There’s nothing special about free trade across international borders. The principles are the same whether I in Pacific Grove am trading with someone in neighboring Monterey or someone in Mexico, Myanmar, or Morocco. Free trade both within a country and across international borders is what has led to our huge standard of living. If that doesn’t seem obvious, think about how you would live if you could never trade. You could never buy wood, food, clothing, pharmaceuticals, or computers and, moreover, could never buy the inputs that are used in making those things. In such a situation, many of us would starve.
We in the United States are lucky. Before the European Union was formed, we were the largest free trade zone in the world. With over 330 million people with a huge array of skills, with a lot of capital equipment, and with fairly decent mineral resources, we need to engage in less international trade than people in other countries. So if we couldn’t trade across borders, we would be worse off but not nearly as badly off as, say, Canadians if they couldn’t trade.
Still, international trade makes us substantially better off. We can get coffee from Colombia instead of buying the limited supplies that Hawaii has to offer and building expensive hothouses in the lower forty-eight. We can get bananas from Central America rather than building hothouses to grow them domestically. And how would we get rubber for our tires?
This is from David R. Henderson, “Globalization and Its Discontents,” Defining Ideas, March 2, 2023.
Read the whole thing.
READER COMMENTS
Henry
Mar 3 2023 at 10:28am
Some of the concerns about globalization reflect worries that producers in far away nations cut corners on safety, purity, and environmental protection in ways that are difficult to detect. This can give them a cost advantage. Our laws on purity, safety, etc. are diluted by letting nations that don’t have similar rules access to our markets. Likewise, labeling laws vary from nation to nation; “Champagne” is a highly restricted trademark in the EU with a slightly looser definition in the US and no restrictions in Russia.
Jon Murphy
Mar 3 2023 at 10:36am
It can give them a price advantage, but not a cost advantage. The price of the good may be lower, but the cost may be higher. Cutting corners may be a short run means to profit, but not a long one. Individuals often pay more for better quality.
By way of an example, when I was a consultant, I had a client who produced and sold audio equipment. When I took them on, their main factory was in China. After a few years, they closed that factory and moved production back to the US. When they made that move, their sales and profits rose. True, producing in the US had a higher input price point, but they had a defective rate of virtually zero. With their Chinese factory, they had to send back anywhere from 1/3 to 1/2 of the product because it was defective. Their price was higher to manufacture in the US, but the cost was lower.
Jon Murphy
Mar 3 2023 at 4:30pm
I should say in my first sentence that they do not necessarily get a cost advantage.
David Seltzer
Mar 4 2023 at 3:11pm
“Some of the concerns about globalization reflect worries that producers in far away nations cut corners on safety, purity, and environmental protection in ways that are difficult to detect. This can give them a cost advantage.” I suspect that far away nations who cut corners are not difficult to detect and are quickly discovered as information is rapidly dispersed in today’s markets. The secondary benefit is lower cost of search. When someone posts about an inferior product, it goes viral almost instantaneously. Yelp is an example.
vince
Mar 3 2023 at 5:12pm
That’s right. And that’s why many call it a race to the bottom. I hope things have gotten better than this: https://verite.org/project/the-new-york-times-fast-and-flawed-inspections/#:~:text=An%20extensive%20examination%20by%20The%20New%20York%20Times,the%20most%20fundamental%20workplace%20safeguards%20like%20fire%20escapes.
Jon Murphy
Mar 3 2023 at 5:22pm
Fortunately for the world, the opposite is true. Indeed, as David’s article points out, the bottom benefits the most from trade.
vince
Mar 4 2023 at 2:55pm
Race to the bottom is a different issue than the contentious question of winners, losers, and fair distribution.
Jon Murphy
Mar 4 2023 at 3:09pm
Sort of. There are significant overlaps.
Regardless, free trade is not a race to the bottom. The evidence is overwhelmingly clear on that.
Warren Platts
Mar 5 2023 at 4:58am
“race to the bottom”
I call it a race to the middle. Free trade puts upward pressure on working-class wages in low-wage countries & downward pressure in high-wage countries. Once wage levels worldwide are equilibrated, much of the impetus for helter-skelter free trade will go away. Trade levels will decline as trade goes back to what it used to be for: things like coffee & tea & pineapples & tourism & Scotch whiskey. Manufactured goods will tend to be homespun.
Jon Murphy
Mar 5 2023 at 6:35am
No. Wages will ultimately rise as productivity increases. The downward pressure on high wage countries idea is based of a misunderstanding of the short-run factor equalization model. In reality, wages rise for all participants.
Warren Platts
Mar 5 2023 at 10:42am
In theory, Jon, perhaps (cf. Stolper-Samuelson Theorem). But in practice, when you transform a manufacturing worker who formerly contributed $300,000 added value to the economy into a food service worker who only contributes $30,000 value added (because you’re running a big, fat trade deficit & so manufactured exports cannot balance imported goods & so manufacturing workers are forced into the service sector), then you’ve not only reduced his personal productivity, you’ve reduced (or at least slowed down the rate of growth of) the national productivity. Hence downward pressure on wages compared to what they would be otherwise without unilateral free trade 100% of the time.
Jon Murphy
Mar 5 2023 at 10:55am
Why are you only looking at 1/4th of the transaction?
Plus, you’re suffering from an empirical problem; your hypothesis isn’t borne out in reality. Real US compensation for nonsupervisory workers have been steadily rising, even in import competing industries. For example, Real US Manufacturing wages are roughly 15% higher now than the were pre China Shock.
Warren Platts
Mar 5 2023 at 2:21pm
{citation needed} I looked at the FRED series “Average Hourly Earnings of All Employees, Manufacturing.” The series only goes back to 2006, so it doesn’t capture the full China Shock. Nonetheless, wages in March 2006 were $20.70; adjusted for inflation in 2022 dollars, that’d be $31.18. The listed wages for March 2022 were $30.64, although by December 2022 average wages had climbed to $31.46. Thus, since 2006, REAL average manufacturing wages have been pretty much exactly flat.
But of course manufacturing employment is down, so I combined average wages with number of employees. Total annualized wages for March 2006 would have been approximately $588.5 billion; adjusted for inflation that equals $886.6 billion in 2022 dollars. But only $779.2 billion were paid out as of March 2022.
https://fred.stlouisfed.org/graph/?g=10Nn1
Jon Murphy
Mar 5 2023 at 2:32pm
FRED. Real US Manufacturing Compensation
Warren Platts
Mar 5 2023 at 2:41pm
Um, “Real US Manufacturing Compensation” only shows percentage change, and it’s in the negative sector at least as much as the positive side.
https://fred.stlouisfed.org/graph/?g=10NuI
Jon Murphy
Mar 5 2023 at 3:33pm
You’re shooting from the hip again.
It’s important to look at the data, not make assumptions. To paraphrase Mark Twain, the problem isn’t that people don’t know. The problem is people know so much that isn’t true.
nobody.really
Mar 5 2023 at 4:41pm
That is ironic–‘cuz even though people know that Mark Twain said that, no one has found evidence that he did.
According to the Oxford Dictionary of Quotations, 3d ed., p. 491 (1979), Josh Billings (Henry Wheeler Shaw) said “The trouble with people is not that they don’t know but that they know so much that ain’t so,” but no one has been able to document that, either. But in 1874 he wrote, “I honestly beleave it iz better tew know nothing than two know what ain’t so.” That’s the earliest source I know of.
Jon Murphy
Mar 5 2023 at 5:00pm
Ain’t that always the case? Things get lost to history.
Warren Platts
Mar 6 2023 at 6:27am
Jon, you’re ignoring employment. “Wages” means total wages paid out to the manufacturing sector, not the average wage of the average worker. If the manufacturing sector were reduced to a single worker making $200/per hour would you say that real wages were up by a factor of 10X since the China Shock? I certainly hope not.
So let’s take a detailed look at the data shall we?
We will stick with your series even though it’s unclear what deflator they are using and the fact that it says the data prior to 2003 is not directly comparable to post-2003 data instead of the series I linked to that is based on a monthly survey 666,000 businesses and deflated by the Urban Consumer Price Index that shows a grand total increase in real average wages per worker 1.4% over the last 17 years since the series I linked to only goes back to 2006.
I reset the index to the start of the China Shock to January 1, 2001, about when PNTR status was granted, and employment fell off the cliff. I also added manufacturing employment (MANEMP) to your series of real wages (COMPRMS). Then I multiplied the 2 lines in order to obtain an index for total manufacturing wages paid out.
Now, you predicted real wages would go up for import competing workers due to the institution of free trade with China. And it is true that, according to your deflator, the average real wage paid to the average worker is up by 11% since the China Shock.
However, when we look at total real wages (green line), those declined by a precipitous 27.6%. Then after the worst of the China Shock was over, around 2010, real total wages began creeping up again, slowly, until the Covid recession where they have been basically flat since. Over the entire period total wages are down by 15.5%, with little sign they will get back to pre-China Shock levels any time in the near future.
There are of course competing theories of trade within economic science. Thus none of the above is surprising. As Paul Samuelson said in his last paper, “in a real sense foreign educable masses—first in western Europe, then throughout the Pacific Rim—could and did genuinely provide the same kind of competitive pressures on U.S. lower middle class wage earnings that mass migration would have threatened to do. Post-2000 outsourcing is just what ought to have been predictable as far back as 1950.”
Thus, clearly, the actual data from the China Shock confirms Samuelson’s Mill-Ricardian model much better than the factor equalization model you referred to above.
Link here: Manufacturing Sector: Average Real Wages; Employment; Total Real Wages
Jon Murphy
Mar 6 2023 at 8:00am
You’re changing your story. Up until this post, you’ve been trying to argue that the amount paid to workers in the import competing industries will fall to foreign levels. What little data you’ve cited have been on this point. Now you’re trying to say the number of people employed is what matters (of course, anyone with rudimentary knowledge of price theory dismisses the claim that employment matters as the sign of the health and productivity of an industry. Marginal thinking and all that).
But even if you’ve just misspoken the past few days, the implication of your claim is odd. You’re suggesting that having 1m workers earning $1 each are better off than 1 worker earning $500,000.
The only way we can reach your conclusion is if we reject price theory. I am unwilling to do that.
Warren Platts
Mar 6 2023 at 3:19pm
A mere assertion backed up an argument from authority arguing against a straw man. My claim was about the entire economy, not just the manufacturing sector.
My point is very simple: when you transform 5 million workers who were formerly contributing $1 trillion to the GDP into 5 million workers who are only contributing $200 billion to the GDP, you’ve just given the economy an $800 billion annual headwind. That’s real money, especially when compounded over decades.
And this is just silly. OF COURSE an economy consisting of 1 million workers making a dollar a day is better off than an economy consisting of 999,999 slaves and 1 owner making $500,000. Even if he was more generous than Jesus and gave it all away, everyone would only be making 50 cents a day.
Warren Platts
Mar 7 2023 at 7:59am
Empirical evidence for the race to the middle. Prior to the China Shock, the wage differential between China and the U.S. was a factor of 30X. Now it’s been reduced to a factor of 3X. Getting close to the level where it’s not worth the shipping costs anymore..
https://www.forbes.com/sites/miltonezrati/2023/01/30/the-east-west-wage-gap-not-nearly-as-compelling-as-it-once-was/?sh=1cc1dec8254d
Jon Murphy
Mar 7 2023 at 12:27pm
You’re the one rejecting price theory and constantly changing your story when facts don’t support you.
If you want to talk about the entire economy rather than just manufacturing (another change in story explicitly opposed to everything you’ve been saying thus far), then that’s fine. According to the BLS, average wages and total payrolls are all up as well from the so-called “China Shock.”
Warren Platts
Mar 8 2023 at 6:11am
Nobody is rejecting price theory. What’s happening is you are reasoning from a price change. And nobody’s changing their story. My initial claim was,
“Free trade puts … downward pressure in high-wage countries.” That is an economy-wide claim.
Your theory predicts that trade with China should cause wages and payrolls to increase. You point out that they have increased, and then conclude your theory has been confirmed. But that’s not how it works.
You need to look at the timing of the shock and then observe the apparent effect on the rate of growth. If your theory is correct, post-PNTR wage growth rates should have increased. It did not. In fact the rate of growth went down.
Here is the empirical proof: a chart of real total wage & salary disbursements stretching back to 1959. It is plotted logarithmically so that relatively straight slopes represent relatively constant growth rates.
Four periods visually leap out at you: (1) during the 1960’s there was a period of relatively rapid, stable growth; (2) the 1970’s were flat; (3) then starting in the early 80’s, there was another period of growth until 2001 at about the same overall growth rate as the 60’s, but more variable; and then (4) there is a sharp inflection point marking the start of the PNTR period. Growth is still positive, to be sure, but it is at a slower rate.
For the PNTR period, payrolls increased 22% (~1% per year) which is much lower than the previous period starting at about 1982 of 31.6% (~1.7% per year).
You can see the same effect on GDP. For the PNTR period, overall GDP growth has been 52.7%; not bad until you consider that for the previous 22 year period overall growth was 96%.
Conclusion: the facts certainly look like China-PNTR has caused a headwind of downward pressure on wage, payroll, and GDP growth rates, just as Paul Samuelson’s 2004 paper said it would.
Jon Murphy
Mar 8 2023 at 8:51am
Yes, you are. You may not think so, but you explicitly reject price theory multiple times.
I don’t think you know what that phrase means.
And then you decided to redefine what “downward pressure” means from a negative number to “whatever I want.”
It’s also worth pointing out that such a claim is a rejection of price theory.
Of course, it’s not according to the model you attempt to use. One also must wonder why you repeatedly referred to manufacturing and only switched claims to “economy-wide” once the emprical evidence proved you wrong.
Yes, that is exactly how science works. Playing world games and rejecting basic mathematical concepts to “prove” your point is, on the other hand, not how science works.
How, if you want to change your story again and now claim (in an explicit rejection of all price theory, logic, and evidence) that trade results in slower growth of wages, that’s fine. But you need to answer the current evidence explaining slower growth in compensation and then explain why price theory is wrong before injecting your own hypothesis with evidence. To this point, all you’ve given us is mere assertions and zero emperical evidence.
Warren Platts
Mar 8 2023 at 12:34pm
You’re putting words in my mouth again because you’re not reading what I’m writing and, therefore, you are arguing against a straw man, as per usual.
Once again: free trade puts downward pressure (a negative number — you got that part right at least) on wage growth for the working class in high wage countries, while raising wages for the working class in low-wage countries. However, free trade does of course also put upward pressure on the U.S. laptop class’s real salaries, not only by lowering the price of imported goods, but also in large measure because of the downward pressure on U.S. working class wages.
The above is not controversial. Even Don Boudreaux will acknowledge that there are some groups of Americans who have been hurt by free trade; but he will insist the gains of the winners exceed the costs of the losers, and that even if the losers are not compensated, their grandchildren will be much better off in the long run. That is the “price theory” (sic) that you also teach.
However, as in most sciences, there are multiple theories, such as Samuelson’s and many others of his ilk. Samuleson mathematically proved long ago that it is not necessarily the case that the gains from trade to the winners must always exceed the costs to the losers.
Therefore, the Boudreaux-Murphy “price theory” in itself cannot settle the question as to whether the gains to the American winners from China-PNTR exceed the costs to the losers. That’s an empirical question.
And if you’ll just look at the GDP (yes, Jon, that’s called empirical evidence), the real GDP growth rate since 2001 has only been 1.94% compared to 3.1% for the preceding 22 years. Thus how is it possible for the winners to compensate the losers since the overall pie is smaller than it otherwise would be with no China-PNTR? If there had been zero effect, the GDP would now be $32.68 trillion instead of the current $25.46 trillion. On average, we are worse off, thanks to China-PNTR.
The ball is now in your court, Jon. To refute me, you’d have to (a) show the mathematical error in Samuelson’s theorem that says trade gains to winners need not exceed costs to losers; and (b) therefore, something else must be going (perhaps the forever wars that started at about the same time?) that exerted so much downward pressure on GDP growth that it more than canceled out the upward pressure caused by China-PNTR.
Jon Murphy
Mar 8 2023 at 8:56am
BTW, Warren, you should be aware that you explicitly define “downward pressure” as a “lowering of wages” twice:
First:
Second:
Wages and compensation are rising. Therefore, trade is not reducing wages. QED.
nobody.really
Mar 5 2023 at 4:50am
Let’s try this scenario: Say the US has a policy against slavery, even if it might reduce the cost of production. Say that a foreign country makes products using slavery, and thereby achieves a cost advantage. What consequences would we expect unregulated trade to produce?
vince
Mar 5 2023 at 1:11pm
… a race to the bottom.
Jon Murphy
Mar 5 2023 at 1:20pm
So, let me ask you the same empirical question I asked Warren (after all, every hypothesis needs evidence. Otherwise, it’s just chatter):
Why don’t we see a race to the bottom? Why does the evidence strongly point to a race to the top?
vince
Mar 5 2023 at 2:24pm
First, could you reply to the questions raised by nobody.really? He asks a very common-sense question.
The issue is very complex, but how much evidence do you need to be convinced that corporations want to maximize profit?
Jon Murphy
Mar 5 2023 at 2:36pm
His response was to you, not to me.
None. It’s mathematically impossible to maximize profits through a race to the bottom. It’s because of the profit maximizing motive that trade makes everyone better off.
To get to a “race to the bottom,” one has to weaken the profit maximizing assumption.
vince
Mar 5 2023 at 2:43pm
“His response was to you, not to me.”
How do you answer it?
Revenue 100, labor 90, profit 10. Shift to slave labor. Revenue 100, labor 1, profit 99. QED.
Jon Murphy
Mar 5 2023 at 3:36pm
Nothing has been proven, mon ami. You showed reducing costs can increase profits. That’s true. But that’s not a race to the bottom.
Again, it is mathematically impossible to maximize profits through a race to the bottom. That’s why you’re struggling so hard to find empirical evidence and relying on assumptions and false claims. You and Warren both.
vince
Mar 5 2023 at 4:01pm
Rather than continuing the thread with pointless ideological circling, I leave it with this link.
https://ler.la.psu.edu/wp-content/uploads/sites/4/2021/12/Anner-Race-to-the-Bottom.pdf
Again, the issue is complex. It’s easy to oversimplify, pick and choose empirical data, and use statistics to “prove” an ideological viewpoint.
Jon Murphy
Mar 5 2023 at 4:26pm
Mathematics being ideological? Weird flex, but ok.
Which, given you cannot even find evidence to support your claim, kind of says something, no?
Jon Murphy
Mar 5 2023 at 5:03pm
I can tell you historically what consequences we see: the end of slavery. Slave societies simply cannot compete against free socieities. Slavery dramatically increases the cost of production.
Warren Platts
Mar 6 2023 at 7:11am
“Race to the bottom” means lowering of a wages. And since (ignoring interest payments) Profit = Production – Wages, if you lower Wages, you should be able to, in principle, increase Profit.
But Jon is right at least in the long run (and Marriner Eccles said the same thing a century ago) because profit depends on there being a market filled with consumers who actually have a little money to spend.
It is like the game Monopoly. After you win, what happens to the value of all your hotels? They become worthless because everyone else is bankrupt and thus there’s nobody left to pay rent anymore!
Jon Murphy
Mar 6 2023 at 8:10am
In that case, it is proof positive that international trade has not resulted in a race to the bottom. Real compensation has been generally rising.
There’s part of your problem. You don’t know what profit is. Profit = Total Revenue – Total Costs. You need to start with correct definitions if you want to get anywhere.
Now, there’s a key Econ 101 concept both you and vince are rejecting in order to get to your erroneous conclusion. To figure it out, let me ask you the same question I ask my students:
The Boston Red Sox are paying Rafael Devers about $11m per year for the next 10 years. They could fire him and pay me the League minimum wage ($500k) a year to do the same job. I’m 33 years old, about 200 lbs, and haven’t been on a baseball diamond since I was 18. Why don’t they?
Flying has a much higher price than driving places. First class even so. And owning a jet even moreso. So, why do CEOs opt to fly rather than drive?
Why do so few people in the US make minimum wage? Only about 5% of the working population, give or take.
TL;DR: both you and vince have empirical and theoretical problems. You’re working off bad theory (really no theory) and the data do not support your claims. You need to resolve both problems.
vince
Mar 6 2023 at 12:15pm
This is ridiculous. The implicit assumption, which you are missing, is that labor is the only factor of production.
That can be consistent with global labor exploitation and a race to the bottom. Has it risen relative to profits or to production?
Another point about rising wages. Say I make $100,000 and my coworker makes $20,000. Next year, I’m paid $200,000 and my coworker is paid $20,001. Should the coworker be thrilled that he is making more than he did last year?
Warren Platts
Mar 6 2023 at 4:05pm
Jon, we are talking about the entire economy and how the national income is divvied up between owners of capital and labor, not Acme Inc.’s latest P&L statement.
The equation Production = Profit + Wages goes back to at least Henry George and no doubt much earlier. It is perfectly, mathematically valid, even for Acme Inc.’s latest P&L statement because it only looks at value added. That is, costs other than wages are excluded. Therefore, Total Revenue – Total Costs = Production – Wages. A simple mathematical truth of middle school algebra.
Because Production = Profit + Wages and there’s no law of economics that says the Profit/Wages ratio must be constant, then it’s theoretically quite possible for Labor’s share of the GDP to decline over time. And that is exactly what we’ve observed in the free trade era: Labor’s share of the GDP has declined considerably, as predicted by Samuelson et al.
Chart here: https://fred.stlouisfed.org/graph/?g=10QsQ
robc
Mar 7 2023 at 8:02am
Yes.
I literally don’t even understand your question. Why would there be any correlation between your salary and his salary.
I think Jon’s baseball salary analogy is dead on. Plenty of baseball players make slightly more year over year while teammates get huge raises. And if they don’t like it, they can become a free agent (assuming they qualify, etc).
vince
Mar 7 2023 at 12:22pm
“Why would there be any correlation between your salary and his salary.”
My implication was that they both nearly doubled their productivity. Anyway, is it really hard to imagine a correlation among raises at a company? I often hear about across-the-board raises with given percentages.
Jon Murphy
Mar 7 2023 at 12:32pm
I agree. Warren’s assumption (which isn’t implicit, it’s explicit) is absurd. His whole assertion (not even worth the title of “hypothesis” because he is not even discussing observations) absurd.
It’s OK to reject scientific conclusions. But one typically needs strong evidence for that. Warren doesn’t even have that.
Only if we redefine basic mathematics.
That’s up to him. If he feels underpaid, he can always find another job. I cannot tell him how he should feel.
Jon Murphy
Mar 7 2023 at 1:13pm
Cool story. The equation is still false (and no amount of shell-game wordplay will change that).
As an aside: I did a quick Google search and cannot find Henry George, or anyone else for that matter, making that claim. Logically, it doesn’t make sense given the temporal structure of production.
Jon Murphy
Mar 7 2023 at 5:26pm
But they didn’t. The first guy probably did. The second guy only increased his productivity by 1/20,000th.
vince
Mar 7 2023 at 5:37pm
No need. Executive makes $100,000. Labor makes $20,000. Productivity increases 10%. Executive finds a slave who produces same labor output for $2,000. Executive gets a raise to $130,000. Average wages go up at the same time as a race to the bottom.
vince
Mar 7 2023 at 5:39pm
Maybe in your world.
Jon Murphy
Mar 7 2023 at 5:43pm
It was your example. The implication is clear and it is not that both workers’ outputs doubled.
There are multiple logical and empirical problems with your example, but there’s still the bigger problem that a positive number is not the same as a negative number.
Warren Platts
Mar 8 2023 at 8:59am
It is from his Progress and Poverty. Here is the actual quotation:
Now, George has rather idiosyncratic usages of these words: e.g., interest is all return on use of capital (not just interest on loans), whereas rent is the return on unimproved land only (thus wouldn’t include rent you’d pay to live in an apartment), and wages for George includes all human exertions, including management. So, for example, imagine an absentee landlord leases land to a farmer who owns tractors and implements and does nothing else but hires workers and an agronomist who manages the operation, then the landowner would get the rent, the farmer gets the interest, and the laborers and the manager get the wages.
As for profits, this is what George had to say:
But, as you can see, George is embarked on the same project as this conversation: how production is divvied up between workers and owners. In the vernacular sense of “profit” we use today, that’s the “unearned income” that owners qua owners get, and wages are what workers and managers are paid for their labor. Since George had a hangup when it came to land, he was keen on separating “rent” from “interest” but for our purposes we can lump the two together. Hence my:
Thus on further consideration, I take back my earlier assertion that Production – Wages = Total Revenue – Costs. They are not quite the same thing. Imagine a guy that owns a small Irish pub and lives upstairs. He does not pay himself a salary, so his own labor wouldn’t show up on the P&L statement. But for BLS & GDP purposes, the total value added would be wages, including an imputed wage for the owner to run the place plus profit, that which was left over after backing out booze & utility costs. They would also add an imputed rent for GDP purposes roughly equal to what the owner would have to pay if he had to lease the premises.
Mark S Barbieri
Mar 3 2023 at 6:26pm
Our laws on purity, safety, etc. are diluted by letting nations that don’t have similar rules access to our markets.
I think I’m missing something. Why is it bad that people we trade with have different safety standards? In my personal life, I use this to my benefit. I have a 2-story house and my safety standards don’t allow me to use a tall ladder to clean out the rain gutters. Fortunately, I trade with someone with different safety standards. I think we’re both better off because of this.
Wouldn’t the same be true in dealing with other countries. No job is perfectly safe or perfectly unsafe. Everything has a trade-off between safety and efficiency. Why is it a problem if different countries see the trade-offs differently?
Jon Murphy
Mar 3 2023 at 6:58pm
Good point Mark. It’s also worth noting that such differing policies help us see what those tradeoffs are and whether they’re worth it. If some country does have some persistent cost advantage in producing X because of differing policies, then it can signal that such policy is beneficial.
Ruth
Mar 3 2023 at 6:32pm
Some places have weaker currencies. Having a strong currency means having a service based economy. Most of the unfairness right now is because of a lack of parity between currencies. The USA wants to bring back manufacturing without weakening its currency. How can that work? Short answer: it won’t!
Steven Berger
Mar 4 2023 at 2:35am
If this were a perfect world and we were perfect people then ‘Globilization and the concomitant unified world government would probably be a natural and obviously good idea.
Since neither we or it is, then the potential for misuse and inequality is so great and almost inevitable that there is almost no way that this idea of ‘Globilization’ will turn out well, (not that this will necessarily stop it from happening….!)
Jon Murphy
Mar 4 2023 at 10:22am
Why do you think free trade requires a unified world government? You’re arguing against a “unified world government,” but I cannot think of how that has anything to do with free trade.
David Henderson
Mar 4 2023 at 10:44am
I’m wondering the same thing, Jon. Since World War II, we’ve moved so far in the direction of free trade. Check data on the average tariff rate over the last 80 years. And we did it without a world government.
Henri Hein
Mar 4 2023 at 3:53pm
The EU went from originally being purely a free-trade zone to evolve into a meta-government with legislature, courts, a central bank, etc. Maybe Steven worries something similar will happen with the WTO over the long run. I don’t believe this myself, but have heard the concern before.
Jon Murphy
Mar 4 2023 at 3:57pm
Perhaps, but a single example (and one that is hardly a unified government) is insufficient to support his claim that free trade requires a unified government. There are many free trade areas that do not have unified government
Mark Brady
Mar 5 2023 at 12:41am
Jon, the free trade areas that you have in mind are in fact customs unions, and increasingly they have very rigorous protection for intellectual property.
Jon Murphy
Mar 5 2023 at 6:38am
Mark:
In this case, a fta and customs union a distinction without a difference.
I’m not sure what the point of invoking intellectual property is.
Mark Brady
Mar 5 2023 at 6:14pm
“In this case, a fta and customs union a distinction without a difference.”
There’s a very important difference. Unlike a customs union, a free trade area has no common external tariff. Today’s FTAs, like NAFTA, all have a common external tariff.
“I’m not sure what the point of invoking intellectual property is.”
Today’s FTAs restrict the (re-)importation of IP-protected goods like patented medicines, copyrighted books and music, and trademarked clothes, shoes, and accessories.
Jon Murphy
Mar 5 2023 at 7:45pm
I’m sorry, I don’t see where you are going with any of this. How it is relevant to the claim that free trade requires a “unified world government”?
Mark Brady
Mar 5 2023 at 9:24pm
“I’m sorry, I don’t see where you are going with any of this. How it is relevant to the claim that free trade requires a “unified world government”?”
If we’re discussing free trade in a global setting, it would be a good idea to clarify our understanding of the arrangements that ostensibly promote free trade, e.g., the difference between a free trade area and a customs union, and the extent to which the international enforcement of intellectual property restricts, rather than promotes, free trade.
Jon Murphy
Mar 6 2023 at 8:11am
I still don’t know where you are going with all this, Mark. None of what you are talking about seems to apply to the claim that free trade requires a unified world government.
Mark Brady
Mar 6 2023 at 5:59pm
Unilateral free trade does not require “unified world government.” But the imposition of one or more country’s intellectual property law on other countries (as required by the WTO) could be seen as a step (desirable or not) toward “unified world government.”
Jon Murphy
Mar 7 2023 at 12:34pm
Why? Literally no other treaty works that way. Why would IP?
Thomas Lee Hutcheson
Mar 4 2023 at 6:30am
Some restriction on trade — a fee for CO2 “content” of imports — would be necessary to prevent imports from undermining the incentive effects of a Pigou tax on net CO2 emissions and to encourage trading partners to enact such taxes themselves.
Jon Murphy
Mar 4 2023 at 10:20am
Your argument here implies that a Piouvian tax is inefficient.
nobody.really
Mar 5 2023 at 4:23am
How so?
A Pagouvian tax is designed to discourage externalities by getting consumers to bear the cost of their consumption. If consumers could simply evade the tax by buying from another jurisdiction, the externality would continue uncorrected.
Jon Murphy
Mar 5 2023 at 6:45am
Precisely. Which in turn increases the marginal enforcement costs, which turns the Pigouvian tax into an inefficient tax (just like any other). As marginal enforcement costs increase while holding marginal abatement costs constant, then the dead weight loss of the tax increases as the tax becomes more about funding the agency than correcting the externality.
One point to bring up here that doesn’t detract from your point (I knew what you meant) but I want to clarify.
The Pigouvian tax is not about customers bearing the cost of their consumption. Since who bears the burden of the tax depends on the elasticity of supply and demand, the Pigouvian tax is about getting the market participants to internalize the external costs of their transaction.
nobody.really
Mar 5 2023 at 12:27pm
So how do you recommend managing externalities?
Jon Murphy
Mar 5 2023 at 12:43pm
By avoiding heavy-handed, top down solutions like carbon taxes, regulations, and things like that. Allow the market to do its thing. Even high transaction costs are not the barriers that people think they are.
nobody.really
Mar 5 2023 at 2:53pm
Thanks for your candor; that’s one point of view. You suggested I review textbooks to understand how tax burdens are incorporated into conventional comparative advantage analysis. Perhaps you’d want to review textbooks regarding externalities; I suspect we’d find that my views are more conventional than yours.
Would you draw the same conclusions about trading with slavers? Would you say, “Hey, it’s not our business if our trading partners enslave people, and if our trade encourages them to enslave more people. We have no business imposing our norms on them–and our efforts wouldn’t work anyway”?
Curiously, David Henderson has just posted thoughts on someone who is generating a lot of externalities (Putin) and how efforts to constrain his actions–including efforts restricting trade–may be having more effect than generally acknowledged. You’ve offered two remarks to that discussion, neither of which has been “Hey, let’s continue trading with Russia, externalities be damned!” Why the reticence?
Jon Murphy
Mar 6 2023 at 8:22am
No need to review. I teach the stuff. Yes, your views are more conventional than mine along certain margins (although I suggest you review the Nobel Prize winning work of Ronald Coase along with James Buchanan and Craig Stubblebine’s paper “Externality,” Carl Dahlman’s paper “The Problem with Externality,” and John Nye’s paper “The Problem with Pigou.” You’ll see the story is way more subtle. I have a good summary here.). I do reject the convention, however. In fact, I am working on a paper now where I think I have shown that a Pigouvian tax is not a solution at all to externalities except in the immediate term. I show that once we move beyond time t, the Pigouvian tax becomes inefficient, and increasingly so.
Yes. Markets are extremely powerful anti-slavery tools.
No. The first sentence contains false assumptions (free trade tends to reduce slavery, not increase it. Besides, it is already illegal to purchase and sell slave-made products in the US). The second is irrelevant to the question of externalities.
There’s no reticence. None whatsoever. Everything I am saying is aligned though basic price theory.
Warren Platts
Mar 5 2023 at 10:50am
Good point. If the Western developed economies really were serious about lowering their share of global CO2 emissions, the single, easiest low-hanging fruit they could pluck would be to end imports from China. Indeed, literally all of the CO2 reductions the USA has managed to achieve in recent years due to fracking & increased renewables is offset by high CO2 emissions embodied in Chinese imports that wouldn’t be there if the same goods were manufactured in the United States. E.g., Chinese steel results in 4-5X more CO2 emissions per ton of steel than steel produced by Nucor (Dan Dimicco, personal communication).
Jon Murphy
Mar 5 2023 at 10:57am
Hm. Probably not easy or low hanging fruit. Indeed, it would likely increase Western share of carbon emissions.
Warren Platts
Mar 5 2023 at 2:47pm
Not at all. Ending the China trade would increase the West’s emissions from within their own borders. But, in terms of carbon emissions resulting from total Western consumption, the West’s global share of emissions would go down.
So it’s a trade-off: lower global CO2 emissions versus cheaper imported manufactured goods. Choose your poison…
Jon Murphy
Mar 5 2023 at 3:38pm
Unless we ignore basic mathematics, logic, and empirical evidence, that conclusion is unlikely.
Warren Platts
Mar 6 2023 at 7:03am
Jon, we must also take into account science and engineering. The engineers at Nucor have figured out how to produce steel at the rate of 0.47 tons of CO2 per ton of steel. Meanwhile, in China, they produce steel at the rate of 1.8 tons of CO2 per ton of steel. This is a big deal because the Chinese steel industry accounts for 15% of China’s total CO2 emissions. China exports around a hundred million tons of steel per year. If that steel were replaced by Nucor steel, global CO2 emissions would be reduced by ~150 million tons per year.
Jon Murphy
Mar 6 2023 at 8:26am
Unless you’re saying that accounting and engineering don’t contain mathematics, logic, and empirical evidence, I don’t see what your point is here.
You seem to be cherry picking with your NUCOR example. But let’s take it for a given. You still have a basic mathematics problem. If you reduce the denominator by a grater percentage than the numerator, then the share rises, not falls.
Warren Platts
Mar 6 2023 at 4:48pm
Huh? Not sure you mean because I can’t read minds and you refuse to write clearly. However, since we are talking about rates, we can both be assured the denominator is constant — 1 ton in this case — because the denominator in all rates are constant.
Thus if you can replace a ton of Chinese steel produced in an old fashioned coal-fired blast furnace (2 tons of CO2 per ton of steel) with a ton of American steel produced in an electric arc furnace (0.5 tons of CO2 per ton of steel), then you have just reduced global CO2 emissions by 1.5 tons. Right?
We can look at more general rates of CO2 embodiment, if you would prefer, such as CO2 emitted per dollar of GDP. In 2020, China emitted 2912 million metric tons of CO2 whereas USA emitted 1286 metric tons of CO2. In 2020, China’s GDP was $14.687 trillion whereas USA GDP was $21.060 trillion.
Therefore, China’s CO2/GDP = 198 grams of CO2 per dollar of GDP, whereas USA’s CO2/GDP = 61 grams of CO2 per dollar of GDP. Thus China’s economy is 3.25 times more carbon intensive than is the USA’s. So it’s not just Chinese steel that is more carbon intensive. It’s a general pattern in the entire Chinese economy — no cherrypicking needed. Consequently, it’s quite clear that generally replacing Chinese imported goods with Made-in-USA goods would have the salutary effect of reducing USA’s share of global CO2 production.
Jon Murphy
Mar 7 2023 at 12:36pm
I’m sorry. I assumed you knew how to calculate percentages and understood how relative changes worked.
Warren Platts
Mar 8 2023 at 3:32am
Thank you. I know you are very good at math and would have pointed out any specific mathematical errors on my part. Here is some more data on relative CO2 production rates, with a very interesting graphic you will like: you can visually observe China’s carbon emissions dramatically accelerate after PNTR. There is indeed a vast literature on the subject of the international trade of embodied GHG emissions.
Report: China emissions exceed all developed nations combined – BBC News
Jon Murphy
Mar 8 2023 at 8:52am
I did. You refuse to answer them.
Warren Platts
Mar 8 2023 at 9:47am
This is what you wrote earlier:
But it’s not the case that the denominator is reduced by a greater percentage than the numerator. Hence your statement is irrelevant.
The numerator gets reduced from 2 to 0.5 whereas the denominator (1) stays the same.
Therefore, the “share” falls from 2/1 to 0.5/1
QED
nobody.really
Mar 5 2023 at 4:43am
Has anyone built a model to test this–that is, to explore the variables that would make this claim true or false?
In the interest of simplicity, imagine a world with one buyer and two sellers–IN is located in the same country as the buyer, and OUT is located outside the country’s taxing authority. Imagine the country needs to raise $X, and will do so proportionately from all the profits generated in the country. If the buyer does business with IN, they both generate profits, and they share the burden of financing government. If the buyer does business with OUT, then IN generates no profits and the buyer must shoulder the burdens of financing government on her own.
Under this scenario, there may indeed be something “special” about doing business with OUT: All else being equal, the buyer would seem to have an interest in avoiding it. I don’t mean to say that OUT could not reduce its price/increase its quality sufficiently to win the buyer’s business–but this looks like a rather different model than conventional models of comparative advantage.
Jon Murphy
Mar 5 2023 at 6:49am
Many. The most famous is the one we all learn in a Principles class: comparative advantage. There are also more complex models (the Heckscher Ohlin model, for example). I don’t know your access, but Amy trade textbook you’ll find in a library will have models for you to explore.
International trade is one of the oldest subjects explored by economists.
nobody.really
Mar 5 2023 at 12:11pm
Delighted to hear it. Could you provide a link to a model that incorporates public finance burdens?
Jon Murphy
Mar 5 2023 at 12:44pm
IIRC, Paul Krugman’s International Trade textbook goes into detail (my books are in storage so I cannot go into detail).
robc
Mar 7 2023 at 8:10am
In a country of 2 people, the public finance burden will be zero or I will be seceding from the other IN.
Jon Murphy
Mar 5 2023 at 6:52am
It looks exactly like a comparative advantage model to me.
Warren Platts
Mar 5 2023 at 5:05am
Synthetic rubber made out of petroleum byproducts?
Synthetic rubber – Wikipedia
Comments are closed.