Free Trade Should Not be Our Goal

Promoted from the diaries by streiff. Promotion does not imply endorsement.


The basic argument for free trade goes something like this:


Consider two islands, one with a lot of fish and another with a lot of trees.  Ideally the inhabitants of forest island should manage their forests and sell boats to fish island.  The inhabitants of fish island would then sell the fish to forest island and everyone is well off.  Let’s imagine that on Forest Island the Chief’s brother in law tries to catch some fish and sell them.  Nobody wants his fish though because they are small and taste bad.  So the Chief decides that no longer can anyone buy any fish from Fish Island.  The Chief’s brother in law is happy, but the rest of Forest Island starts getting hungry.  Meanwhile over on Fish Island they decide to respond by refusing to buy wood or boats from Forest Island, and they have to try to fish from shore.  Now everybody (except for the Chief’s family) is worse off.  Everyone benefits when trade can happen because some groups are just better at producing some goods.

Notice here that the underlying benefit is that each island has more wealth with free and open trade.  That is, free trade is not its own goal, wealth creation is the goal, and free trade is the means to get there.  Now let’s consider the United States today.  Let’s consider the goal of wealth creation.  We can accomplish that two different ways 1) generate more wealth within our borders 2) reduce the cost of importing wealth created outside our borders.  Obviously tariffs raise the cost of importing wealth created elsewhere, that’s kind of the point.  From the national level though we need to consider the overall tradeoff between generating more wealth locally and importing wealth.  China has been “stealing” intellectual capital for decades and we have allowed that in order to reduce the cost of manufactured goods.  However, over time that has mean more and more wealth generation has occurred in China while the value of our inventions has decreased (since they are stolen).  With Mexico we have a massive financial benefit from low cost of trade, but we also have a cost of managing illegal immigration.  I suspect that in a cost benefit analysis the cost of integrating 133,000 Hondurans and Guatemalans per month is higher than the benefit we have in outsourcing production to Mexico.  That is, if we had to choose between a secure border and free trade, we would be financially better off with a secure border.  Luckily the threat of tariffs seems to be getting us both a secure border and free trade.


I think the game Trump is playing is how to maximize not global wealth, but American wealth.  Wall Street will hate this, since they invest in global wealth.  However, the voters are all interested in American wealth.  I think it is reasonable to put in strong protections to prevent the global theft of American intellectual property.  I think it is also reasonable to force trading partners that are existentially dependent on access to the American market to prevent third parties from using their nation to harm us.

Here is my guess for how this plays out

  • Mexico secures their southern border and enforces their immigration laws (insomuch as a corrupt incompetent government that can’t control 80% of its cities can)
  • Tariffs are lifted (if they were ever enacted) on Mexico
  • Tariffs remain on China
  • Supply chains continue to unmoor from China and hook to Mexico and India instead
  • The Mexican economy strengthens as more manufacturing bases there
  • Illegal immigration from Mexico remains below 0 (as it has been for a while)
  • Trump runs for reelection on the following platform
    • Low unemployment & low inflation
    • Wage growth
    • Illegal immigration is way down – wall being built
    • Conservative jurists in place
    • Criminal Justice Reform Bill

Seriously, imagine a rally in Detroit where Trump asks the crowd – “If you have a job now, but were unemployed before I was elected I wanna hear you.  If you’ve gotten a raise in the last three years or moved to a better job let me hear you too!  You wanna give that back to the bankers to ship to China?”



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