Dear Dr. Mankiw,
I have been a long-time reader of your articles, blog, and other writings. Your recent piece in The NY Times (Reviewing the tenets of Free Trade, Feb. 18 2018) should feature a prominent label, like a cigarette pack, stating "This article is academic and theoretical and should not be applied to real world situations. The ideas expressed within may be harmful to you and others."
Like the famous dictum that the battle plan is the first causality of contact with the enemy, your article, while argued well as part of a Econ 101 discussion, falls apart on contact with the realities of supposed "free trade." Not that I am anti-free trade. On the contrary, I recognize that trade based on competitive advantage can be more economically efficient, in theory. In reality, the differences between countries and economic systems make these discussions as relevant to real-life conditions as the assumptions like that of a frictionless atmosphere in Physics 101. Theoretical constructs like economic efficiency and free markets simply do not exist. A blanket condemnation of tariffs and other regulations placed on the ivory tower ideal of free trade is ridiculous. In reality, mechanisms like regulations and tariffs are necessary and can act to improve trade relations and the welfare of actual people on both sides of the trade.
In your (theoretical) example of England and Portugal, you state that "Both nations would end up better off." You fail to note that "better" refers to the aggregate at best and to nobody in all likelihood. This statement, like the "increase in income per person of at least one-half percent," fail because of the fallacy of averages. If Mr Gates walked into my house, household income would increase several orders of magnitude, but I would still be cutting coupons. Let me give you several counter-examples.
American manufacturing of steel, machinery, and machine tools was certainly world-class in the 50s and 60s. Over time, Japanese, and later Chinese, companies developed [some would say stole] American techniques and processes to become competitive and then to replace these industries. Why? Largely because their prices were lower. Does this mean that Japan and Chine had some competitive advantage? Yes, but only by acquiring techniques and IP from the originators, paying lower wages to employees who worked in what US employees would recognize as substandard and unsafe conditions, receiving subsidies from both their own government and the US government, and ignoring environmental concerns and polluting at will.
As a southerner, I have seen the effects of the collapse of the textile industry and its effect on communities here. Those companies moved their manufacturing offshore facilitated by a "free trade" regime. Further, I have visited clothing factories in Mexico and athletic shoe and clothing factories in Indonesia. I can say, without fear of contradiction (except by lies peddled by the shills of such that benefit from supposed "free trade" or paid apologists for the owners of these modern sweatshops) that these factories are not models of safe manufacturing processes staffed by happy, well-paid workers.
Indeed, again and again, you hear the drumbeat of "too much regulation" from the US GOP and right wing media, with particular wrath directed to OSHA and the EPA. Escape from regulation has been one of the driving forces for the offshoring of US manufacturing. That alone should give the thoughtful free trade evangelist pause. To state the obvious, when a factory which treats the employees fairly, is safe, and deals with waste and pollution properly is compared with another which underpays the workers, ignores safety concerns and indeed is located in a country where there is no worker compensation or other support system for injured workers (even given that such programs in the US are frightfully poor and functionally almost non-existent), and dumps and pollutes at will, of course the prices of product will be less. But that's not competitive advantage, that's a free trade regime exporting worker exploitation and environmental degradation.
Regarding the tariffs on solar panels from China, I am not familiar in detail as to whether they are actually subsidized by the Chinese government, by how much, and whether those subsidies are quantitatively different from the subsidies the US government has given to US manufacturers. It strikes me that this move is not related to an attack on free trade at all but is a stratagem to inhibit competition with established players in the energy sector, particularly oil companies - which now have so throughly captured the regulators that Exxon's climate denier-in-chief now serves as the entire US State Dept.
Of course, any free trade theory or competitive analysis fails when considering state economies based on extractive industries, especially considering trade with countries which may not possess such resources or have no alternative sources. As an paradigm for such resource-based economies, consider oil. In almost all countries with significant oil industry, leaving aside the prominent outlier Norway, the money goes to a corrupt, unelected government of sheiks, mullah, kleptocrats, apparatchiks and to the executives and well-connected board members of the extractive companies. Yes there are shareholders, like me, but we never see the millions which disappear into the pocket of executives, consultants, politicians, and the other members of that parasitic constellation. Further, the US has been complicit in installing and propping up these regimes. [Meanwhile, in the US, profits are privatized and costs are socialized, as usual. Spills are "cleaned up" with public dollars, the irreversibly poisoning of surface and subsurface water supplies is denied by payees and apologists of the fracking industry, the air pollution is ignored while corporate media promotes Potemkin solutions like hybrid or electric vehicles, and the climate change related to burning of this toxic material is denied right up to the top of the government.]
Or consider Zaire, an important source of tantalum, needed for electronics manufacture, and cobalt, used in batteries and high durability alloys. While ostensibly "American' companies like Apple, Intel, Tesla, and Qualcomm, and their Asian competitors freely buy these raw materials, they are mined by poor villagers and children, dragooned into mining under the guns of private militias, while the proceeds flow to warlords and corrupt government officials. There, the competitive advantage is slavery. Or, well, the list goes on.
Most Americans would recognize that free trade between such vastly different countries in not free trade at all but exploitation of the people on both sides of the trade. One one side to enrich the warlords, kleptocrats, and governmental cronies abroad, while here in the US, the benefits flow, almost exclusively to the "1%" and their employees in the judiciary, legislative, and administrative branches of our government. Workers are displaced while the plainly stated intent for the party in power is to further undo what remains of the social “safety net.” Has American productivity increased in the era of NAFTA, CAFTA, and the (thankfully) aborted TPP? Yes, as has GDP per capita and income per person. But has this translated in a benefit for textile workers, steel workers, machinists and hourly workers of all kinds? Not so much. In particular, average wages and wage growth have been flat or even negative, while vast majority of the benefits of such "free trade" have flowed to very few. But, on average, things are great!
So, can tariffs improve this exploitation of workers and destruction of the planet? Yes. If oil and coal were taxed to fully cover all of their now externalized costs, including environmental, prices would likely more than double, less would drive, less cars would be sold, and there would be a greater political push for mass transport and other solutions. Further, solar power, which is already competitive, would become the obvious choice. [It might accelerate the change from the car and fossil fuel economy we have adopted in the last 100 years. This will come anyway, but perhaps it can come sooner. In any case, in a century or two, the survivors (hopefully there will be some) will be looking back on this period as a great and destructive mistake.] If an appropriate tariff on Indonesian sweatshops' output was placed, American manufacturing would be competitive, and that would be a net benefit to workers in the US but not so much to the owners of these companies. As to whether Indonesian workers benefit, that would depend on the desire of the local factory owner and government to actually compete on an equal level, instead of competing on who can most effectively exploit the system.
Posted to No Hair Blog, Feb. 18, 2018
Copyright by nohair.net and the author