On Trade

(10:30AM EST – promoted by Nightprowlkitty)

You’re talking history, right? I’m talking now. Because down here, it’s still “Who’s your old man?” ‘Til you got kids of your own and then it’s, “Who’s your son?” But after the horror movie I seen today… Robots! Piers full of robots! My kid’ll be lucky if he’s even punchin’ numbers five years from now. And while it don’t mean shit to me that I can’t take my steak knives to Dibiago and Sons, it breaks my fucking heart that there’s no future for the Sobotkas on the waterfront!

~Frank Sobotka, The Wire

One of my favorite concepts in economics is the Theory of the Second Best.  While it can be a bit technical, in summary, the theory is that if, for whatever reason, the required conditions for the optimal outcome are impossible to achieve, the second best outcome may require deviating from the conditions which were required to make the optimal outcome possible.  To use an analogy, most Democrats preferred ranking of the last three candidates for President was Obama, Clinton, McCain.  But one of the required steps to the optimal outcome of Obama’s election was his nomination, which made the second best outcome impossible.

The second-best problem is one which has particular resonance for me as a libertarian.  Many libertarians allied themselves for years with the Republican party, to try and establish the required conditions for a libertarian state.  However, the outcome of a libertarian state is further away than ever; responsibly, a libertarian must consider which of the desired conditions for our optimal outcome are negotiable in order for us to achieve our second-best outcome.  Of course, this is hardly only true for libertarians.

Trade is a funny issue.  I’m not that old, but I remember such drastic shifts already in my lifetime.  I can remember when my neighbor went to live in the Soviet Union for six months, and how he packed his bags filled with Levi’s and Marlboros, as those were better than cash over there.  Today, I often pass by the Lukoil gas station on Hudson Street in Manhattan.  I remember when the great foreign trade menace was Japan.  We couldn’t possibly compete trading with Japan, we were told.  Their markets were closed to our products.  Their corporations viewed business as war.  They considered us filthy gaijin who didn’t deserve a fair shake.  Of course, Japan’s economy contracted, and no one worries about buying Japanese goods anymore.  We’re now worried about the country on the opposing shore.

People fall all over themselves to heap praise upon Ronald Reagan and Pope John Paul II for their actions to bring about the fall of the Soviet Union.  Largely forgotten by history is one of the key figures, Willy Brandt, former Chancellor of West Germany.  Brandt was the champion of the policy of Ostpolitik, or “Eastern Politics”.  Ostpolitik was a policy of change via rapprochement with East Germany, Eastern Europe, and the Soviets.  At a time when the market economies of the world closed themselves off from the Communist Bloc, Brandt traded with them.  West German goods became the signature items of the Soviet elite, as a result, and the failed economies of the Warsaw Pact petered on a small while longer.  But every heart in Eastern Europe was transformed a bit by trade alone, and a superpower ended up surrendering without a shot being fired.

When I was a kid, my dad was one of those people who was militant about only buying an American car.  Six years ago, he bought an Acura.  Despite billions spent on “Buy American” ad campaigns, Americans voted with their wallets.  Individually, we have all discovered again and bought into the concept of “gains from trade”.  My television is from Japan, my laptop from Texas with parts from China, my credit card from Delaware.  What do all these examples have in common?

They are all examples of what economist Dani Rodrik recently referred to as “regulatory arbitrage“.  Japan has a patent system which favors them in production of televisions.  China has a labor system which is much less stringent than the United States.  Texas has no income tax, making it cheaper to employ workers; Delaware has a relaxed corporate regulatory system which makes it favorable for companies to be headquartered there.  The milk I drink is produced in New York, because my state subsidizes its own dairy farmers in exchange for requiring price controls for sellers, making out of state milk more expensive.  Coca Cola is made with high fructose corn syrup instead of sugar because we tariff sugar imports while subsidizing domestic corn production.

(The Rodrik post is part of a series of posts on globalization which began with a column by GMU economics professor Tyler Cowen’s column in the NY Times.  Cowen responded on his blog.  As Rodrik is an econ professor at Harvard, this is really a fascinating dialog between two of the leading economics professors in the nation.  I recommend it to everyone.)

Mostly, when we think of regulatory arbitrage, we think about companies outsourcing jobs to take advantage of cheaper labor in other countries.  Of course, this isn’t regulatory arbitrage at all; the regulatory arbitrage is in the difference in regulation between nations.  But, as the above examples show, we have regulatory arbitrage domestically as well.  And that benefits us in some ways.  We pay lower interest rates on our credit cards because regulations are different in Delaware.  But it also fucks others.  The last round of global trade negotiations at Doha collapsed because rich countries including ourselves refused to lower our subsidies for agriculture, which combined with our advanced farming technologies economically undermines poorer nations.  

A significant part of why I will not call myself a member of the progressive movement is because as I understand it, the progressive position is that it is bad to trade with other nations and promote job growth in poor nations, but that it is good to spend billions subsidizing American agriculture, ensuring that poor farmers in impoverished nations cannot compete with our food surplus.  I can’t see what is progressive about double fucking the poorest people of the world.

And while the lament about working conditions in China and other nations concerns me, I also recognize it for what it is: an improvement in the living conditions of some of the poorest people in the world.  It was exactly fifty years ago that between 14 and 43 million Chinese people starved to death.  That is possibly as many people as died in all of the Second World War.  The average life expectancy in China has risen to 73, exactly double what it was in 1949 when Mao first took control of the nation.  I can lament for ages that Chinese workers may lack the freedoms and benefits of American ones, but I can’t argue with the data: Chinese people now have an average life expectancy which rivals the most modern nations in the world, when within the lifetime of millions of Chinese people, tens of millions of their neighbors were starving to death.

I don’t worry too much about trade.  It is a debate where I know which side wins.  Ordinary Americans have already decided; the anti-trade movement will die the same death as the “Buy American” movement.  Moreover, even if the gains from trade aren’t mostly coming to Americans, they are coming to the Chinese, the Indians, and millions more.  And for all our wealth, we are a minority of the world.  Even if we withdraw from the liberalization of world trade, they will not.  And they will thrive without us, which we are not foolish enough to allow happen.  Like with the Second Amendment, this is a battle where the American left is going to lose.

The question which progressives have to ask themselves is if their optimal solution of anti-free trade policies is unattainable, what is their second-best solution?  And what steps should they take to attempt to reach it?  There is no debating the real tragedy that outsourcing and trade liberalization wreaks on individual lives which are irrevocably altered by it.  But the desire to stand athwart history and yell “Stop” is not a liberal impulse, nor one which has ever succeeded for the conservatives who preach it.  History does not stop, no matter who asks it to.

So, if we accept we cannot stop history, what can we realistically do?