Trade Policies

Why Should We Care about Trade Policies?

Trade policies affect our lives far more than we realize. As producers, they supply access to more markets. As consumers, they offer us a wider choice of products. As citizens, they shape our ability to gain employment as well as the wages at which we are employed. If trade policies are allowed, these three competing interests must be carefully weighed because they are often at odds with each other. Unfortunately, the world has moved from fair trade policies of the past to the so-called “free” trade policies of today. Free trade has been a dismal failure and has been a primary factor in the worldwide global economic collapse we are now witnessing. But before we pass judgment, we need to understand what trade policies are.

What is a Trade Policy?

A trade policy is that collection of international agreements a country enters into that either allows or disallows access to their domestic markets by foreign governments. Note the conspicuous absence of the term “trade” in this definition. That’s because in the classic sense, there really is no trade involved. What’s really going on is price determination and engagement rules in a global marketplace.

Engagement Rules

The first question that needs to be addressed is whether or not to allow access to a particular domestic market. On the upside, allowing foreign competition into a domestic market offers consumers more choice. It can also offer lower prices, but the importing country needs to be careful when allowing access to a domestic market where they are also producers of the same product. Allowing unfettered foreign access to a domestic market can eliminate that domestic market if the prices are low enough. This might seem like a good idea to consumers, but it is shortsighted; a bad idea from the perspective of the country as a whole. See the resource Fair Trade on this website for more details about this topic.

Price Determination

The second task of trade policy formulation is price determination. Suppose Honduras is the only country that produces coffee. In that case, they can offer their product on the global market at whatever price countries are willing to pay. Most countries would allow access to their domestic markets because they don’t produce coffee and their consumers demand it. The price would be adjusted according to the exchange rate between each country. (We ignore commodity markets here because they have little to do with the fundamental understanding of trade policies).

The Normal Trade Process

But now suppose that Cuba also produces coffee, and so they offer their product to the global marketplace. If access to say the US market is granted to both countries, there will very likely be some price competition between them and we would expect to see the global price of coffee fall. This is good news for consumers. But note that this is not “free” trade - it is “normal trade.” It is supply and demand on a global scale, plain and simple.

Let’s Make a Deal

Normal trade policies are straightforward, but things can quickly get convoluted when countries start negotiating multi-market agreements. For example, I’ll give you access to these three markets if you can convince these other countries to give me access to their seventeen markets. So a trade ambassador has to take into account the net effect of all of their trade agreements when advocating for their constituents.

Measuring the Success of Trade Policies

From the perspective of an individual country; a “good” trade policy results in no loss in domestic employment, more choice for domestic consumers and a reasonable trade balance, preferably a trade surplus. Does this sound like America’s track record? In fact, it does not. The results are quite the opposite. Ever since America has moved from fair trade to free trade, there has been a net loss of millions of American jobs, American wages have fallen in real terms and America is dead last in terms of global trade – the highest trade deficit in the world.

How the West was Lost

Suppose India proposes a deal with America. India will allow access to their automobile market in exchange for access to America’s labor market. Now we’re talking “free” trade. They are “trading” Indian services (cheap labor) for American cars (products). Who benefits? It depends on the net effect, and also how that effect is measured. But it is obvious that the multinational and presumably the East Indian benefits. Who loses? American labor. Why? - Because they aren’t trading apples for apples. A fair trade would be to trade an equal number of Americans for Indians. But why would anyone do this? They wouldn’t – Americans are far more expensive than Indians; and so the inequity of an “agreement” like this is exposed. Modern trade agreements are often put together in this manner to mask the procurement of cheap foreign labor.

Long Term Consequences

Although it first appears that Americans working for the company doing the exporting of cars might benefit, in the long run there is nothing stopping the multinational from later manufacturing the “American” car elsewhere where the standard of living is lower, and hence wages are lower, hence costs are lower, hence the multinational has more room to raise profits. What we find is a potential increase in “shareholder value” at the expense of American workers. Further, the jobs the Indians are after are high-paying American jobs. Since “free trade” scenarios like this are now common, the best practice is to avoid any agreements having to do with labor or services. To “trade” in these areas is disastrous for the richer country.

Sustainable Capitalism requires Fair Trade

Free trade advocates would have us believe that free trade embodies the benefits of a free market. On the surface, this seems to be plausible. But closer inspection reveals an unfair advantage to the nation with a lower cost of living that will ultimately lead to a lower standard of living for the richer nation. If the difference in wages is high enough, it can even lead to the collapse of the economy of the richer nation. Why? – Because capitalism requires constant consumption. Without good-paying jobs, there is no consumption – and capitalism fails. So while we might be able to prop it up in the short run, long run sustainable capitalism requires Fair Trade.