When Politicians Say "Free Trade," They Mean Upward Redistribution
The long and short in this story is that "free trade," as it appears in
Washington policy debates, is pretty much whatever the rich and powerful
want it to be.
By Dean Baker, TruthoutPublished February 11, 2019
In Washington policy circles, being a supporter of free trade is pretty much
comparable to saying you believe in evolution. All reasonable people say
they accept the doctrine and agree that tariffs and other forms of
protectionism are evil and dirty.
While there are good arguments for free trade as an economic policy, in the
real world what passes for "free trade" is pretty much any policy that
redistributes income upward, even if it is directly at odds with free trade.
I have long harped on patent and copyright protection, both because I think
that these government-granted monopolies are bad policy (at least in their
current form), and because they are 180 degrees at odds with free trade.
The rationale for patents and copyrights is they provide incentives for
innovation and creative work, but there is a rationale for every form of
protectionism. This doesn't change the fact that patent and copyright
protection are still forms of protectionism. And, the imposition of stronger
patent and copyright protections, which has been a central component of
every trade deal for the last quarter-century, is a very costly form of
protectionism.
Needless to say, the beneficiaries of this protectionism tend to be in the
high end of income distribution. The list includes folks like Bill Gates,
the pharmaceutical industry and the entertainment industry.
But, this is hardly the only situation where the "free traders" depart from
free trade. The Export-Import Bank, which provides loans and loan guarantees
to exporters, has generally received strong support from self-described free
traders.
On its face, this is difficult to understand, since the bank is providing an
explicit subsidy to exporters by allowing them to get loans at below-market
interest rates. In the textbook, government subsidies for exports are 180
degrees at odds with free trade.
It is also important to note that the vast majority of the bank's loans and
guarantees benefit a very small number of companies such as Boeing,
Caterpillar and GE. In some years, Boeing alone has accounted for close to
90 percent of its loans.
When the Export-Import Bank was last up for reauthorization in 2017, its
proponents argued that the bank was necessary because our competitors
provided similar subsidies to their major corporations. In the textbook free
trade models, foreign subsidies aren't supposed to matter, since this just
means that foolish governments are subsidizing US consumers. Apparently, we
are supposed to think differently when the profits of major US companies are
at stake.
We actually got a chance to test the consequences of these companies doing
without the subsidies from the Export-Import Bank. As Charles Lane pointed
outin the Washington Post, the bank has been unable to issue large loans for
the last two years because Republicans in Congress have denied it a quorum.
Yet Boeing and our exports of planes seem to be doing just fine. In other
words, this was a just a subsidy to well-connected businesses that "free
traders" decided to support.
Another area where "free traders" seem to have little interest in free trade
principles is currency values. In a system of floating exchange rates, like
we currently have, large trade imbalances are supposed to be corrected by
changes in currency prices.
A country with a large trade surplus is supposed to see the value of its
currency rise relative to other currencies. This makes the goods and
services they produce less competitive in the world. By contrast, the
currency of a country with a large trade deficit is supposed to fall, making
its goods and services more competitive.
This process can be thwarted if a country buys up large amounts of dollars
or other reserve currencies to keep its currency from rising. This is what
China did in the last decade. There is now general agreement that China
acted to deliberately hold down the value of its currency to keep its
competitive advantage.
While China has stopped buying large amounts of currency, it still holds a
huge amount of reserves, which has the same effect. While some of us have
noted this point, most news accounts are dismissive of the idea that China
is holding excessive reserves and thereby keeping down the value of its
currency.
For this reason, it was surprising to see a New York Times articlethat
asserted as a matter of fact that "Russia has $472 billion in reserves, more
than the country's combined public and foreign debt of $453 billion and
nearly three times what the IMF recommends."
China's reserve holdings, counting its sovereign wealth fund, are more than
ten times as large. While China's economy is roughly eight times the size of
Russia's, this means that the size of its reserves, relative to its economy,
is actually greater than Russia's, which the NYT told us is "nearly three
times what the IMF recommends."
This matters because it means that China is still holding down the value of
its currency to maintain a competitive advantage in the international
economy. If we had an administration that was concerned about the US trade
deficit with China, it would be pushing for the country to offload some of
its reserves and allow the value of its currency to rise.
Note, this is what is supposed to happen in the free trade story.
Governments are not supposed to be acting to prevent the price of their
currency from rising.
Instead, to the applause of the "free traders," Trump is pressing demands to
force China to show greater respect for US patents and copyrights. If he
succeeds, this will mean US companies will have more incentive to outsource
jobs to China, since they have less reason to fear transfers of their
technology.
The long and short in this story is that "free trade," as it appears in
Washington policy debates, is pretty much whatever the rich and powerful
want it to be. It has nothing to do with the economic concept of free trade;
it is about redistributing more money from everyone else to them.
