The following is a piece by CPA member and supporter, Raymond Mills

Answer to Alan Blinder

An authoritative presentation of what mainstream U.S. economists believe about free trade can be found on the internet under Google; Free Trade; Library of Economics and Liberty; Free Trade by Alan S. Blinder.  Read it to understand the opposition.

Dr. Blinder makes the case that U.S. public policy on trade should be guided by free trade principles.  In so doing, he ignores experiences and ideas that support a contrary conclusion.  1. He ignores the impact of excessive imports on Gross Domestic Product.  2. He assumes that classical protectionism is the only alternative to free trade, ignoring other good options. 3. He ignores the action of the governments of Japan, China and Germany aimed at achieving a trade surplus with the U.S.

Imports and Gross Domestic Products

Blinder (and Adam Smith) say that what is true for a member of a group is therefore true for the group as a whole.  Thomas Sowell labels this argument “The Fallacy of Composition”.  Sowell’s example is that an individual sitting in a stadium can improve his view if he is the only one standing.  If all stand, no views are improved.  Our traffic control system can tolerate an occasional red-light violation.  But the system would collapse if most people ignored red lights.  Another example can be found in the U.S. Congress passing bills to send Federal dollars to congressional districts.  If the requests for pork are limited to only a few poor areas in the South, the system can tolerate some pork barrel spending.  But if every politician insists on pork for his district, Federal spending becomes unsustainable.  What is true for a congressional district might not be true for a nation.  Blinder (and Adam Smith) disagree.

Blinder says that we all take advantage of the opportunity to pay someone else to do work for us (such as laundry) so we can use our time to better advantage.  “We understand intuitively that cutting ourselves off from specialists can only lower our standard of living…Adam Smith’s insight was that precisely the same logic applies to nations.  Here is how he (Adam Smith) put it in 1776.”

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy …If a foreign country can supply us with a commodity cheaper than we can make it, better to buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage.

This argument commits the fallacy of composition by saying that what is prudent practice for a household is also prudent practice when everybody does it.  The conclusion does not follow because our collective purchases have an impact on domestic production that is not felt when only one family is buying.  When the first car made in Japan was sold in the U.S. that event had no impact on General Motors production in the U.S.  But when Japanese cars took market share from General Motors that did impact production of domestic models in the U.S.  Import purchases have a noticeable impact on domestic production when import purchases are widespread among the population and in excess of domestic exports.

The point to be made here is that the impact of purchases of imports on domestic production will be ignored if the analysis looks only at the situation from the perspective of an individual consumer.  By arguing that what is true for one consumer is true for the nation as a whole, Blinder is closing off discussion of the most important issue – what impact does an excess of imports over exports do for national Gross Domestic Production (or Product)?

Each consumer is the best judge of how to spend his money.  But the consequences of all those decisions does have an impact on the U.S. economy.  It is the duty of economists to recognize this reality, to include a discussion of this reality in their thinking.  Congressmen and the President should be held accountable when they ignore this reality.

What should be done about imports is another question (after recognizing their multiple impacts).  The obvious first answer should be to find a way for U. S. consumers to enjoy the benefits of imports while preventing imports from reducing domestic production (GDP).  That goal can be achieved if the total value of imports for a year is equal to the total value of exports for a year. (Automobile producers may suffer but some other producer will provide the wealth that automobile producers formerly provided).  This perspective requires adoption of the assumption that balanced trade is the proper goal or measuring stick for evaluating international trade.  Adam Smith rejected this option when he asserted that free trade should be adopted by all nations, ignoring a possible trade deficit.  Modern day defenders of free trade (including Professor Blinder) accept and defend this view propounded by Adam Smith.

Professor Blinder says that the principle of Comparative Advantage shows that the U. S. will be able to produce something that will sell on the international market even if low wage countries (such as China) could produce everything cheaper than the U.S.  This is, of course, true.  In 2012, the U.S. exported 2.2 trillion dollars worth of Goods and Services.  But it is the balance between exports and imports that should be the issue.  Our trade deficit in 2012 was .54 trillion dollars.  The comparative advantage story, as told by Thomas Sowell, for example, concludes that “Americans can get more chairs by producing television sets and trading them for chairs …Conversely, Canadians can get more television sets by producing chairs and trading them for television sets”.  In this make believe world commodities are swapped for commodities and no money need change hands.  When no money changes hands we have balanced trade – exactly the outcome I am advocating should be the goal of trade policy.  Sowell is describing a situation that produces balanced trade.  The direct exchange he postulates will not exist when trade is unbalanced.  If direct exchange is an essential part of the Comparative Advantage story, unbalanced trade means that Comparative Advantage is not present.

The above quote from Adam Smith advocated buying the foreign made product “with some part of the produce of our own industry”.  That means, in my mind, that our exports should be as large as our imports.  If not, if imports are paid for with dollars not generated by exports in this time period, then imports are not paid for with our own production in the current time period (the time period and means by which dollars are created to pay for our trade deficit is a complicated but crucial issue that will not be discussed further here)

When describing trade, Adam Smith (and Alan Blinder) use language which suggests balanced trade without admitting they are describing balanced trade rather than free trade (free trade does not require balanced trade).

The statistics on U.S. unbalanced trade are readily available from the U.S. Census Bureau.  They show 36 continuous years of unbalanced trade between 1977 and 2013.

Classical Protectionism

The second error is to assume that classical protectionism is the only alternative to free trade.  Blinder (and other defenders of free trade) insist that we must choose between free trade or classical protectionism (tariffs or other restrictions on trade applied separately for each item imported).  They do not allow the possibility that restrictions on imports could apply uniformly to all imports or perhaps all imported manufactured goods.  If tariffs that vary by product is the only alternative to free trade, that tips the scale in the favor of free trade.  However, if balanced trade is the goal, obviously restrictions should apply to all imports because the trade deficit is the results produced by all goods and services.  When all imports are treated uniformly, competition among domestic producers is preserved, no producer gets an advantage over any other producer and it is clear that the tariff system is being used to achieve a national objective (Balanced  Trade).

Classical protectionism was created and used for centuries to protect individual domestic firms or industries.  Classical protectionism served the interests of individual firms and not the interests of the nation.  Adam Smith said British trade regulations “may … be demonstrated to be in every case to be a complete piece of dupery, by which the interests of the State and the nations is constantly sacrificed to that of some particular class of traders”.  Paul Krugman agrees and cites this likelihood as a part of his political argument for free trade.  “any government agency attempting to pursue a sophisticated program of intervention in trade would probably be captured by interest groups and converted into a device for redistributing income to politically influential sectors” (International Economics, 1993, pg.230).

The above argument assumes that this “sophisticated program” would apply different tariffs by product.  Political influence on the means of reducing the trade deficit can be eliminated by creating public support for a trade policy that treats all imports equally.
If a single tariff level is applied uniformly to all products (or all manufactured products), the Congress does not get to choose which products receive protection. The importance of eliminating choice among products to receive protection can hardly be overstated.

Adam Smith argued for free trade, in part, because free trade eliminated using the excuse of seeking balanced trade to justify special interest legislation.  I am arguing for balanced trade because it eliminates not only special pleading by special interests but also governmental actions to produce a trade surplus with the U.S.

Aggressive Governments

Japan demonstrated to the entire world how trading with the U.S. can help an impoverished nation rise to become the second largest economy in the world (1947 -1977). “The Japanese government channeled funds into heavy industries with high value added per worker. …used tariffs and import restrictions to protect select industries” (Krugman, pg. 288).

The U.S. policy was supportive of Japan in the early part of this period.  The U.S. had the economic resource to tolerate Japanese behavior and the U.S. needed successful economies in other countries to purchase our exports and by that means to become capable allies in the cold war with the Soviet Union.  The U.S. also needed the small cars produced in Japan in 1973 during the first oil embargo.  However, by 1981, the U.S. government wanted to reduce automobile imports from Japan.  It requested and received a voluntary export quota from Japan.  This diffused the problem without anyone admitting the free trade was not working.  In 1985, after the U.S. had suffered through 4 years when U.S. exports were below the level of 1981, Secretary of the Treasury James Baker persuaded the five leading trading nations of the world to sign an agreement that they would jointly intervene in the foreign exchange market to bring about a depreciation of the dollar. Again, ad hoc agreement diffused the situation.  The lesson from these two events (I think) was that the U.S. was not going to repudiate free trade ideology or to take any unilateral action to reduce its trade deficit.  This must have emboldened other nations.

Germany has supported exports for years by used the device of rebating value-added taxes to those domestic firms that contributed to the creation of goods that are sold overseas.  If sold in Germany, no rebate is provided.  In addition, imports to Germany are required to pay to the government the tax that is collected on domestic firms by the value-added system.

China, of course, is a dictatorship controlled by the Communists party that has used a variety of governmental resources to produce a large trade surplus with the U.S.

Around the world, many nations, after signing agreements to reduce tariff barriers, use informal bureaucratic barriers to discourage imports into their countries.

Mr. Blender sees no reason to discuss whether or not other countries are acting in accordance with free trade principles.  Or what impact the behavior of other countries has on the trade deficit experienced by the U.S.  His final paragraph focuses on the faults of protectionism.  I agree with what he says there.  But I argue that issue is not responsive to the question of whether or not intelligent, well informed people whose future is bound up with the future of the U.S. should continue to be Free Trade supporters.

Conclusions

Free trade can be made to appear attractive to U.S. citizens by 1.  Ignoring our 36 years experience of a continuous trade deficit.  2. Ignoring the role of the governments of Japan, Germany, China and other nations in acting aggressively to insure that their country maintains a trade surplus with the U.S.  3.  Ignoring the fact that individual consumer decisions which benefit individual consumers can have negative impacts on Gross Domestic Product.  4. Ignoring the fact that classical protectionism is not the only possible alternative to free trade.   5.  Ignoring the possibility of substituting balanced trade for free trade and defending the national interests in equal trade by adopting tariffs applied uniformly to all products imported.