Barack Obama’s recent statement on fair trade, a statement applauded by some leading Republicans, contains some easily recognizable errors in international trade theory. The central problem with his remarks is seen in his following position:
Now, one of the things that I talked about during the State of the Union address was making America more competitive in the global economy. The good news is that we have the best workers and the best businesses in the world. They turn out the best products. And when the playing field is level, they’ll always be able to compete and succeed against every other country on Earth.
But the key is to make sure that the playing field is level. And frankly, sometimes it’s not.
Here we see the view, commonly held by the media and non-economists in our universities, that international trade is a competition, analogous to sports or military competition (sometimes, “trade competition” is compared to the Cold War). If the playing field is not level, then the trade is not fair. Economists, and this view is not limited to Austrians, understand that international trade is the fruit of cooperation, not competition. America and China are not trade competitors. Paul Krugman thoroughly demolishes this fallacy in “The Illusion of Conflict in International Trade” (reprinted in Krugman’s Pop Internationalism). Krugman explains that in international trade “it is the illusion of economic conflict, which bears virtually no resemblance to the reality, that poses the real threat.”
The danger in Obama’s position is that he pledges to do something about China’s trade practices:
Since I took office, we’ve brought trade cases against China at nearly twice the rate as the last administration, and these actions are making a difference. For example, we halted an unfair surge in Chinese tires, which has helped put over 1,000 American workers back on the job. But we haven’t stopped there.
Two weeks ago, I created a Trade Enforcement Unit to aggressively investigate any unfair trade practices taking place anywhere in the world. And as they ramp up their efforts, our competitors should be on notice: You will not get away with skirting the rules. When we can, we will rally support from our allies. And when it makes sense to act on our own, we will.
Obama is threatening China. Our government will “aggressively investigate,” other government’s actions, other countries “should be put on notice,” governments that obey Obama’s decrees are our “allies,” and he’s willing to take actions against those that refuse to bow down to the U.S. state. Fortunately, Obama does say that “we prefer dialogue” to more aggressive actions, but he doesn’t limit his actions to negotiations. Government managed trade in the name of fair trade reduces our gains from trade, but the danger in Obama’s position is that it could lead to real conflict with China that goes beyond the illusion of conflict seen by our political leaders.
For some sound reasoning on this issue, see Krugman’s Pop Internationalism. In addition to the paper mentioned above, I recommend “Competitiveness: A Dangerous Obsession” and my favorite chapter “What Do Undergrads Need to Know About Trade?”