Can We Have Free Trade?

I find discussing trade with libertarian free traders frustrating. I believe in free trade. I also believe in the virgin birth. Belief is not enough when you’re talking about the economy. You’ve got to take practical considerations into account as well.

Referring to Don Boudreaux’s piece at AEIR, I wouldn’t accuse him of “naïve globalism”. I would accuse him of not understanding what David Ricardo actually wrote and how what he did write doesn’t apply to our present circumstances.

I have probably understood Ricardo’s theory of comparative advantage for longer than Don Boudreaux has been alive. In addition I have actually read what Ricardo wrote and Mr. Boudreaux would be the exceptional commentator if he had. Practically everyone relies on what other say about comparative advantage rather than what Ricardo said.

I think there are several reasons that Ricardo’s theory does not apply to our present circumstances. For one thing “free trade” doesn’t just mean the absence of tariffs. It means the absence of any barriers or restrictions on trade in any form. That includes patents, copyrights, occupational licensing, and any other barrier to trade.

For another I have yet to encounter any manager who engages in the sort of arbitrage that Ricardo imagines. I have met lots who understand absolute advantage. They buy from the lowest cost sources. IMO Ricardo imagined trade that was completely controlled by some authority, e.g. “the Sovereign”, who did engage in the sort of arbitrage described by Ricardo.

A third reason is that unlike in Ricardo’s day the most important factor of production, capital, is highly portable from one country to another. Under such circumstances comparative advantage doesn’t mean much but absolute advantage does.

We are presently in a world in which absolute advantage is king and there are multiple non-tariff barriers that constrain trade.

I look forward to Mr. Boudreaux’s demonstration that even in the presence of those non-tariff barriers and other countries imposed all sorts of barriers on our goods and services the people of the United States would still benefit from that limited sort of free trade. I have never seen such a proof. Maybe it’s possible to construct one but I doubt it.

I think that what would happen is pretty much what is happening. People working the protected sectors, e.g. healthcare, finance, government, would benefit and everyone else would find it much harder to get alone. There would be lots of cheaper goods but the unemployed couldn’t afford them.