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Are Economists Unreasonable About Free Trade?

By May 29, 2008

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A great debate between Robert Driskill - Why Do Economists Make Such Dismal Arguments About Trade? and Greg Mankiw - On The Case For Free Trade. Both pieces are hilighly recommended, along with Anti-Dismal's summary of points made by Mankiw, Driskill, Steven Landsburg and Tim Worstall.

I am a lot less of a "free trade evangelist" than I was 5 years ago. However, my difficulty with free trade differ greatly from Driskill's. Two major points:

  1. There is no such thing as a free trade agreement. As Landsburg has pointed out, a true free-trade agreement could be written on the back of a napkin - "We won't put quotas or tariffs on your products if you won't put quotas or tariffs on our products". But no trade agreement in the history of the world has been like that. Have any economists actually read the Canada - U.S. Free Trade Agreement? The thing runs 230 pages and contains a raft of exemptions and restrictions. I deal with these issues every day (I work for a company that provides international regulatory compliance to the chemical industry) and trade between Canada and the U.S. is hardly free. The term managed trade agreement is more apt. So the big question must be "Is Trade between the U.S. and Canada freer than it was before the agreement?" It may or may not be, the study DID THE CANADA - U.S. FREE TRADE AGREEMENT. AFFECT ECONOMIC INTEGRATION? (PDF) showed that the agreement had at best a modest impact on the economy of either country.

  2. The fact that trade quotas are economically damaging (on average) is intuitive. But are tariffs, necessarily, if they are used as a revenue source by the government? That is, how economically damaging are tariffs to the economy relative to other taxes, such as corporate income taxes? It may be the case that raising tariffs and lowering corporate income taxes may be welfare-improving. The biggest drawback to tariffs is that they may be expensive to enforce and collect (I would love to see data on this). Tariffs are a essentially a sales tax (one targeted to foreign products) and in general sales taxes are far more economically efficient than income taxes. I do not know for sure if raising tariffs and lowering income taxes would be welfare-improving (when also taking into account that other countries would likely respond by raising tariffs on your products) but I certainly cannot rule it out. I would love to see a study on this, but I am not aware of any.


May 29, 2008 at 2:11 pm
(1) cynic says:

I have always been a free trader. But as a theoretical matter, if one part of trade is not free, as you suggest, then the arguments for having the rest free are not valid.

May 30, 2008 at 12:38 am
(2) Jon says:

My guess would be that tariffs would be more damaging than the average sales tax because of substitution effects. A domestic product is almost always a perfect substitute for its foreign equivalent, which increases the elasticity of demand for each good. Once that increase in elasticity is factored in, tariffs could possibly be set at optimal levels as part of a complete tax policy. As usual, the key is making sure to set taxes according to elasticity (as well as externalities).

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