Trade Policy Redux

...speaking of David Hume and Adam Smith; those two individuals are responsible in large part for the well-reasoned beginning to the modern debate over "free trade" between countries.

FREE TRADE
The classic statement of liberal trade policy goes something like this: If you have many countries trading without restriction, some of them will be 'good' at some activities, while others will be 'good' at other activities. That is, a given country X will have an absolute advantage in coal mining over all the other countries in our hypothetical trade bloc (or the world). If X has an absolute advantage in mining, producing, manufacturing, and converting goods or services of every type, then most people have an instinct to say, "Why should X trade with anyone? They do everything better than everyone!" But classic liberal trade theory says that this is incorrect. X can reach a higher level of consumption (which for classic liberal economists roughly equates to 'welfare') by trading on those things for which it does not have a comparative advantage and specializing in those things in which it does have a comparative advantage. A comparative advantage exists where country X mines coal more efficiently than it, say, processes raw goods into coffee grounds. The argument runs that X should then mine coal, and some other country should process coffee grounds, because the net outcome will be a higher 'surplus' (welfare).

Classic liberal economic theory takes this idea and essentially applies to everything, and that hasn't stopped (nay, it has increased) as we have evolved our understanding of economics. Now these same sorts of principles (derived normatively from 'utilitarianism') are applied to contract law, microeconomic theories of the firm, and public policy analysis. Behind all of these economic disciplines lies the idea of maximizing 'welfare' -- which often means, quite simply, producing more widgets.

IMPLICATIONS FOR TRADE
Basically, the free trade argument takes what we have said a step further and says that if all countries, all the time, and without legal or informal restrictions -- specialized their activities and only produced or manufactured those things or services that it had a comparative advantage in, then the net welfare (or output) would be at its highest level at any given time. Also, the argument goes a step further than that: the net welfare of the world would progress faster (faster productivity gains and diffusion/spread of technology) and to a higher level under free trade policies than under any other policies.

You may notice something perplexing about this strict utilitarian-backed, economic analysis. It doesn't talk about the distribution of 'the pie' (the sum of a country's welfare, or of the world's welfare). In fact, mostly these theories are not concerned with questions of distribution but merely with questions of maximization of social surplus. To the extent that such theories analyze distributional effects at all, they tend to be conclusory, stating that the 'natural' distribution of the free market is the one that gives the best incentives for innovation, productivity, and overall growth.

Growth, in short, leads to more social wealth to pass around. More social wealth, in the long-run, leads to new technology that gets spread around, easier living, less labor, and more opportunities for solving social problems (say, curing cancer). Not all economists make these arguments, and not all economic theorists believe the case is so simple. But the free market fundamentalists of the world certainly do. "Free trade is good for all the people all of the time."

PROBLEMS
The foregoing explanation of free trade leaves something to be desired. The last quote of the preceding section essentially states the absolutist argument for free trade, and it relies on several assumptions:

1. The distributions that result from free market policies encourage growth: it is assumed that they do, because if they do not, it challenges the whole enterprise. That is to say, if country X can erect some trade barriers or redistribute some of its wealth by favoring some industry in country X, and the 'World GDP' (or whatever measure chosen by the policy analyst) actually goes up, then free trade absolutists are in trouble. Also, if country X ends up dedicating its workforce to producing low-cost tee-shirts to sell to other countries because that is its comparative advantage, what happens if all the major tee-shirt producers that operate in X are multinational corporations (MNCs) based in another, richer, country? The workers' productivity gains may never 'trickle down' to them in this case, and X will not benefit from the 'welfare gains' as it is extracted and transferred abroad. Unless, of course, X taxes production-for-export goods -- but that would be a violation of free trade principles.
   
2. In transition economies, free trade is the best way to get off the ground: another assumption is that free trade works well in countries recovering from communist or authoritarian rule. If at least some countries such as these show a strong track-record of success by closing their borders to a significant degree, then this rebuts the conclusion of the free trade absolutists. Furthermore, if they then argue that free trade for those countries -- while stalling its individual growth -- might have benefited the 'World GDP' more than closing its borders, it raised the question of nation-state autonomy. That is, can we really expect (or should we) national leaders to take actions that are detrimental to their country but beneficial to the world overall?