Home > Uncategorized > When politicians say “free trade,” they mean upward redistribution

When politicians say “free trade,” they mean upward redistribution

from Dean Baker

In Washington policy circles, being a supporter of free trade is pretty much comparable to saying you believe in evolution. All reasonable people say they accept the doctrine and agree that tariffs and other forms of protectionism are evil and dirty.

While there are good arguments for free trade as an economic policy, in the real world what passes for “free trade” is pretty much any policy that redistributes income upward, even if it is directly at odds with free trade. I have long harped on patent and copyright protection, both because I think that these government-granted monopolies are bad policy (at least in their current form), and because they are 180 degrees at odds with free trade.

The rationale for patents and copyrights is they provide incentives for innovation and creative work, but there is a rationale for every form of protectionism. This doesn’t change the fact that patent and copyright protection are still forms of protectionism. And, the imposition of stronger patent and copyright protections, which has been a central component of every trade deal for the last quarter-century, is a very costly form of protectionism.

Needless to say, the beneficiaries of this protectionism tend to be in the high end of income distribution. The list includes folks like Bill Gates, the pharmaceutical industry and the entertainment industry. 

But, this is hardly the only situation where the “free traders” depart from free trade. The Export-Import Bank, which provides loans and loan guarantees to exporters, has generally received strong support from self-described free traders.

On its face, this is difficult to understand, since the bank is providing an explicit subsidy to exporters by allowing them to get loans at below-market interest rates. In the textbook, government subsidies for exports are 180 degrees at odds with free trade.

It is also important to note that the vast majority of the bank’s loans and guarantees benefit a very small number of companies such as Boeing, Caterpillar and GE. In some years, Boeing alone has accounted for close to 90 percent of its loans.

When the Export-Import Bank was last up for reauthorization in 2017, its proponents argued that the bank was necessary because our competitors provided similar subsidies to their major corporations. In the textbook free trade models, foreign subsidies aren’t supposed to matter, since this just means that foolish governments are subsidizing US consumers. Apparently, we are supposed to think differently when the profits of major US companies are at stake.

We actually got a chance to test the consequences of these companies doing without the subsidies from the Export-Import Bank. As Charles Lane pointed out in the Washington Post, the bank has been unable to issue large loans for the last two years because Republicans in Congress have denied it a quorum. Yet Boeing and our exports of planes seem to be doing just fine. In other words, this was a just a subsidy to well-connected businesses that “free traders” decided to support.

Another area where “free traders” seem to have little interest in free trade principles is currency values. In a system of floating exchange rates, like we currently have, large trade imbalances are supposed to be corrected by changes in currency prices.

A country with a large trade surplus is supposed to see the value of its currency rise relative to other currencies. This makes the goods and services they produce less competitive in the world. By contrast, the currency of a country with a large trade deficit is supposed to fall, making its goods and services more competitive.

This process can be thwarted if a country buys up large amounts of dollars or other reserve currencies to keep its currency from rising. This is what China did in the last decade. There is now general agreement that China acted to deliberately hold down the value of its currency to keep its competitive advantage.

While China has stopped buying large amounts of currency, it still holds a huge amount of reserves, which has the same effect. While some of us have noted this point, most news accounts are dismissive of the idea that China is holding excessive reserves and thereby keeping down the value of its currency.

For this reason, it was surprising to see a New York Times article that asserted as a matter of fact that “Russia has $472 billion in reserves, more than the country’s combined public and foreign debt of $453 billion and nearly three times what the IMF recommends.”

China’s reserve holdings, counting its sovereign wealth fund, are more than ten times as large. While China’s economy is roughly eight times the size of Russia’s, this means that the size of its reserves, relative to its economy, is actually greater than Russia’s, which the NYT told us is “nearly three times what the IMF recommends.”

This matters because it means that China is still holding down the value of its currency to maintain a competitive advantage in the international economy. If we had an administration that was concerned about the US trade deficit with China, it would be pushing for the country to offload some of its reserves and allow the value of its currency to rise.

Note, this is what is supposed to happen in the free trade story. Governments are not supposed to be acting to prevent the price of their currency from rising.

Instead, to the applause of the “free traders,” Trump is pressing demands to force China to show greater respect for US patents and copyrights. If he succeeds, this will mean US companies will have more incentive to outsource jobs to China, since they have less reason to fear transfers of their technology.

The long and short in this story is that “free trade,” as it appears in Washington policy debates, is pretty much whatever the rich and powerful want it to be. It has nothing to do with the economic concept of free trade; it is about redistributing more money from everyone else to them.

See article on original site

  1. February 12, 2019 at 3:24 pm

    This is real world economics; One real world perspective is to create a form of money that actually measures something real in the metric system.

    The present monetary system is like asking a carpenter to build a wall twenty dollars long and six dollars high.

    February 12, 2019 at 7:54 pm

    Absolutely in agreement with you as a member of the general public. But then from my logic formed in the real world I am a Keynesian in spirit who believes in protectionism, with tariffs to give the local producer the opportunity to compete against cheap imports. Again in my opinion one of the reasons Keynesian ideas were discredited was absolute protectionism destroyed the incentive to produce quality at an affordable price. This situation opened the door for the greedy free traders to institute a version of free trade that suited them.Ted

    • Helen Sakho
      February 14, 2019 at 1:45 am

      They can weave all the capers they choose to weave in whatever colours. They can protect each other absolutely, or in relative terms.
      There is no such a thing as “free” anything any more. The only thing that moves freely, totally freely around the globe is hate. And the hateful somehow manage to protect themselves absolutely, condemning the rest of humanity to wishful hopes to survive the next day. Economics needs to come clean. Maybe some higher being, somewhere will help it become close to it. I remain sceptical. But, let us hope for the best…If that day ever comes, I shall start to believe in it as a social science, and accept its genuine imperfections.

      • Robert Locke
        February 14, 2019 at 12:24 pm

        Its a dirty business that we are forcing on our young people. A few years ago a Russian woman who had married a German, told me the lament of her son. He was in the last semester of an undergraduate course in economics at Groningen (NL). He despaired because the study of economics had taught him nothing about the real world, from his studies he got theories and model building that equipped him for nothing of occupational usefulness; he would have been better off studying a science or even a trade, like cabinet-making. He was leaving the university with a degree in economics, but he had no skills, knew nothing.

        All this stuff about replacing a model with a new model, has produced a discipline in which none of he models are valid, and a student body, eager to make some contribution to their world, unprepared to do so.

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