Kansas Progress Institute

Ad Astra Per Aspera ~ To the Stars Through Difficulties

Free trade I: theory

Posted on April 12, 2016

By David Burress

I’m no specialist on the topic, but here is my rough understanding of international trade theory.
1. Free trade in goods nearly always increases total world output in the short run.
2. An individual country usually, but not always, increases its own output in the short run when it opens up free trade in goods.
This is the key fact that led most economists to support free trade for a very long time.
3. There are two kinds of gains from trade: classical static short-run gains (comparative advantage theory) and dynamic gains due to, e.g., having a more competitive local industry. Asian and other experience shows that limiting trade until local industry is strong enough to survive competition is better than opening up trade immediately. There are many other reasons why classical theory doesn’t apply to the long run, many of which were explored by Paul Krugman (he got a Nobel for it). Key point: oligopoly industries tend to stay put in the places where they were first founded.
4. The benefits of opening up freer trade are always distributed unequally, with many winners and losers.
5. In the short run, the size of income redistribution within a country most often dwarfs the size of total gains for that country.
In the long run, the impact of freer trade on the income distribution within a country depends on who runs the country.
6. Since the US is currently run by oligarchs, the oligarchs will tend to reap most or all benefit from increased free trade. They could even use free trade to make everyone else worse off.
7. Economists who still support unfettered free trade in goods have no adequate intellectual basis in theory for doing so. They claim:
a. things probably equal out in the long run (though they can’t give a really good argument why).
b. government will probably mitigate stresses in the short run (though they can’t give data showing that has happened).
c. people who oppose free trade have special interests (a disingenuous point: of course they do!  Anyone in favor or in opposition of a policy has special interests).
8. Free trade in physical capital investment and finance capital and intellectual property rights are even more complicated. Economists who claim to understand the distributional impacts and that those impacts are benign are, in my view, charlatans.
9. In highly developed countries, free trade in people (i.e. open borders) has clearly negative short-term impacts on a majority of citizens.
10. Economists hardly ever mention another huge problem with modern trade agreements: the investor-state dispute resolution procedures. These agreements remove power over business regulation from national court systems to unaccountable and nontransparent international arbitration agencies, meaning that sovereignty tend to shifts from nations to international corporations. We know almost nothing about what the long term distributional effects of that will be, but they are very unlikely to benefit non-owners of capital.

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