Another round in the Pino-Dougherty free-trade bout.
I’m surprised how many rounds this can go.
Dominic objected to the first premise of my two-sentence case for protectionism. I restate it yet again:
A global free market is necessarily indifferent to the distribution of goods, skills, technological capacities, and power among nations. Statesmen cannot be so indifferent.
In response Dominic believed he was refuting me by saying “they are not indifferent” because markets respond ruthlessly to prices and profits.
Markets are not indifferent to where and how goods and services are produced. They are highly — ruthlessly — partial to producing them where and how it is most profitable to do so. [Emphasis added.]
Well, that’s exactly my point, I said. This isn’t refutation, but agreement. Dominic is saying that markets care about price signals, and profits determine the distribution of skills, resources, manufacturing. The market actors discriminate based on prices, not nationality.
For some reason, however, Dominic doesn’t accept the meaning and implication of these words. And so in his second response, he writes.
I responded that it is not indifferent, but rather is guided by profit-loss and price signals, which incorporate information that no government could ever gather. [Emphasis added.]
Yes, again, he said it was partial to profit-loss and price. I said it was indifferent to nations, not “indifferent to location as such” or indifferent to location as qualified by price.
Unbelievably he responds by making my very point again:
Michael clarifies that he believes “on principle [markets] don’t consider politics or nationality in location.” Completely untrue, as I wrote.
Countries that have stable institutions, strong protection of property rights, better trained workforces, and a variety of other things that are favorable to profit-making are more likely to be trading partners than countries that lack those things. When a U.S. business decides to source components from another country, it is never indifferent between countries. It is partial to the country where it can best make profits by sourcing from there.
Yes, it discriminates on the principle of price, not nationality. The national distributions are accidental and unintended consequences of the price consideration. Prices are not equal to nationality and are not even a strong proxy for nationality. That countries that have good, stable, free-market systems and strong property rights are good for business was not under dispute. But this fact tells you nothing about “where it [any particular venture] can best make profits. . . .” The quality and freedom of the domestic market or the education of the people may be overwhelmed by other considerations and often is. Apple invested $55 billion in China not because of that country’s highly educated and highly trained workforce — it was Apple that educated and trained them — but because the Chinese Communist Party earnestly desires this kind of investment and the knowledge transfer that goes with it, and so builds the infrastructure, sources the energy, subsidizes the Chinese partners of Apple. Imagine trying to get Foxconn’s suicide nets approved by a local government in Albany, N.Y.! It might be even harder than getting the emissions standards to be competitive with China’s. This wasn’t just a simple story about the triumph of competitive advantage in fair competition, but making money through policy arbitrage. I’ve asked, which is the freer market, the domestic market of the United States, with its freedom for labor and similar patterns of regulation and subsidy, or the United States plus its current level of trade with China, which includes all of China’s mercantile policy, its legally encumbered workforce, its lying about environmental regulations. Of all the supporting arguments I’ve brought up, this should be the simplest question to answer, if defining freedom in markets is easy and the international free-market trade is such a simple extrapolation from property rights. I suspect we don’t get it, precisely because the economic marriage and intercourse of America’s market and China’s radically different kind of market is legally complex, requires serious political reflection to apprehend, and is just nothing like the virtuous type of free exchange that justifies the market economy.
One other note: Dominic says he doesn’t support the existence of China’s state-controlled enterprises. Fine. But they exist. Is it still free trade? The ultra-libertarian argument for free trade is unilateralist and treats foreign mercantile policy and subsidy not as a threat, but as a stupid gift given to foreign trade partners. “Thanks for the cheaper ships, dummies!” Other free traders are willing to make exceptions for geopolitical rivals, or at least to resort to international trade bodies to fight dumping or other unfair practices.
Dominic throws down a gauntlet, asking me to account for the current tariff policies. I don’t expect him to listen to every episode of The Editors nor to read everything I write on the site. But here are his questions with my short, sometimes glib answers inserted into the text in bold.
Does he support the massive tariffs on trade-surplus partner Brazil because Trump is mad about Jair Bolsonaro? [Wouldn’t be my idea, but I’m open to the idea that using our leverage can lead to some other positive negotiated deal, like building a more united bloc against China.] Does he support the higher tariffs on India over Russian oil purchases, pushing India toward China, while the China “truce” continues even though China buys more Russian oil than India does? [No, I think sanctions don’t have a good record in accomplishing diplomatic goals, and secondary sanctions are even worse. I addressed it here a few weeks ago.] Does he support enormous tariffs on metals and other inputs to domestic manufacturing? [On balance I probably prefer friendshoring but am open to an argument or a sustained policy to modernize the American steel industry.] Does he support tariffs on coffee, bananas, and other natural products that simply do not grow here in large amounts? [Not in principle, but again, as I believe these are expedients, a temporary raise could be justified if it had a solid chance of encouraging more purchases and investment in America. This seems unlikely in the case of Madagascar, which probably has less need of our financial services than we do of its vanilla, but the dumbest thing that advocates of protection or free trade do is preemptively announce which industries belong to which countries as if it were a matter of law.] Does he support the 39 percent “reciprocal” rate on Switzerland, which had basically no tariffs on U.S. goods at all, [No, but only because I like Swiss watches, not because I’ve given it reflection.] and the other “reciprocal” rates that are generally far higher than foreign rates levied against U.S. goods? [I take seriously but not literally the admin’s case that other nations have regulatory barriers that they could remove to make our markets more fair.] Does he support the billion-dollar tariff bills foisted on American automakers? [Answered sufficiently above.] Does he think the $150 billion tax increase that the White House is bragging about is beneficial to the economy? [Tariffs are not a particularly efficient source of revenue, but I was cool to the renewal of some tax cuts because I believe our debt is also a serious problem.] Does he support the national-emergency declaration the president is claiming as a blank check to do all of this unilaterally? [As I’ve said on numerous podcasts, I believe Congress should set gradualist tariff policy to give it the effect of permanence around which investors can plan, at least when the goal is something like decoupling, or encouraging long-term investment in capturable resources and industry. However, Congress wasn’t entirely wrong in thinking that when they are used as negotiation tools, the executive, not Congress, is a more appropriate office.]
In any case, while it is true that some entrepreneurs — many — do sacrifice some level of profit to provide for other social goals, even patriotic ones, I hold that my first premise has not been seriously challenged, but rather confirmed: “Global free markets are indifferent to the distribution of goods, skills, technological capacities, and power among nations.” They are, exactly as Dominic said originally, “highly — ruthlessly — partial to producing them where and how it is most profitable to do so.”
The only conflation with nations is insofar as it matches price signals and profit motives. That is my point. The “ruthlessly” rather emphasizes it.