Why Trade Wars Are Good For Trade

7 April, 2010

Economists know that international trade is mutually beneficial. Barriers, such as tariffs and quotas, reduce consumer choice and make goods more expensive. And after all, what business has the state in precluding your mutually beneficial exchange just because the counter-party is a foreign citizen?

Unfortunately, international disputes can put free trade in jeopardy. When states respond to apparent ‘distortions’ by slapping tariffs on incoming goods, they’re trying to retaliate. In reality, they’re hurting their own citizens. What good could possibly come of trade wars?

Today, the line between ‘foreign’ and ‘domestic’ producers is more blurry than ever before. The MacBook I’m typing on right now was sold to me by an Irish retailer, having been assembled in China from parts produced in Taiwan and Korea. It was designed by American engineers, and some of Apple’s profits no doubt return to private investors here in Ireland too. Who benefited from my purchase? Lots of people, some foreign and some domestic.

Even if international trade wasn’t integrated in this way though, tariffs and quotas would still hurt domestic consumers. Unfortunately though, there are strong interests aligned with governments throughout the world determined to restrict trade and maintain their dominant position in markets free from foreign competition. This is a simple example of a collective action problem: small groups of firms and workers find it easier to organise themselves than millions of disparate consumers – even when the benefits to the former are outweighed by the costs to the latter.

This isn’t the whole story though. Many consumers just support protectionist measures because they think free trade sends jobs overseas. They don’t understand the full benefits of free trade, and it is this ignorance that allows governments to retaliate and spur trade wars. Think of the Republicans complaining about China’s undervalued currency.

What have we learned? Firstly, game theorists would say that removing restrictions is a dominant strategy in determining optimal trade policy. No matter what the other guy does, you should always try to keep trade as free as possible. Secondly, some governments don’t determine their trade policy with regard to the greater good and will instead try to subsidise or otherwise benefit their exporters. Thirdly, if you give the irrational, ignorant public an excuse, they will try to slap trade barriers on your goods and services. So much for the dominant strategy.

What if  the public knew the truth and adopted the dominant strategy instead? Then foreign nations would suffer no punishment or retaliation if they imposed trade restrictions on our exporters. They would exploit this advantage by benefiting their favoured firms and importing goods into our markets. If we threatened to retaliate, they wouldn’t believe us – it’s not a credible threat because we know we’re hurting ourselves in the process.

So how do countries maintain a credible threat of retaliation under the status quo? By hiding the costs from the consumer, and exploiting his ignorance. If they knew the truth, would consumers suffer trade restrictions on imported goods in order to benefit a single exporting firm? Probably not. The threat of retaliation is only credible under the status quo because it’s not rational.

Revenge isn’t rational in general. If somebody does hurt you, it’s never optimal to follow through on a threat of vengeance. The threat of vengeance is only credible because the decision to pursue it is not rationally considered. So in a world with free trade on the edge of a knife, it’s not so bad that the public sometimes cry out for trade restrictions. If they didn’t, our deterrence of same would lack all credibility.

© The Free Marketeer 2010

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The Difference Between Kidneys and Babies

29 March, 2010

The most interesting question that I’ve addressed in a debate recently has been whether there should be a market for adoption and surrogacy. Although the concept jars with most people, the real reason to oppose such a market isn’t immediately clearly.

After all, if two individuals can make themselves happier through the exchange of money for services, what business does the state have in prohibiting it? We have markets for everything else, and there’s strong evidence to suggest that organs trade should be legalised. So what is the difference between a kidney and a baby?

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Fair Trade For Some, Poverty For Others

7 March, 2010

Some of you will know that the past two weeks have been  ‘Fairtrade Fortnight’, and today brings the end to an exhaustive media campaign persuading consumers that they should switch over to Fairtrade products.

It’s all very well-meaning, and certainly makes consumers feel good about themselves. But does Fairtrade actually make life better for the poorest farmers in the world? The more ethical policy would be to embrace free trade and stop keeping prices artificially high.

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Book Recommendations

6 January, 2010

A good friend of mine recently retired from a part-time job at a subsidised book store run by the Students’ Union. A relatively banal event, marked by a celebratory dinner in a top Dublin restaurant at the expense of tax-payers and students.

The student-run book store in Trinity College is inefficient and unnecessary. Since it doesn’t help the targeted demographic of underprivileged students, it should be privatised.

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Guardians of the Peace?

9 December, 2009

Ireland’s police force, an Garda Síochána, are threatening to take action in light of public pay cuts. Although not legal according to the constitution, past examples of disobedience amongst law enforcement in Ireland include the ‘Blue Flu’ of 1998.

The reality is that no government can properly negotiate with a national police force on even footing, as long as no real alternative exists. Could private security provide the answer? By supplanting national law enforcement, maintaining accountability, promoting competition amongst service providers, and ensuring that society cannot be blackmailed by public workers with the threat of chaos.

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The Economics of €2 Spar Hot Chicken-Fillet Rolls

12 November, 2009

SandwichThe recession has brought down prices throughout the economy, in response to faltering demand. In Dublin, the most poignant example of this is Spar’s much celebrated €2 hot chicken-fillet roll.

But in the same shop, many prices haven’t fallen as much. Why is this? Like the canary in the coal mine, the €2 hot chicken-fillet roll acts as an indicator in case of recovering consumer spending.

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A Different Kind Of Carbon Leakage

3 November, 2009

Red FoxThe Irish Government recently decided to ban fur farming in Ireland. Their justification for this, presumably, stems from concern for animal rights and the cruelty of the practice.

In fact, this measure may end up harming animals – by pushing fur farming out of jurisdictions with responsible and concerned governments, they are forcing fur farming into more permissive and cruel states.

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