What do we really want from free (r) trade? Back to first principles

As we start the renegotiation of NAFTA, there is lots of chatter in the media about the importance of trade, how critical it is to the Canadian economy, how it boosts GDP by x and makes us more productive, yadda, yadda, yadda.

It’s important to go back to the start and ask ourselves what we are trying to accomplish with free (r) trade.  And, by the way, close cousins – free movement of people, free flow of capital, and free flow of ideas – may be even more important now.

Why trade at all? Why not build self-contained economies and have all goods and services produced within the hermetically sealed bubble?

I think Jared Diamond provides some core reasoning as to why trade matters. Diamond is best known for the Pulitzer prize winning Guns, Germs, and Steel, but I prefer Collapse if you want a good chronological view of how economies/states evolved over time.  Certainly trade is not the focus of either book but you get a good overview as a bonus.

The bottom line is that trade is supposed to be mutually beneficial.  While the benefit may be a bit lopsided there would be no reason to pursue free (r) trade if one jurisdiction benefited and the other hurt.  Diamond talks about the earliest recorded examples of trade – inland tribes that were good at making arrowheads and other instruments from stone trading with coastal tribes that were good at harvesting fish.  The benefited from the expertise of each other and both were better off.

Many economists tend to have a fairly stern view of the impacts of trade.  Yes, it will cause economic upheaval in specific industries and geographies within the country but overall it will be better for the whole.

But in free, democratic jurisdictions, pure economic efficiency can get grounded on the shoals of practical reality.  If enough communities and industries are hurt by trade (even if that is offset by winners), you can get Trump and this mood of anti-free trade.

Of course, the cold blooded economist looking at spreadsheets and crunching data will say that countries need to encourage broad intra-jurisdictional migration, retraining rather than income subsidization and more of a ‘tough love’ to the transitional period.  They (many) argue that the same ruthless efficiency brought to industries by free trade should be applied to the labour market.

But that again ignores some fundamental issues.  Lots of people like where they live.  They don’t want to move.  It’s hard to retrain people – you can’t just snap your fingers.  And there is that little thing called democracy.  If the people revolt against trade…..

There hasn’t been much backlash about free trade in Atlantic Canada.  People are told on a regular basis that we are highly dependent on exports – fish, wood, agriculture, oil – and that has more or less sunk in.

For me, I think the starting point for the concept of free (r) trade in democratic societies has to be mutual benefit – quid-pro-quo.   I’ve written about this on many occasions.  There is good research (see Gladwell) that people will actually accept a worse outcome for themselves if they perceive the other party is getting a greater benefit.  If someone is offering to give you and I $100 but you get to decide how to divide the money and I get to decide whether or not the deal gets done – the research shows you have to get pretty close to 50/50 to get acceptance.  In some pure, spreadsheet economic theory I should take $1 because it is better than $0 – but I find it egregiously unfair that I would get only $1 while you get $99 even though I am better off by $1.  So I will kibosh the whole thing because you are getting a better deal than me.

I will hurt my economic fortunes because I perceive you are getting a ‘better deal’.

Human nature and democratic politics will not be usurped by economists.

 

 

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