A Conversation About Free Trade in the 21st Century

On this episode of the Authors Corner, Ethan sits down with AIER Senior Fellow Don Boudreaux, who is also a board member at the Mercatus Center, a professor of economics at George Mason University, and the former president of the Foundation for Economic Education. His research specialties include globalization and trade, law and economics, and antitrust. He also runs the blog Cafe Hayek alongside a number of other roles. The topic of this episode was free trade and contemporary challenges. 

To start off the interview, Don takes us through the history of trade as an economic phenomenon and how the idea of almost unhampered free trade was a recent development. The world has never been so interconnected and societies have always been fundamentally skeptical of open commerce. There are a variety of reasons for this, some of them very much making a resurgence. These include a misunderstanding of how trade works, protectionist interests, and a distrust of foreign entities. 

The first great truth about trade is that countries do not trade, people trade. Although it may be easy to present trade as a video game; country X decides to exchange resource A for resource B with country Y, that is not only an inaccurate representation, but it is actually a dangerous way to understand trade. Trade is more like buying something online; it’s an interaction between a buyer and a seller that just happens to be in different countries. Individual consumers and firms make countless purchases based on their individual needs much like they would in a domestic market. 

Free trade would essentially be this process unhindered by protectionist quotas and tariffs. By opening up countries to trade, it’s essentially an expansion of their domestic market as more products and services are able to enter. As a result, consumers are able to access more diverse goods, suppliers face greater competition as well as inspiration, and the economy becomes more dynamic as a result. This is why Don takes issue with the constant concern with trade deficits, which he explains are not only a nonissue, as it simply means we are importing more than exporting, but deficits typically signal investment in the hopes of future purchases. 

Countries that run trade surpluses, like China for instance, also specialize in manufacturing cheaper goods which isn’t that exciting for the Chinese people that have to work those jobs but very helpful to Americans who import those goods. It goes without saying that it’s also good for the Chinese when we purchase those products; it’s a win-win situation. 

Another contemporary issue Don touched on was the idea of repatriating supply chains, which has been a common talking point for those that peddle soft protectionism. Although many supposed free marketeers would reject outright tariffs or industrial policy, many seem to have a soft spot for the idea of bringing “critical supply chains” back into the US. This could be anything from energy, of which the Trump Administration proudly touted our domestic production of fossil fuels or anything that could be deemed a “national security concern.” Repatriating supply chains is not good or bad in and of itself provided it happens naturally. However, many politicians who make this argument believe that the government should take measures to arbitrarily promote the repatriation of production. This would forgo many of the comparative advantages brought about by producing goods elsewhere and would likely create inefficiency in resource usage. Furthermore, politicians will likely abuse the label of “national security” to divert resources to their favored constituencies rather than actually shoring up production capacities for critical resources.

Don and Ethan saved the tough questions for last as they ended by discussing contemporary issues when it comes to trade with China. Although all economically sound minds can agree that the trade war was a bad idea, Ethan pushed Don on more contentious issues such as forced intellectual property transfers and slave labor allegations in Xinjiang. 

On this question of slave labor, Don first qualified that we need to be very careful about using such allegations to justify hard policy decisions. Is it truly slave labor or is it more along the lines of the poor working conditions that are common throughout the developing world? The US government does not have the best record on honesty when it comes to accusing its geopolitical targets of misconduct. If it is the latter, then we should understand that not all countries can magically have the same working conditions as we do in the United States, and it is likely those jobs are the best thing available. If it is slave labor, then it should be exposed to the world and consumers should be informed. At the end of the day, it is China’s loss for resorting to the use of slavery, which on top of being a moral failure, is nowhere near as productive as voluntary labor. 

The question of forced intellectual property transfers is also a complicated question. For one, Western companies are voluntarily choosing to hand over IP to do business in China, and attempting to copy the designs of successful companies is a universal practice. Another issue is that numbers on this issue are inconsistent. The Trump White House, for example, claimed that IP theft was far more damaging than what was found by independent studies. Furthermore, China’s behavior will likely come back to haunt them as companies themselves will become hesitant to invest in China in the face of growing opportunities elsewhere. All this raises the question of whether retaliatory trade measures would be appropriate or productive. 

At the end of the day, free trade is a principled commitment that not only enables a system of mutual benefit but is a pathway to a more open and prosperous world.

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