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Rankin Column: Free Trade and Economic Correctness

Keith Rankin's Thursday Column:

Free Trade and Economic Correctness
26 August 1999

Last week Reserve Bank governor Don Brash was reported (Herald, 20 August) as having chastised his fellow economists for not having done more to convince the public that free trade is always the best policy for any nation.

I am in the fortunate EC (economically correct) position of being able to plead innocence. In an article "Lamb Impost Plan shows up US Double Standards" (NZ Herald, 10 June), I wrote that a tariff against Canadian pork imports represents "a cost to New Zealand pork consumers". I went on to say that, by selflessly imposing a tariff on subsidised pork imports, the world's allocation of resources would be more efficient than if we selfishly took advantage of the misguided Canadian subsidies.

(There is some dispute about whether Canadian pork imports really are subsidised, as claimed. That didn't really matter to me, because my point was based on the assumption that Canadian pork had been subsidised. I assume, therefore I am an economist.)

The problem with the economically correct view on free trade is that it is composed of two parts that are ethically inconsistent. The multilateral/cosmopolitan argument - a tautology under assumed conditions of global full employment - is that free trade is the best cooperative solution. Cooperative solutions work when all countries cooperate.

It is accepted by the economically correct however that some nations with power in particular markets can use protective tariffs to give their own consumers gains while imposing losses on other countries' consumers. Such power plays constitute negative-sum games for the world, meaning that the losses of the losers exceed the winnings of the winners. The moral here is that nations should place the world interest ahead of the national interest.

When we consider the unilateral argument for free trade, the morality is reversed. To adopt free trade in a protectionist world is likened to ordering a subsidised lunch. The free trade nation gains by either importing cheap subsidised goods or by importing goods made cheap on account of having been refused entry into other countries' markets.

A policy of mutual protection, moderately and consistently applied, is better for the world as a whole than is a policy in which a few opportunist countries adopt unilateral free trade in order to take advantage of the protective subsidies or tariffs that prevail elsewhere. In a world where all countries adopt similar protective policies, efficient relative prices are maintained and therefore the composition of world production is very efficient. Tiny losses in global allocative efficiency can be counterbalanced by the fact that mutual protection facilitates the adoption of full employment policies.

Should New Zealand selfishly adopt an opportunist trade policy? Or should New Zealand selflessly pursue a cooperative trade policy? Don Brash's prescriptions turn out to be selfish. Given the lens through which he sees the world, an opportunistic New Zealand would always pursue free trade. We would refuse to cooperate whenever we have the opportunity to gain at the expense of other nations, and we would feign cooperation when there is no gain to be made by doing otherwise.

The real issue is not free trade versus protection. Rather, it is cooperation versus opportunism. Cooperation yields win-win outcomes. Opportunists, on the other hand, seek win-lose outcomes. Opportunism, applied by all (or most) nations, yields unintended lose-lose outcomes for the world as a whole; the "prisoners' dilemma" writ large.

The economically correct advocates of free trade accuse protectionist nations of committing the sin of "economic nationalism" (or "mercantilism") which is their code for misguided opportunism. They ignore the fact that the unilateral argument for free trade is no less opportunistic than is the unilateral argument for tariff protection.

It is true that some protectionist nations do undermine international cooperation. Other nations however regard mutual protection as a means to a cooperative win-win solution, with mutual free trade as a lose-lose scenario. Hence, Green political economists, who see the world economy holistically rather than through the nationalist lenses that most people use, favour tariff protection as a form of cooperation that works best when all countries do it.

What are the conditions required making protection the best cooperative policy?

If there was a world central bank, and if Don Brash was its governor, then world interest rates would likely be too high and there would be global unemployment rates in excess of seven percent.

Under conditions of unemployment, free trade countries seek to raise exports in order to shift the incidence of global unemployment to other countries. That is opportunism. In such a world, a policy of mutual tariff protection would be best for the world as a whole. Such a policy of mutual protection got the world out of the Great Depression of the early 1930s. Protection enabled each country to create full employment using demand-management policies.

On the other hand, if there was a world central bank committed to creating sufficient money to maintain global full employment, then multilateral free trade would act as an effective form of international economic cooperation. (In such a world, the Greens might still favour protection, though, fearful that global economic growth might be too fast.)

There is no technical resolution to the free trade versus protection debate. The better cooperative policy for mutual gain depends on (i) whether there is global full employment, and (ii) on whether you believe that communities should acquiesce to the sovereignty of international market forces.

The real world is characterised by unemployment rather then full employment. Therefore Green political economists, rejecting economic correctness in favour of a certain amount of evenly applied protective friction, may have a more practical vision of international economic cooperation than does Donald Brash. Practical visions, however, being predicated on the world as it is rather than as it is assumed to be, are not EC.


© 1999 Keith Rankin


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