Serving the Quantitative Finance Community

  • 1
  • 2
  • 3
  • 4
  • 5
  • 7
 
User avatar
Pat
Topic Author
Posts: 1207
Joined: September 30th, 2001, 2:08 am

Is free trade the problem?

November 21st, 2013, 2:39 pm

Consider the importation of a widget in which the sole competitive advantage (of the exporting country) is lower labor costs.> Is this a net benefit to the economy which is importing the widget?The economy gains on the supply side because the widgets are cheaper by the difference in labor costs (less the extra transportation,packaging, and handling costs). This is both a direct benefit -- money saved can be spent elsewhere -- and an indirect benefit -- cheaperwidgets, means there will be more areas in which using a widget gains more value than the (new lower) cost of the widget.The economy loses on the demand side, as the wages (costs paid for labor) leave the economy. Again there are direct costs (the forgonewages paid to labor cannot be used to purchase any goods and services) and a multiplier (purchasing goods and services would transfermoney to the providers of the these goods and services, who in turn would also purchase goods and services, etc.)The question is under which circumstances would the trade still be (net-net) beneficial to the economy?> Said another way, few people would argue that making trade free-er (eliminating trading barriers) is stimulative in the short run ... stored wealth canbe used to purchase more products as they become cheaper. The question is whether the overall reduction on the demand side is a depressing forcein the medium term: Mightn't the reduction in wages decrease the aggregate buying power of the economy? And what would the long term outlook be? If there are always places in the world where people are willing to work for subsistence wages, doesn't this mean that if trade was perfectly free, then all labor would be priced at subsistence wages? After all, skilled labor is just labor with a few years of experience. I.e., is the pricing power of labor just transportation costs? If so, does this mean that the eventual outcome is poverty for nearly everyone, a higher fraction of the population in proverty each generation as transportation costs are relentlessly driven down.> If we were headed down this path, what would the economy look like? Wouldn't it look a lot like today's economy, where there is ever more stringent competition for a decreasing number of jobs that ensure "middle class" life style? With governments trying to repair the demand side of the economy by running huge deficits, and using direct and indirect transfers to keep the demand side -- and economy-- inflated?> And yes I have studied economic history. Besides the depression, there is also the industrialization of Japan in the 50's & 60' (which was achieved by severely restricting imports), the industrialization of the US between, say, the 1850's and 1900's (which was also achieved by taxing imports), etc. In fact wasn't one of the key proximate causes of the US civil war exacty this issue (harsh import duties imposed to protect the industry of the North and the belief in the North that a free man should not have to compete economically with slave labor)
 
User avatar
farmer
Posts: 13479
Joined: December 16th, 2002, 7:09 am

Is free trade the problem?

November 21st, 2013, 10:56 pm

I had this argument with my friend the other day. The problem is you throw out such general abstract principles. If I come back with abstract principles going the other way, you will not be convinced. If I go into more detail, I can only provide specific examples. And even with ever more details, you will not be convinced my examples, whether hypothetical or anecdotal, show some general principle. Really it is easier to remodel a house than to change a person's economic perceptions.
 
User avatar
farmer
Posts: 13479
Joined: December 16th, 2002, 7:09 am

Is free trade the problem?

November 21st, 2013, 11:02 pm

You have to look at it from the point of view of production. Can a person produce anything of value? Let us consider a world of two product categories, food, and infinite inventions. If you could make your own food, it would not matter how much food other people could make.
 
User avatar
Pat
Topic Author
Posts: 1207
Joined: September 30th, 2001, 2:08 am

Is free trade the problem?

November 22nd, 2013, 4:05 pm

It is tough to change someone's religious beliefs. And "free trade" = "economically beneficial to society" seems to be a axiom to virtually all reputable economists. But is it best (whatever I mean by that) in all circumstances? If not, in what circumstances woud it not be benefiial?Can we look at extreme cases to show that indeed there are cases in which it's highly undesireable, and by extension, there must be a boundary between desirable and undersirable
 
User avatar
katastrofa
Posts: 10084
Joined: August 16th, 2007, 5:36 am
Location: Alpha Centauri

Is free trade the problem?

November 22nd, 2013, 4:57 pm

This book provides quite a lot of historical evidence that:- free trade is not always helpful- almost every highly developed country in the world restricted free trade as a development strategy to promote the growth of their own industry- these restrictions worked (e.g. for Germany and USA in the XIXth century).
 
User avatar
gardener3
Posts: 1496
Joined: April 5th, 2004, 3:25 pm

Is free trade the problem?

November 22nd, 2013, 5:23 pm

QuoteSaid another way, few people would argue that making trade free-er (eliminating trading barriers) is stimulative in the short run ... stored wealth canbe used to purchase more products as they become cheaper. The question is whether the overall reduction on the demand side is a depressing forceFree trade is like a productivity improvement. Production and wealth will go up in the short run, but may have bad distributional effects. That is, the the average wealth goes up while the median wealth may go down. There is a tendency to overstate productivity gains while minimizing distributional effects. It's also not clear the long run effects of distributional costs. But, historically it's been positive.Quote If we were headed down this path, what would the economy look like? Wouldn't it look a lot like today's economy, where there is ever more stringent competition for a decreasing number of jobs that ensure "middle class" life style?Why are there a decreasing number of jobs? 100 yrs ago, 90% of the labor force in the US worked in agriculture. I am sure if you told someone back then that only 1% would be working in agriculture in a century, they'd ask how people would survive with so many disappearing jobs.
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Is free trade the problem?

November 23rd, 2013, 3:13 pm

QuoteOriginally posted by: PatConsider the importation of a widget in which the sole competitive advantage (of the exporting country) is lower labor costs.> Is this a net benefit to the economy which is importing the widget?The economy gains on the supply side because the widgets are cheaper by the difference in labor costs (less the extra transportation,packaging, and handling costs). This is both a direct benefit -- money saved can be spent elsewhere -- and an indirect benefit -- cheaperwidgets, means there will be more areas in which using a widget gains more value than the (new lower) cost of the widget.The economy loses on the demand side, as the wages (costs paid for labor) leave the economy. Again there are direct costs (the forgonewages paid to labor cannot be used to purchase any goods and services) and a multiplier (purchasing goods and services would transfermoney to the providers of the these goods and services, who in turn would also purchase goods and services, etc.)Analyzing aggregate changes in GDP misses a lot of the figurative and literal richness of the effects of trade. Yes, it is true that trade means that M widget makers might lose their jobs. Yet N*M widget buyers benefit from lower widget prices (with N increasing with increasing widget making productivity). Trade makes widgets more affordable so more people, especially poor people, can buy and enjoy widgets. Thus trade increases consumer surplus (which isn't measured in the aggregate GDP). Moreover, trade creates a differentiated market with discount imported widgets and high-end domestically-made widgets. Finally, trade creates jobs in transportation which actually tend to pay similar wages to those in manufacturing.QuoteOriginally posted by: PatThe question is under which circumstances would the trade still be (net-net) beneficial to the economy?I think it is ethically questionable to define "the economy" as just one nation's economy as if the humans living in low-cost-labour countries mean nothing. The unit of analysis should be the entire world, not just one selfish nation. The very clear pattern of the past few decades has been one of increasing standards of living in all those poor export-driven countries. But if we accept (and defend!) the rights of voters (widget workers, widget consumers, and widget traders) to be selfish, then the simple fact that consumers of widgets plus traders of widgets almost always outnumber domestic makers of widgets means that voters should tend to favour cheaper widgets (i.e., trade). QuoteOriginally posted by: Pat> Said another way, few people would argue that making trade free-er (eliminating trading barriers) is stimulative in the short run ... stored wealth can be used to purchase more products as they become cheaper. The question is whether the overall reduction on the demand side is a depressing force in the medium term: Mightn't the reduction in wages decrease the aggregate buying power of the economy? And what would the long term outlook be? If there are always places in the world where people are willing to work for subsistence wages, doesn't this mean that if trade was perfectly free, then all labor would be priced at subsistence wages? After all, skilled labor is just labor with a few years of experience. I.e., is the pricing power of labor just transportation costs? If so, does this mean that the eventual outcome is poverty for nearly everyone, a higher fraction of the population in proverty each generation as transportation costs are relentlessly driven down.If we believe that trade diminishes the aggregate economy of the importer, does it not boost the economy of the exporter -- creating wage growth for the exporter? The funny thing is that "subsistence wages" grow over time because the definition of subsistence becomes more lavish over time. Those who live on "subsistence wages" in the EU and US have a lifestyle that would be the envy of most of the people on this planet and almost all of the people who have ever lived throughout history. And, today, those who have a "subsistence wages" in the coastal cities of China have a much higher standard of living than those who live in rural China and those who lived in those same cities a few decades ago. Just look at the growth of the BRIC economies both overall and at the median wage level. The UN's own estimates of Human Development show huge gains in almost every single low-cost-labour country (and in almost every high-wage country, too).The only condition under which subsistence wages would stay perpetually low is if the population growth rate in the low-cost country exceeds the country's economic growth rate (and remember that this low-cost country is potentially serving 7 billion consumers so the opportunities for growth are vast).QuoteOriginally posted by: Pat> If we were headed down this path, what would the economy look like? Wouldn't it look a lot like today's economy, where there is ever more stringent competition for a decreasing number of jobs that ensure "middle class" life style? With governments trying to repair the demand side of the economy by running huge deficits, and using direct and indirect transfers to keep the demand side -- and economy-- inflated?The Western governments face a triple challenge. It's not just the effects of world trade that make their economies seem moribund, it's also their increasingly unfavourable demographics (aging populations) plus the after-effects of the credit bubble which created 5-10 years of artificially-high growth rates. I fear that the Western governments will keep trying to artificially maintain the standard of living created during the good times while eschewing the kinds of long-term investments that could actually create a better economy. Borrowing money for direct consumption (i.e., high spending on social welfare & pension benefits) seems very unlikely to create the level of fundamental growth in the tax base that will be required to repay their sovereign debts.QuoteOriginally posted by: Pat> And yes I have studied economic history. Besides the depression, there is also the industrialization of Japan in the 50's & 60' (which was achieved by severely restricting imports), the industrialization of the US between, say, the 1850's and 1900's (which was also achieved by taxing imports), etc. In fact wasn't one of the key proximate causes of the US civil war exacty this issue (harsh import duties imposed to protect the industry of the North and the belief in the North that a free man should not have to compete economically with slave labor)Self-sufficiency is a strategy that may have worked in the past, but cannot work today (except if a country wishes to remain a backward agrarian economy in which almost no one lives at the modern "middle class" standard of living). Far too much of today's economy depends on specialized materials and specialized manufacturing systems that are only available at the global level. A small economy simply cannot produce the same range of "middle class" products (e.g., cellphones, cars, appliances, consumer electronics) as efficiently as the global economy. Even the modern middle class diet now depends on free trade to provide the full range of food stuffs (e.g. bananas, citrus, year-round fresh veg, imported cheeses, wine, spices, etc.)
Last edited by Traden4Alpha on November 22nd, 2013, 11:00 pm, edited 1 time in total.
 
User avatar
acastaldo
Posts: 1416
Joined: October 11th, 2002, 11:24 pm

Is free trade the problem?

November 23rd, 2013, 5:14 pm

very nice post by Traden4Alpha
Last edited by acastaldo on November 22nd, 2013, 11:00 pm, edited 1 time in total.
 
User avatar
Pat
Topic Author
Posts: 1207
Joined: September 30th, 2001, 2:08 am

Is free trade the problem?

November 27th, 2013, 3:36 pm

but then consider the limit: Labor cost for all manufactured items is $1 / day ?
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Is free trade the problem?

November 27th, 2013, 4:21 pm

QuoteOriginally posted by: Patbut then consider the limit: Labor cost for all manufactured items is $1 / day ?And yet the advent of free trade and low-cost global logistics has done exactly the opposite. The percentage of people earning $1/day or less has dropped substantially in most countries and especially in those countries that have been the greatest focus for outsourcing.The "race to the bottom" argument may seem plausible, but it's based on short-term, first-order effects. Looking long-term -- and that's what counts if we are "considering the limit" -- there are second-order effects by which demand from a large global market can't help but create greater local investment, economic growth, and wage growth in low-cost countries. Moreover, any transient wage declines in high-cost countries tends to drive improvements in productivity, innovation, and a reallocation of labour (look at how much better U.S.-made cars became once they had to compete with the Japanese). The entire history of economic development is less about squabbling over some fixed-sized pie and much more about finding ways of growing the total pie by decreasing the cost of necessities, increasing the variety (and affordability) of luxuries, and making workers (or other economic resources) create more value.Will every person's wages march monotonically upward? Of course not! Yet, in aggregate, there's much more evidence for a "race to the top" than a "race to the bottom."
 
User avatar
Cuchulainn
Posts: 64444
Joined: July 16th, 2004, 7:38 am
Location: Drosophila melanogaster
Contact:

Is free trade the problem?

November 27th, 2013, 5:07 pm

Quotelook at how much better U.S.-made cars became once they had to compete with the Japanese). In the 50s and 60s the Japanese came to USA to learn the Deming way, which has fallen into disuse in USA it seems. QuoteWill every person's wages march monotonically upward? Of course not! Yet, in aggregate, there's much more evidence for a "race to the top" than a "race to the bottom"That's two races. The 'middle class' has joined in. QuoteThe entire history of economic development is less about squabbling over some fixed-sized pie and much more about finding ways of growing the total pie by decreasing the cost of necessities, increasing the variety (and affordability) of luxuries, and making workers (or other economic resources) create more value.The cost of 'necessities' has increased the last years. So, I don't think this statement is 100% accurate.
Last edited by Cuchulainn on November 26th, 2013, 11:00 pm, edited 1 time in total.
"Compatibility means deliberately repeating other people's mistakes."
David Wheeler

http://www.datasimfinancial.com
http://www.datasim.nl
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Is free trade the problem?

November 27th, 2013, 5:19 pm

QuoteOriginally posted by: CuchulainnQuotelook at how much better U.S.-made cars became once they had to compete with the Japanese). In the 50s and 60s the Japanese came to USA to learn the Deming way, which has fallen into disuse in USA it seems.Actually, Deming went to Japan both as part of the post WWII reconstruction efforts and to give lectures/consulting.Free trade creates opportunities for cross-fertilization of ideas and best-technology components. And free trade forces non-competitive companies (and countries) to improve performance.
 
User avatar
Cuchulainn
Posts: 64444
Joined: July 16th, 2004, 7:38 am
Location: Drosophila melanogaster
Contact:

Is free trade the problem?

November 27th, 2013, 5:23 pm

QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuotelook at how much better U.S.-made cars became once they had to compete with the Japanese). In the 50s and 60s the Japanese came to USA to learn the Deming way, which has fallen into disuse in USA it seems.Actually, Deming went to Japan both as part of the post WWII reconstruction efforts and to give lectures/consulting.Free trade creates opportunities for cross-fertilization of ideas and best-technology components. And free trade forces non-competitive companies (and countries) to improve performance.Life is not all about 'best technology'. Basically, you are assuming an unlimited supply of resources. Which is not true.
Last edited by Cuchulainn on November 26th, 2013, 11:00 pm, edited 1 time in total.
"Compatibility means deliberately repeating other people's mistakes."
David Wheeler

http://www.datasimfinancial.com
http://www.datasim.nl
 
User avatar
Traden4Alpha
Posts: 23951
Joined: September 20th, 2002, 8:30 pm

Is free trade the problem?

November 27th, 2013, 5:52 pm

QuoteOriginally posted by: CuchulainnQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: CuchulainnQuotelook at how much better U.S.-made cars became once they had to compete with the Japanese). In the 50s and 60s the Japanese came to USA to learn the Deming way, which has fallen into disuse in USA it seems.Actually, Deming went to Japan both as part of the post WWII reconstruction efforts and to give lectures/consulting.Free trade creates opportunities for cross-fertilization of ideas and best-technology components. And free trade forces non-competitive companies (and countries) to improve performance.Life is not all about 'best technology'. Basically, you are assuming an unlimited supply of resources. Which is not true.I agree that life is not all about 'best technology' even if that's a big part of the short-term drivers for free trade. Free trade is also about long-term equality with everyone having equal opportunity to buy from and sell to everyone else. Why should politically powerful trade unions and corporations mandate that consumers can't buy less expensive (and better!) products from anywhere. Why let trade unions and corporations impose a self-serving blockade on a country?Free trade and economic growth don't assume unlimited supply of resources. In fact, if anything, free trade pushes everyone to do more with less. The U.S., for example, has more than doubled it's GDP/barrel of oil in the past 30 years (and there are a number of countries that have up to twice the economic energy efficiency of the U.S.). Moreover, a system can monotonically increase and yet remain bounded. Finally, there's always outer space, which is practically infinite even if a bit hard to get to.
 
User avatar
Cuchulainn
Posts: 64444
Joined: July 16th, 2004, 7:38 am
Location: Drosophila melanogaster
Contact:

Is free trade the problem?

November 27th, 2013, 6:14 pm

QuoteFree trade is also about long-term equality with everyone having equal opportunity to buy from and sell to everyone else. I was not aware of this. It's a nice theory. I can buy a fiets in any fietsenwinkel for Euro 1399.99 including VAT.
Last edited by Cuchulainn on November 26th, 2013, 11:00 pm, edited 1 time in total.
"Compatibility means deliberately repeating other people's mistakes."
David Wheeler

http://www.datasimfinancial.com
http://www.datasim.nl