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The Cult of Free Trade in a Nutshell

Summary:
The argument for unrestricted free trade by Ricardo’s principle of comparative advantage requires a number of stated or hidden fundamental assumptions to work properly, as follows:(1) domestic capital or factors of production like capital goods and skilled labour are not internationally mobile, and instead will be re-employed in the sector/sectors in which the country’s comparative advantage lies;(2) workers are fungible, and will be re-trained easily and moved to the new sectors where comparative advantage lies.(3) it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage;(4) technology is essentially unchanging and uniform; and(5) there are no returns to scale. Assumption (1) doesn’t hold today and what happens is movement of capital under the principle of absolute advantage (Lavoie 2014: 508). This results in a type of race to the bottom for industrialised countries that do not protect their industries.(2) is of course highly questionable. (3), (4) and (5) are utter nonsense. Abstract pro-free trade arguments often seem to make the implicit assumption of full employment, or the effective tendency to full employment, in all nations as well, which is yet another mad and unrealistic assumption (Lavoie 2014: 508).

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The argument for unrestricted free trade by Ricardo’s principle of comparative advantage requires a number of stated or hidden fundamental assumptions to work properly, as follows:
(1) domestic capital or factors of production like capital goods and skilled labour are not internationally mobile, and instead will be re-employed in the sector/sectors in which the country’s comparative advantage lies;

(2) workers are fungible, and will be re-trained easily and moved to the new sectors where comparative advantage lies.

(3) it does not matter what you produce (e.g., you could produce pottery), as long as you do it in a way that gives you comparative advantage;

(4) technology is essentially unchanging and uniform; and

(5) there are no returns to scale.

Assumption (1) doesn’t hold today and what happens is movement of capital under the principle of absolute advantage (Lavoie 2014: 508). This results in a type of race to the bottom for industrialised countries that do not protect their industries.

(2) is of course highly questionable. (3), (4) and (5) are utter nonsense. Abstract pro-free trade arguments often seem to make the implicit assumption of full employment, or the effective tendency to full employment, in all nations as well, which is yet another mad and unrealistic assumption (Lavoie 2014: 508).

Movement of capital to a place where it has absolute advantage tends to cause de-industrialization in Western countries, as capital moves to nations with the lowest unit labour and factor costs, and higher wage countries experience falling wages, high unemployment and rising trade deficits.

A country like China actually makes the process worse by actively intervening via mercantilist industrial policies to promote offshoring of manufacturing to their country. But even if this intervention didn’t happen, unrestricted free trade would still have deleterious consequences for the high wage countries. For Post Keynesian alternative policies to free trade, see Norman (1996), Cripps and Godley (1978), and Lavoie (2014: 507–512).

The argument for pure free trade is built on sand and is almost wholly intellectually bankrupt if it is supposed to be describing the world in which we live. A longer analysis is here. This theoretical incompetence in neoclassical and Austrian economics on the issue of free trade is accompanied by a blockheaded ignorance of the real-world success of protectionism (see Bairoch 1993; Chang 2002 and 2008; Hudson 2010; Reinert 2007).

The argument for free trade would be a joke, if it didn’t have such disgusting and terrible consequences for real human beings.

Look at the images of Detroit here and weep. This once prosperous city has been wrecked by the cult of free trade.

Further reading
“The Early British Industrial Revolution and Infant Industry Protectionism: The Case of Cotton Textiles,” June 22, 2010.

“Protectionism and US Economic History,” June 8, 2014.

“Mises on the Ricardian Law of Association: The Flaws of Praxeology,” January 25, 2011.

BIBLIOGRAPHY
Bairoch, Paul. 1993. Economics and World History: Myths and Paradoxes. Harvester Wheatsheaf, New York and London.

Chang, Ha-Joon. 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. Anthem Press, London.

Chang, Ha-Joon. 2008. Bad Samaritans: Rich Nations, Poor Policies, and the Threat to the Developing World. Random House Business, London.

Cripps, Francis and Wynne Godley. 1978. “Control of Imports as a Means to Full Employment and the Expansion of World Trade: The UK’s Case,” Cambridge Journal of Economics 2.3: 327–334.

Hudson, Michael. 2010. America’s Protectionist Takeoff, 1815–1914: The Neglected American School of Political Economy (new edn.). Islet, Dresden.

Lavoie, Marc. 2014. Post-Keynesian Economics: New Foundations. Edward Elgar, Cheltenham.

Norman, Neville R. 1996. “A General Post Keynesian Theory of Protection,” Journal of Post Keynesian Economics 18.4: 509–531.

Reinert, Erik S. 2007. How Rich Countries Got Rich, and Why Poor Countries Stay Poor. Carroll & Graf, New York.

Robinson, J. 1973. “The Need for a Reconsideration of the Theory of International Trade,” in M. B. Connolly and A. K. Swoboda (eds.), International Trade and Money: The Geneva Essays. Allen and Unwin, London. 15–25.

Lord Keynes
Realist Left social democrat, left wing, blogger, Post Keynesian in economics, but against the regressive left, against Postmodernism, against Marxism

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