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Thursday, December 7, 2017

“Unfair” Advantage Is No Excuse for Protectionism

A foreign governments' market interventions do not justify prohibiting trade with them.

A recent Wall Street Journal story reports that the longer growing season of Mexican farmers is seen as a cause of dumping and that a renegotiated North American Free Trade Agreement may have to compensate for this comparative advantage of Mexico:

American farmers, however, complain that their Mexican rivals enjoy unfair advantages, including low-cost farm labor, state subsidies and a year-round growing season that lets them dump cheap berries on the U.S. market when the two countries’ growing seasons overlap in the late spring.

Perhaps the reporter or editor’s interpretation was a bit loose (the reporter did not respond to my inquiry regarding whom exactly he was citing). But note how, in a similar way, French farmers complain against the unfair weather advantage of their Spanish competitors:

French farmers and winegrowers dumped some two tons of peaches and nectarines in front of the Spanish consulate … in order to denounce Spanish competition, deemed “unfair.” … For [a fruit growers’ spokesman], “a European solution is needed.”

It is difficult to believe if you haven’t seen it with your own eyes, but economic savvy is even less common in France than in America. This is a bit distressing nearly two centuries after French economist Frédéric Bastiat wrote his petition of candle makers disadvantaged by the competition of the sun. “If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun,” Bastiat noted.

In The Wealth of Nations, Adam Smith defended the importation of wine even if “[b]y means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them.” As he explained, domestic production would cost “about thirty times the expence for which at least equally good can be brought from foreign countries.” Or, to borrow an example from William Taussig, very good pineapples could be grown in Maine with similar means.

Comparative Advantage

Geography, weather, and other natural conditions create justifiable comparative advantage in trade. Except if one is an ascetic, it is not rational to produce by oneself what somebody else can produce more cheaply in another climate.

The question is which features of the world count in comparative advantage?

However – and here is a little challenge – the distinction between “natural” and “artificial” conditions is not as neat as one might think. Some geographical conditions can be changed by human entrepreneurship or government intervention. If hothouses have been built with a government subsidy and their cost is sunk, don’t they now represent a comparative advantage?

Ski resorts can be built and artificial snow made, possibly with government subsidies. Ignorant people can be instructed, even in government schools. Moreover, some phenomena straddle the distinction between the natural and the artificial, that is, phenomena like language, culture, and morals (see chapter 1 of Friedrich Hayek‘s vol. 1 of Law, Legislation and Liberty).

The question is which features of the world count in comparative advantage? Swiss producers’ strong work ethic and Canadians’ use of English help determine their comparative advantage. Economies of scale benefit producers who have come to serve a larger market.

Market institutions and a political system favorable to enterprise also help determine comparative advantage. But don’t the Chinese government’s subsidies and other assistance to Chinese businesses also help determine the latter’s comparative advantage? Similarly, aren’t the subsidies that aircraft maker Bombardier got from the Canadian and Québec governments now part of the company’s comparative advantage?

Subsidies change relative prices, but trade proceeds from that point on.

Such interrogations are related to an important argument made by Paul Krugman in an article later published in the Journal of Economic Literature (“What Should Trade Negotiators Negotiate About?” 35-3: 113-120). Krugman argued that government regulations and taxes are part of the comparative advantage landscape; they do change relative prices, but trade proceeds – and should be left to proceed – from that point on.

Intervention Doesn’t Negate the Benefits of Trade

This comprehensive concept of comparative advantage does not invalidate arguments against inefficient or immoral regulations, taxes, or subsidies. We may wish (often contra Krugman) that these measures do not exist in our own country, and try to persuade foreigners that they should not be subjected to them either. But they do not extinguish comparative advantage and negate all benefits from trade.

Except perhaps in extreme cases (for example, trading in stolen goods, such as goods made with slave labor), foreign governments’ interventions do not justify another government prohibiting its own residents from trading with the regulated or subsidized foreigners. One can wish that one’s trading partners were freer and thus more productive and wealthy, but it remains beneficial to trade with them, even if not as much as it would be in an ideal world where everybody were perfectly free.

As Krugman suggests, this wide view of comparative advantage reconciles free trade and political decentralization at the world level. It is beneficial and possible to have both.

Comparative advantage continues to exist under intervention.

On the one hand, political decentralization is necessary to preserve liberty and experimentation, as opposed to a world government. Different peoples can have different sets of regulations, including less regulation. There is no need to impose standards or regulatory harmonization in “free trade” agreements. On the other hand, the benefits of free trade are preserved because comparative advantage continues to exist under intervention, although with some distortions. The distortions introduced by a world government monopoly would certainly be worse.

This line of argument supports the idea that unilateral free trade is beneficial: it is in the interest of (most of) a country’s residents to be free to import at will whatever obstacles other national governments impose on their own citizens or subjects.

Reprinted from the Library of Economics and Liberty.

  • Pierre Lemieux is an economist affiliated with the Department of Management Sciences at the University of Québec in Outaouais, and a senior fellow at the Montréal Economic Institute.