Free For All - The Free Liberal Blog: Undo the Obstacles to the Manifestation of Comparative Advantage

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TFL’s newfound friend and commenter ACC appears to be quite knowledgeable about the intricacies of the Ex-Im Bank. I am in this sense at a disadvantage. ACC does, however, give us an opportunity to go back to square one on important concepts.

Today, let’s go back to “comparative advantage.” ACC says:

This cuts to the issue of whether or not one believes that promoting exports at all is a "good" thing. If you believe at all in the theory of comparative advantage, you probably would think that it is.

My take: the notion of comparative advantage is an observation, not a call to arms. When markets, goods and services flow freely and peacefully, it liberates people to do what they do best. It also tends to aggregate in nation states. The US, for example, does technology more effectively than Switzerland. The Swiss do chocolate and watches effectively.

These advantages can and, most of the time, do evolve and arise without government intervention. The theory of comparative advantage says absolutely nothing about “promoting” anything. Some promotion does happen, to be sure. Whether such promotion works to increase the prosperity of the citizenry – who can say? What is clear is that nations that do less promotion and less intervention are generally substantially more prosperous than those nations that do more, over time.

ACC also asserts:

Nor are resources just magically being shifted out of production of other goods a la Soviet arms factories eschewing consumer durables – especially in a case like Boeing -- its natural market is going to be made up of international actors by default.

This depends on what you mean by “magic.” People and corporations react to subsidies and penalties, do they not? Subsidize X, and we almost always get more X. Penalize (tax or regulate) Y, and we almost always get less Y. Call it “reinsurance” if you must, but the Ex-Im Bank is in the subsidy business. While I’m pleased to see that the Ex-Im Bank is not a drain on taxpayers, I’d remind you that there are other “facilitating” government and quasi-government entities in the mortgage and pension liability areas that appear to be ticking time bombs for taxpayers.

That’s why I advocate undoing the obstacles to the manifestation of comparative advantage. It’s a neutral, peaceful approach, not the government-as-mad-scientist, testing and tinkering with a market of people that just wants to do its thing. While he was no saint, Ronald Reagan put this point well: “Get the government off our backs.” Not just off Boeing’s back. Not just off industry’s back. Off your back and my back.

Look at it this way: If government doesn't promote exports (or production of any kind), do you honestly believe that there would be no exports or production? If yes, I humbly, respectfully, but strongly disagee.

-RC

Comments

The biggest obstacle to free use of comparative advantage is how currencies are traded. Currently, China is hoarding dollars and if they dump them we are ruined. Additionally, the difference between the market basket of traded goods and the market basket of goods workers need is different, so that workers are exploited or shut out in international trade. If comparative advantage were operating at 100% with totally free currency markets, this would not be a problem. One needful thing is to actually get and publish all of this information, including and especially the impact of subsidies and tarrifs. Once all information is laid bare, the market will provide corrections or pressure can be applied where needed to change misguided policies.

One of the largest problems we face in world trade is the export of our debt which is magnified by the cutting of U.S. tax rates by the current regime. If we don't undo at least some of these rate cuts (and retreat on the level of defense spending - or raise taxes to match it) any moves to ease up on interest rates will just make our trade position worse.

Posted by: Michael Bindner | January 17, 2008 09:59 AM

Incidentally, the PBOC is allowing the yuan to rise faster and ended the official peg to the dollar sometime in late 2005, I think. They'll still intervene for a while to sterilize some of those capital inflows, but as this article contends, it's becoming less and less in their best interest to do so:

http://www.economist.com/finance/displaystory.cfm?story_id=10499076

You know what RC -- I totally agree with your ideas in theory. But those are normative ideas, and I'm speaking positively, not normatively -- if the US (or any other major actor) were to hastily and unilaterally liberalize its entire trade regime while all the other guys kept their own in place, it would be much akin to other well intentioned but poorly executed attempts to liberalize trade regimes -- you would stand a large chance of losing your internationally competitive private sector actors, and you really don't want to lose your leading sectors (i.e. high-value added, capital intensive industries -- your high paying jobs). See Joseph Stiglitz's book, "Globalization and its Discontents" for more info on what happened in Latin America when they attempted to liberalize overnight. If everybody completely liberalized their trade regimes overnight, that would be great -- that's why we have the WTO. But you get these nasty, collective action problems in the real world, wherein the optimal outcome (universal trade liberalization) is never reached -- it's the quintessential prisoner's dilemma. That's also part of the reason why we see more regional or bi-lateral trade liberalization agreements than multilateral accords -- they're much easier to coordinate.

I'm no neomercantilist, I'm a political realist -- you're living on the moon if you think China is going to just roll over and loosen up its capital controls overnight. They're trying to replicate the past successes of Japan, South Korea, and the other East Asian Tiger economies, after all, which certainly didn't become prosperous through opening up their markets overnight and letting their internationally competitive manufacturing sectors lose to Motorola and Ford -- they wanted Sharp, Toyota, Hyundai, Mitsubishi, and Seiko -- not an eternal existence of subsistence as rice farmers! International economics has a completely different dynamic than economics at the national level -- your theoretically elegant but parsimonious views on international trade have been shaped in a bubble -- we're not talking about one big, closed system that only trades wine and cloth (your X and Y) -- we're talking about multiple different open systems interacting with each other, each with their own idiosyncratic laws, customs regimes, and trade policies.

Also, before we start digging up Ronald Reagan's dead body to reelect him, let's not forget the amount of deficit spending he took on to finance a nuclear arsenal large enough to blow up the entire world three times over. And don't discount Paul Volcker's inflation killing interest rate hikes (which was probably the right thing to do at the time) and massive oil price shocks as a cause of Jimmy Carter's downfall (political aspects of the Iran hostage crisis aside). Reagan and Clinton, by contrast, both benefited heavily from being lucky enough to be on the loose end of the monetary policy curve.

Trade liberalization is great and is very much symptomatic of progress, but if you let your guard down while the other guy (or guys -- it's a free-for-all) doesn't reciprocate, the playing field becomes uneven, and an otherwise well run, efficient economic actor can get taken out by a heavily subsidized foreign competitor that will then have an incentive to charge monopolistic prices. That is not an optimal outcome.

Also, why do you keep changing the topic of the thread? Afraid other people might read what I've written and agree?

Posted by: a concerned citizen | January 17, 2008 05:36 PM

ACC, I like to keep it fresh and available for folks who don't read the comments. I invite you to lay your normative/realist theory out as an article for TFL. I happen to believe that doing the right thing always works. I also believe in moderation, so I'd shift away from managed trade rather than ending all intervention tomorrow.

Posted by: Robert Capozzi | January 17, 2008 05:59 PM

Undo the Obstacles to the Manifestation of Comparative Advantage

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