No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 377 China of manipulating its currency, you can imagine an attitude of “I’d be for free trade if the other side would too. But if they won’t play by the rules, neither should we!” For a discussion of the broader issues of currency manipulation and political objectives, view this website. The fact is that trade has always been subject to political pressures—sometimes more so, sometimes less so. There have been “golden eras” of freer trade, but these often give way when financial crisis occurs. As we mentioned in our discussion of monopoly, trade was managed by governments in the mercantilist era by giving exclusive monopoly charters to favored companies for the right to trade in a given region. Part of the logic of managing trade was a belief in mercantilism . Proponents of mercantilism believed that the wealth of the nation was dependent upon how much gold they had, so they advocated public policies that would encourage export industries (to bring in foreign gold) and discourage imports (to reduce gold outflow). Controlling trade was key to a successful mercantilist policy. Adam Smith in large part wrote his classic work The Wealth of Nations to refute mercantilist thinking, showing that the true wealth was in its productivity (through the division of labor), and David Ricardo’s development of the law of comparative advantage (applied earlier this chapter) devastated mercantilism intellectually. Nevertheless, like a bad penny, it just keeps showing up. Modern mercantilism is practiced by most of the Asian tigers (Japan, China, South Korea, Singapore, etc.) where they support export economies and build up foreign currency reserves. The idea is just as wrong-headed now as when Adam Smith first assailed it, but it has its proponents. Further, it creates tremendous global imbalances that have many economists worried. How long can the model of producing nations sending stuff to the U.S. to consume in exchange for IOUs hold up? Unfortunately, we learned in our public choice chapter that many policies that have highly concentrated benefits and widely dispersed costs will have strong political support. TRUMPONOMICS IS MODERN MERCANTILISM The election of Donald Trump heralded many changes in the United States, but economically a big change was that the President was steadfastly against free trade. Previously, both Republicans and Democrats in the Oval Office would fight against populism in the Congress to promote free trade. With Mr. Trump being a populist himself, the cause of free trade lost a champion. Mr. Trump called the North American Free Trade Agreement the “worst trade deal ever made, ” despite economists general support that on net NAFTA was a benefit to all three countries (U.S., Mexico and Canada). Mr. Trump views trade as creating winners and losers, with a surplus being a winner, and a deficit being a loser. Yet worrying about a trade deficit is akin to an individual saying, “I’m such a loser. I keep running all these deficits with Amazon. I keep sending them money and they never buy anything from me. They just expanded free shipping to more stuff, now I’m going to lose even more!” His solution is analogous to us filling our harbors with boulders so no ships can come in bringing goods. What good Mr. Trump gave economically with deregulation, he took away with his opposition to free trade. For Christians, it is also important to note that free trade over the last 30 years brought over 1 billion people (mostly Chinese and Indians) out of extreme poverty, with the distinct possibility that extreme poverty can be eliminated in the world in the next 10 years. Free markets and largely free trade have led to this result. Mercantilism: an economic doctrine that supported managed trade to stimulate exports and minimize imports, and keep precious metals circulating within the home country. While an economic doctrine, mercantilism was thought to be a way to ensure national security for a nation by maintaining a higher gold stock. Comparative advantage: An individual (or firm, or country) is said to have a comparative advantage if he or she can produce any good or service at a lower opportunity cost than his or her potential trading partner.