One of the safest statements to make in public life (and in the economics profession, as I will explain below) is that “free trade” is good. I have, however, taken to putting scare-quotes around those two words because it turns out that people who claim to be in favor of free trade are in fact simply choosing one kind of managed trade over another. There is simply no such thing as free trade, not just as a matter of politics but as a matter of deep economic theory.
That does not, of course, mean that any set of policies is as good (or as free) as any other. Imposing huge tariffs on imported goods, or banning trade with entire countries or regions, is appropriate only in the most extreme situations, as I will describe below. But that should not mislead us into thinking that any policy that could be described as restricting trade in some way is always a bad idea.
This seemingly abstract economic debate has unexpectedly become important to understand, because international trade has recently become a big deal in the Democratic Party’s intramural struggles, even as it has taken on a toxic role in the Republican race. As is so often the case this year, the Democratic candidates are having a nuanced debate about reasonable differences in policy, while Donald Trump is leading the Republicans by making incendiary and indefensible statements. Understanding the difference is essential.
Although Bernie Sanders’s presidential candidacy will apparently fall short, he has put pressure on Hillary Clinton to defend her previous support of “free trade” agreements. Sanders, for example, accuses Clinton of having harmed middle-class workers by supporting the North American Free Trade Agreement (NAFTA) in the 1990s.
Clinton, it turns out, has a history of supporting some trade agreements while opposing others. Most recently, she has come out against the Trans-Pacific Partnership (TPP), breaking with President Obama and predictably earning the derision of some commentators for changing her position. For what it might be worth, I would describe Clinton’s position on TPP as a principled change of mind, based on a very defensible set of considerations. At a minimum, it is unfair and meaningless to describe her as being against “free trade.”
Why does Secretary Clinton now find it acceptable to oppose something that has been (mis)labeled a free trade agreement? Is it pure electoral politics, with candidates pandering for the votes of Americans who are too dense or self-interested to understand the virtues of free trade? Although all of the presidential candidates are surely doing a lot of that, it turns out that there is now (and actually always has been) a very good case not only that “free trade” is not all it is cracked up to be, but that it never actually had a coherent meaning in the first place.
How Important Is International Trade?
On the Dorf on Law blog, I have recently posted two essays (here and here) describing the debate over the last few decades among economists regarding international trade policy. As I describe there, some economists who used to be the first to rally under the banner of “free trade” are now admitting that the theoretical and empirical cases for trade-expanding policies have always been less than a slam dunk.
In fact, recent economic research has shown that only about ten percent of the rise in world incomes since 1990 was caused by expanded trade. This is especially notable because this is a period in which global trade expanded enormously, mostly because of changes in technology. There has not been much bang for the buck, yet these changes have caused a lot of damage in the United States and elsewhere.
In light of that experience, the idea that we need to push for more and more trade in pursuit of the higher living standards that orthodox economic theory promises has never been weaker. In addition, it is now extraordinarily clear that there are ways for a country to engage with the world but still prevent the kind of damage to one’s citizens that the U.S. has experienced—the kind of economic damage that is now metastasizing into political extremism among dispossessed and disillusioned Americans.
To put it bluntly, the choice is not between free trade and isolationism. Germany stands out as an example of a country that is not isolationist but manages its trade policies to the benefit of nearly all of its citizens. We face, as we always have, choices that imply tradeoffs among desirable goals. There is no simple win-win, even though that is exactly what orthodox trade theory has always held out as a possibility, with the idea that trade expands the economic pie such that everyone can theoretically share in the gains.
Even with the current change in atmosphere in the U.S., it is impossible to imagine American politicians (other than the current Republican presidential front-runner, who challenges the imagination in so many ways) imposing extreme restrictions on trade, of the sort that would reduce globalization in any significant way. As far as it goes, that is overall a good thing. But the kinds of policy changes that Senator Sanders and Secretary Clinton are now debating are not only good politics, but they are good economics as well, no matter that some people will inevitably try to apply the label “protectionist” to anything that a Democrat might propose.
Again, that is not to say that every trade policy is equally good (or bad), but only that the notion that some people are in favor of free trade while others are protectionists has never been internally consistent. This is, in a way, similar to the debate over who is a “judicial activist,” with commentators and jurists hurling around ideas about referees calling balls and strikes, and all of the other clichés. To say that everyone is a judicial activist does not mean that every kind of judicial activism is the same. A judge who decides cases based on the ethnicity of the litigants, to take one obvious example, would be a worse kind of judicial activist than one who finds an individual right in the Second Amendment. That is, I disagree with both positions, but the latter position is at least defensible whereas the former is simply deplorable.
Just as those who toss around accusations of judicial activism cannot see that they are necessarily engaged in it themselves, people who view themselves as the defenders of free trade rarely if ever acknowledge that their position is hopelessly muddled. There is, in short, no single set of policies that deserves to be called “free trade” policies, even though there are plenty of policies that are more restrictive of trade than others.
“Free Trade” and the Baseline Problem
My claim here is not simply that one can be in favor of “a little bit of protectionism,” or something along those lines, even though such a position would, in fact, be more than defensible, based on the low-bang-for-the-buck problem that I noted above. That is, one might be tempted to say that moving toward or away from fully free trade is not likely to have much of an impact on overall economic growth, so long as the movement is within some reasonable range.
This would, in fact, be logically consistent with what we now know about the minimum wage. Whereas most economists used to think that every increase in the minimum wage would harm the overall economy, empirical evidence has convinced many of us that the move to increase the national minimum wage to $12 or $15 dollars would be a net plus—even as we admit that a minimum wage of $500 per hour would be a big net minus.
My argument here, however, rejects the very notion that one can measure the freeness of trade. That is, the free-trade-versus-protectionism debate has always found both sides mistakenly agreeing that there is some consistent and knowable way to describe a law or set of laws as being more or less free. This error is a cousin to the idea that there is some kind of no-government natural state of economic being for which we should strive, even though economies can only exist with a government that sets the rules for commerce and enforces them. What I call the “baseline problem” is the simple notion that there is no set of laws that is obviously the right-and-true minimal set of laws, with any deviation from those laws a violation of the laws of nature.
On one of my recent Dorf on Law posts regarding international trade, my fellow Verdict columnist Michael Dorf offered the following thought experiment:
The internal trade law of the U.S. (dormant commerce clause) and the EU (free movement of goods and persons), as well as the inter-national rules of the WTO, all face the problem of when the application of an internal norm to an external trade partner is permissible. Suppose that the minimum wage in country 1 is $x, while the minimum wage in country 2 is less than $x. If country 1 imposes tariffs on goods from country 2 to compensate for the fact that the different laws in 1 and 2 give producers in 2 an advantage, is that an effort to undermine the comparative advantage of country 2? Or should the lower minimum wage in country 2 itself be deemed the problem? The same question applies to labor standards and environmental standards.
That is exactly right, but Professor Dorf is then arguably too generous in letting self-styled free traders off the hook: “One could say—as libertarians do—that the natural baseline is the completely unregulated market in each country, with no minimum wage, no labor standards, no environmental protection, no regulation at all.” He then correctly calls on economic libertarians to own up to their extremism. The problem, however is not just those extreme policy implications but libertarians’ fundamental belief that there is a no-government baseline—no labor laws, no environmental laws—from which everything else is an impure deviation. (To be clear, Professor Dorf does not believe that there is a no-government baseline. He was simply describing the standard libertarian view.)
When I say that “free trade” is incoherent, therefore, I am saying that there is no single set of laws that is obviously the no-government baseline. What does that mean?
Consider three countries: A, B, and C. Country A recognizes intellectual property rights including 20-year patents, while Country B’s laws protect patents for 10 years, and Country C does not issue patents or protect intellectual property at all. Which is the free-trade country? If it is Country C, why is the Trans-Pacific Partnership (TPP) so concerned with protecting patents and other intellectual property? Is it because Country A is the United States, and the United States is imposing un-free trade on less powerful trading partners? If so, why is Hillary Clinton being attacked as a protectionist for opposing TPP, rather than being hailed as a free-trade hero for stopping the use of government power that would award economic rents to politically powerful players?
That, however, is only one small category of laws. What if Country C’s tort laws include consumer protection rules that impose strict liability on companies for all violations, whereas Country B’s tort laws impose strict liability for design defects but not production defects, while Country A has a complete caveat emptor rule by which injured consumers cannot recover any damages from the producers of dangerous goods?
These examples, however, still could suggest that the problem is that different countries are deviating from the right-and-true baseline in different ways, not that there is no truly free baseline. Maybe Country C’s patent law and Country A’s tort laws are the right, natural baseline?
But what if we expand the legal framework and think about the choice of contract law regimes? If Country A allows equitable defenses such as impracticability, whereas countries B and C do not, which is the free-trade country? What if B will enforce any provision that is written into a contract, so long as it is signed, whereas Country C allows courts to enforce some unsigned contracts based on oral evidence from third parties, while invalidating some signed contracts based on evidence that one party was under duress (how much?) or was reasonably relying on representations by the other party? Which is the free-trade regime? And if the three countries were trying to harmonize their laws in order to become freer traders, which countries would be expected to change their laws?
It gets worse. What if one country allows civil suits to enforce contracts but requires that each suit be brought individually, while another country allows class-action suits, whereas the third country uses criminal sanctions against those who violate their contractual obligations? To complicate matters further, which corporate and securities laws are naturally right, given that corporations and securities are entirely legal creations?
What about basic notions of property law like nuisance, or adverse possession? Or the rule against perpetuities? And what about the interactions between those laws? For example, what are the effects of reducing consumer protections for deceptive marketing, and how would any such changes interact with the countries’ legal definitions of basic fraud?
The point is that every country can make a reasonable decision to deviate from a Wild West kind of economy, for very good reasons. We can argue about the form that patent laws should take, but countries that adopt patent laws typically decide to do so in the belief that they are enhancing commerce in the long run. A country can decide to provide worker-safety protections that another country would reject, simply because of a disagreement about what the proper balance is between the costs that should be borne by corporations versus the risks (disclosed and undisclosed) that are imposed on workers.
Even some extreme restrictions on international trade could easily be justified under completely reasonable criteria. Countries can refuse to trade at all—infinitely high tariffs, if you will—with countries that allow slave labor, or that use child labor, or that oppress religious minorities. Each of those restrictions is a policy choice that cannot meaningfully be described as a deviation from free trade, unless one is willing to say that every exchange between willing parties will be allowed, no matter the human consequences. And even then, if one of those willing parties then expects the government to enforce the terms of that exchange, or to use its police to protect the company’s profits from embezzlers, then there are an endless number of variations on how those protections can be provided (and, to open up another contentious issue, how they will be paid for).
In the end, then, we are always trying to make intelligent and sensible choices about policies that will enhance the nation’s goals, based on the people’s shared (yet somewhat conflicting) moral values. Many of the possible policy choices are easy to reject, but there are too many defensible policy choices among an infinite number of legal dimensions to allow ourselves to think that there is something knowable and measurable called “free trade.”
Donald Trump is dangerously misinformed about the consequences of international trade and the importance of our continued engagement with the world. By contrast, although Hillary Clinton and Bernie Sanders would make importantly different choices, neither of them should be rejected or endorsed based on their commitment to the incoherent concept of “free trade.”