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Random Musings on Free Trade

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By sonofed
February 3, 2006

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So I've been thinking about free trade lately, and I've run into a bit of quandary.

I understand the theory behind free trade - free trade pushes work towards the most economically efficient producers, freeing up resources to develop and build other stuff, all the while making more stuff available to consumers at lower prices. That improves the standard of living of citizens on both sides of the trade.

Free trade also has political advantages since economies intricately tied to each other through trade are less likely to choose war to resolve their differences.

Okay, so here's my problem: The US has a much higher standard of living for our people than the vast majority of the rest of the world. That high standard of living came from our economic dominance as the only industrial economy not crippled by World War II. It has been sustained throughout the years because the technology, logistics, and politics of producing stuff in cheap markets and shipping it to markets here was so daunting that it wasn't worthwhile. That allowed Americans to continue along fat, dumb, and happy working jobs at wages supported by the frictional costs of moving business elsewhere. In short, there was no need for everyone to take a hard look at their skills and make themselves competitive, because the factory was always going to be there in town providing a living wage.

Fast forward to the 90s. Suddenly, the telecommunications and computer technology is there to manage international production and distribution. Suddenly, fuel and shipping costs are so low that it's almost trivial compared to the cost savings generated by moving production overseas. The result has been an exodus of good paying manufacturing jobs from our country. Now those jobs have been replaced, but very often, they are replaced with lower paying jobs, which eventually leads to a lower standard of living.

So here's my question: Is free trade really in the interest of the US or our consumers/citizens? More specifically, is it worth the social cost?

I think the standard of living in the country is higher than it has a right to be based on our underlying competitive advantages. I think this is evidenced by the speed at which our manufacturing base has moved offshore. Free trade is eliminating the remaining barriers that have supported this artificially high standard of living, and so it will come down as free trade progresses.

Is that a good thing? On the one hand, I guess you could argue it is removing an economic imbalance, which will allow for more efficient resource utilization in the economy, and greater prosperity over time.

On the other hand, you could argue that only 28% of American adults have college degrees, and the rest are going to face a struggle adapting to the economic changes inherent is the re-allocation of economic resources. That suggests economic and social dislocation, at east in the short term. Of course, "short term" is a relative thing. In the grand scheme of things 5 years is the short term. 5 years is an eternity when you're talking about not eating or not paying your mortgage.

I also wonder about the long-term consequences of letting strategic industries with a high barrier to entry slip overseas as well.

Consider the steel industry as an example. Let's assume our steel industry isn't as globally competitive as we'd like it to be. The capital and time required to rebuild a steel industry from scratch if we let the US industry die to foreign competition would represent a strategic threat to the US. After all, if a country can cut off our supply of steel, they would have tremendous leverage over the country.

In that hypothetical, should we protect the steel industry? What about uranium? If the Russian suddenly became the low cost producer of uranium, would it be wise to let the domestic industry wither under the competition or do we have a strategic interest in keeping a domestic capability?

Those are potential examples and I'm sure there are many more. The larger question is do you still rely on free trade even when the commodity in question is strategically important?

I guess I am dissatisfied with my usual glib conclusion that free trade is an unquestionable good for both sides of the trade and that the social and economic issues it causes will work themselves out on a long enough time horizon to the benefit of everyone involved.

I'm wrestling with how to integrate the costs of free trade with the benefits to decide whether it is a good thing for the United States at this time given the dynamics of our current economy and labor force.

Any thoughts?

Steve


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