finally, both countries are growing economically at a fast clip. Brazil already has the world’s sixth largest economy. Both are nations whose greatest economic growth lies in their future, not their past.

They seem altogether better bets than those the administration is pursuing. Maybe — my recurring skepticism whispers — that is why the administration isn’t pursuing them.

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Comments

Jon Harrison

Free trade has put many Americans out of work. This may be easy to ignore if one earns one's living in a classroom, but ex-shoemakers and steelworkers and the like understand. The people who once made shoes in Maine and New Hampshire all lost their jobs years ago -- not because they made poor shoes, or unaffordable shoes -- but because workers overseas accepted wages that no American could live on. Academics and other "knowledge workers" are happy because they spend less on shoes. Workers in American shoe factories suffered the consequences in lost jobs and a reduced standard of living. The academic calls it creative destruction. The worker sees it as destruction, pure and simple. Both academic and worker are partly right. But the social good provided by cheaper shoes is outweighed by the social disruption caused by the worker's loss of job, income, and social standing.

In "The Road to Serfdom", Hayek said the following, in substance (I'm not going to dig through my copy to find the quote -- perhaps some reader will): Nothing has hurt the liberal cause as much as the fixation some liberals have on the principle of laissez faire. "Free" trade is a perfect example of this. Because foreigners will work for pennies, we should throw away hundreds of thousands of jobs? What is that but sacrificing people, human beings, on the altar of theory? The academic theorist identifies more readily with ideas than he does with people (non-academic people, at least). He prefers to pay $20 or $30 less for a pair of shoes, even if it puts his neighbor out of work.

It's not a question of "fearing" trade with the "Other". We should welcome the freest possible flow of goods and services between similar economies. But we should not allow ridiculously cheap labor to eviscerate domestic industries. Better to pay a bit more for that pair of shoes, and let your neighbor keep his job. If foreign workers can indeed out-compete Americans on a level playing field, so be it. But tariffs are quite appropriate when foreign workers are "out-competing" Americans simply because they will accept wages that no American could survive on.

I agree that free trade also creates jobs. That's why I favor free trade between the US and comparable economies, such as the EU and Japan. But free trade with the Second World should be ruled out until Second World's economies develop pay scales and regulatory regimes that roughly match our own. The problem, again, is that we are not all knowledge workers. We must retain a manufacturing base in this country, including low-skill manufacturing jobs. Without these we simply increase dependency and other social ills.

Culture matters. It may be that a shrinking of the agricultural sector would benefit Japan for the reasons the author outlines. But if the Japanese nation prefers tradition to efficiency, we can hardly compel them to change. Here we see that pure free trade is very hard to achieve, even between comparable economies.

Once again our author feels the urge to appeal to authority. Now, whether it's a fallacious appeal or a justified appeal, who can say. Economics is a voodoo science -- heck, it's really not a science at all. All "authorities" on economics are open to question. Adam Smith was a great man. But how applicable his ideas are to 21st century problems is at least open to debate. To keep hauling out a man who died over 200 years ago in justification of one's views is no substitute for a reasoned argument based on contemporary conditions.

Gary

A few points in reply:

1. Yes, free trade—like automation—has put some Americans out of work. But it has also given plenty of other American farmers and other workers good jobs.

On NET—when you count the jobs gained as well as the ones lost—the result is no net loss of jobs, and a move to higher productivity.

2. I am not telling you or anyone else to “believe it because Adam Smith said it.” I offered arguments, and also pointed to a recent masterful survey on the issue by Griswold, and even linked my recent review of it. To mischaracterize my view is hardly to disprove it.

3. I am sorry that some shoemakers lost their jobs, just as I am sorry that when automobiles were introduced, the millions of Americans who supported the 20 million horses then used for transportation lost their jobs. I am sorry also for the many thousands of telephone operators who lost their jobs when telecom switching was automated.

But the creative destruction left society much better off and on balance, and the increase in efficiency created more wealth, that in turn created more and better jobs. As I noted, an FTA with Japan would cost more American automakers their jobs, but would increase jobs in the agricultural sector.

One is tempted to ask you: aren’t you sorry for all the American workers that are now unemployed who would get jobs if we had an FTA with, say, India? And how about the Indians who could then have work, but are now unemployed?

And just a reminder: for the people temporarily unemployed because of free trade and automation, we have numerous educational and financial support programs for them, right? We don’t let them starve…

4. You quote Hayek—by the way, isn’t that appealing to authority?—on the laissez faire principle. But you are just confused. I have never advocated laissez faire—allowing businesses to do whatever they want with no regulation. We are talking about FTAs negotiated with other countries. A negotiated FTA is by definition a form of regulation. Again, you ought to try addressing the real issue, rather than setting up strawmen.

5. Your dig that, “The academic theorist identifies more readily with ideas than he does with people (non-academic people, at least)” is both ad hominem and circular.

An academic theorist can identify with ideas and still be right about what benefits people, especially nonacademic people. And in my case, the dig is as factually inaccurate as it is illogical: I have derived most of my income from my business (a telecom agency) and my real estate investments, and believe me, I have felt the sting of creative destruction first hand, as technology drove telecom prices to virtually nothing.

And your reasoning is circular. You assume that to favor free trade is to not care about workers, which in turn assumes what you haven’t shown (or even attempted to show), viz., that free trade cost jobs on NET.

In fact, your opposition to free trade could be said to display lack of concern about the workers and farmers denied work because of lack of free trade.

I will resist that tu quoque response. Really, the truth is that you seem to care only about the jobs you see, not the ones you don’t see.

6. You seem oblivious to the whole notion of comparative advantage. If we trade with India, say, yes, then India’s low labor costs will be an advantage to them, but our immense energy resources, massively productive infrastructure, and enormous agricultural power will be advantages to us. The opportunity to utilize both sets of advantages more broadly will result in huge productivity and wealth gains for both sides.

7. Finally, I never said that I oppose FTAs with Europe and Japan. You are mischaracterizing my views again. I only said that it is unlikely true FTAs can be worked out with either of them any time soon.

Geezer

Liberty used to be a libertarian magazine. Something has changed.

We have here a debate between a progressive-masquerading-as-a-libertarian and a pseudo-libertarian ("I have never advocated laissez faire") concerning the extent to which we benighted commoners should be permitted by our enlightened overlords to trade our labor and the fruits of our labor with other human beings, wherever they may be.

What gives?

Gary

What gives is this: you can be classically liberal and still believe in a minimal state, with minimal regulation. If you EQUATE "libertarian" with "anarchist", okay, then I guess I am not libertarian.By your defintion, though, neither were Adam Smith, Milton Friedman, Hayek, etc. etc. etc.

So to be clear, I support FTAs with every country on earth willing to agree to trade with us freely. Okay?

I will just call myself "classically liberal" if that will help out.

Thanks for reading my piece.

Geezer

Thanks for replying to my comment.

Was Thomas Paine an anarchist? How about Frédéric Bastiat? If so, I guess I am too. If not, not. I could be mistaken, but I don't think either of them used the words "anarchist" or "libertarian" in their writing. I agree with what Bastiat wrote in The Law; that's the kind of "libertarian" I am.

To be clear, I believe that every individual human being has the right to trade freely with any other human being. Do you agree? What's the difference between that and "laissez faire"?

Jon Harrison

Is it better to have a little magic cicle in which all the participants parrot one another, or an open forum in which participants strive to advance their own and others' understanding?

If Geezer's definition of libertarian is the only acceptable one, then by all means let's start purging people. I'll be the first to go.

Geezer

My comment did not include a definition of "libertarian."

I don't have a problem with a progressive being a progressive, but I think it is dishonest of him to pretend to be otherwise. If the definition of "libertarian" is stretched far enough to include Michael Bloomberg, it becomes meaningless.

Jon Harrison

I believe the author of a piece should have the last word in the comments section, and I really don't want to prolong the discussion, but . . .

1) I didn't say that you oppose FTAs with Europe and Japan. I know you support them, as I do. Perhaps I was unclear in my comment, but I don't think so.

2) I quoted Hayek because I knew his words would have more resonance with readers of Liberty than anything I can say. But I was merely agreeing with the sentiment he expressed; it's just an opinion that I happen to share. I don't see it as proof of my argument on free trade. Let's face it, when it comes to the fuzzy "science" of economics, there are no true authorities. Had the phrase been uttered by someone other than a libertarian demigod, I wouldn't have bothered using it.

Free trade as I perceive you advocating it here means no barriers to the movement of goods and services between economies. Literally, a let alone policy with regard to trade. Of course, even pure free trade has to be negotiated, i.e., codified in bilateral or multilateral treaties. But if you mean free trade with negotiated conditions, well, that's not truly free trade. Perhaps I've simply misunderstood your argument on trade? Would you favor, for example, a tariff regime for trade with lesser-developed economies?

3) On comparative advantage, I have to say that you once again display the academic theorist's feeling for ideas and not people. People in the American textile industry who lost jobs to Asian and Latin American competitors don't give a rat's posterior about comparative advantage. I'm not saying comparative advantage is a false idea. But we have to examine the human cost of free trade between disparate economies. The many Americans who lost livelihoods are what I'm focused on. Perhaps it's easy to overlook those people when you're in love with theories.

Gary Jason

Let me once again reply to your confused points.

1. I mean by a “free trade agreement” (an FTA) to be an agreement between two or more countries that there will be NO barriers to trade between them, including all other protectionist measures as well.

That means no tariffs, obviously. But it also means no “non-tariff” barriers, such as (but not limited to) targeted regulations (the EU won’t allow GM food, which just coincidentally just happens to be produced in America, of course), no import quotas, no special permits for imports, no “funneling” (i.e., demanding that all foreign imports from a country come in through one port, which means that the goods will remain on ships for months, which means no agricultural imports), and so on.

Subsidies also count as protectionist trade barrier. If country A allows country B’’s cars to come in tariff-free, but gives its own automakers a 50% subsidy, it really is the equivalent of a 50% tariff on country B’s cars.

Any so-called FTA that doesn’t remove all or the vast majority of barriers to trade isn’t in my view a true FTA. So, for example, an “FTA” with Japan that removed our 25% tariff on their cars but retained their 700+% tariff on our rice wouldn’t be a true FTA—not even close.

2. I support FTAs with any country willing to agree, whether fully developed or “lesser developed”. Indeed, it is just such FTAs that often offer the most advantages on both sides. We get the benefit of their lower-cost labor (say) or their much cheaper commodities; they get the benefit of our agriculture, high-tech manufacturing, intellectual products, and immense energy resources.

3. It follows that I do NOT generally support a “tariff regime for trade with a lesser developed country.” That, by definition, would not be free trade. A true FTA attempts to specifically identify and remove pre-existing barriers to trade, which (again) go far beyond the obvious, like tariffs. That is where the negotiation comes in.

4. I would welcome true FTAs with Japan and the EU, but for the reasons I spelled out in my original piece, I simply doubt that Japan will eliminate its tariffs on our food—or, if it did, it would put in some other non-tariff barrier to protect its farmers from the inevitable dislocation in their industry. And Japan’s prime minister has already said he won’t let that happen.

But, if by some miracle he/they did agree, then I hold that Japan—and us—would be much better off. No doubt many Japanese farmers and some American autoworkers would be temporarily hurt. Creative destruction (as Schumpeter, the economist who coined the phrase) does hurt some people short term. It has a cost. But the cost is worth paying. In the end, unproductive Japanese labor would find more productive work in Japan’s still powerful economy, as would our dislocated workers, and the consumers in both countries would gain.

However, convincing them of that is as hard as convincing you. Some people can never get past what they immediately see to comprehend what is not immediately seen.

5. The point I just made brings up your final point. Yes, Americans who lost jobs in the textiles or auto industries may never come to view what they went through as worth it to society—just as Mexican farmers who couldn’t compete with American corn farmers might never agree. But that doesn’t mean they are right.

And they often show—like you—a total indifference to the suffering the prior protectionist measure inflicted on consumers and workers abroad, and—since you say you focus only on Americans—inflicted upon workers and consumers here in America. Until the force of competition forced our auto industries to improve their products, Americans were forced to buy high-priced, inefficient and often dangerous cars. And farmers had trouble earning a living because the countries we targeted for tariffs typically retaliated. The American automakers always used the rhetoric of “protecting American jobs,” but like you never gave a “rat’s posterior” about how much they were hurting other Americans.

Geezer

"An object at rest tends to stay at rest ...." Is that a true statement? Is it true because Isaac Newton said so? Or did he say so because it is true? There is a difference.

Isaac Newton died over 200 years ago. Maybe what he observed is no longer true.

If someone refers to "Newton's first law of motion," is that an appeal to authority or a shorthand way to refer to a self-evident truth? There is a difference.

Unfortunately, some folks are not smart enough to tell the difference. Sadder still, some folks are not smart enough to understand that they are not smart enough to tell the difference.
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Those distant darkies on the other side of the globe should content themselves with picking cotton and tending rice paddies instead of making shoes, so my next-door neighbor can continue to pay his country club dues. After all, my neighbor is a real human being; those other folks are, well, something else.

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