tisdag 14 november 2017

Free trade case in a nutshell

That, "Industry and agriculture should be protected, for as long as we need people to have jobs", is a fallacy based on popular/populist economic misconceptions. Trump is following the line. The EEC/EU has followed the same line for sixty years.

The misconception ignores the principle of competitive advantage. You would not fry your own fish and chips if there was a perfectly good fish and chip shop across the road. Human progress has been built on division of tasks so that each does that which they are best at; the big strong guys went out hunting, while the weedy short-sighted ones stayed in the camp and made spear tips and fish hooks. Trade arises through the exchange of skills. Without specialisation, the little group of hunter-gatherers would have blunt spears and the weedy guys would have got eaten while out foraging.

The same principle scales up. A single family of homesteaders has to do everything for themselves. When a few more arrive, they can share out their tasks, take advantage of economy of scale and use their special skills to the advantage of the whole community. These benefits continue to accrue until a network of exchange relationships encompasses the whole of mankind.

Tariffs and trade restrictions get in the way of the development of the network. At the crudest level, they have the same effect as transport costs and are functionally equivalent to sanctions imposed by a hostile power. If trade restrictions were beneficial, one would expect islands, and countries like North Korea, to be more than averagely prosperous. It would also be advantageous to restrict trade between, for example, Oxford and Reading.

But it is worse than that. If you fry your own fish and chips, you have to pay retail prices for your ingredients and clean up the mess afterwards. It is an inefficient use of your time. Thus is it with protected industry. If they are less efficient than the foreign competition, they draw resources from the rest of the economy and make the whole less efficient, and indeed less competitive. Protection draws an economy into a vicious circle of decline. Even worse: if consumers are forced to pay more than necessary for some things, then they have less over to spend into the economy elsewhere, which then suffers from artificially reduced demand. Protection of one sector causes unemployment everywhere less. It is a lose-lose situation.

And that is just at consumer level. Where imports are components or raw materials used by other industries, those industries are forced to pay more than they would otherwise have done and become less competitive. The anti-dumping measures against Chinese steel are a good example. European manufacturers were deprived of access to a low-cost raw material. That did not make the low-cost steel go away. It was bought and used by manufacturers elsewhere, who were then in an advantageous position to out-compete the Europeans.

The rational response would have been to encourage European businesses to purchase and stockpile as much of the cheap steel as the Chinese would let them purchase. It is counter-intuitive, though not so very different from the way we manage our own household affairs.

EU protectionism has a particularly damaging effect at the borders of the tariff wall, as those who will be affected by the situation in Ireland have realised. But this is no different from what has been happening at the eastern boundary of the EU, on both sides. It has a particularly damaging effect in eastern Poland, Latvia, and Slovakia, where a natural trading region with ancient cultural and economic ties has been arbitrarily divided.

The situation with agriculture is slightly different. Foreign competition means lower food prices (again to the benefit of the rest of the economy), and therefore lower farm-gate prices. Marginal farms go out of business and the land is put to other uses. In the case of upland hill farms, this would be advantageous as they need to be managed for, among other things, water retention to prevent regular flooding of urban areas within the catchment zone.

Elsewhere, farmland rents drop and farmers go over to other productions. Given the terror of a wave of chlorinated chicken coming into the country, free entry of imports creates a marketing opportunity for producers of the wholesome alternative.

The idea that agriculture would cease is based on a lack of understanding of a basic principle of land economics.

2 kommentarer:

Mark In Mayenne sa...

Fair enough. But what do you do when a foreign competitor wishes to capture a market in, say solar panels by subsidising exports until your local manufacturers all go out of business and your skills are lost. And then whacks up their prices because they have a monopoly? True the equilibrium will re-establish, but after how long?

Physiocrat sa...

Have you got an example where such a thing has actually happened?

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