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| quote: | Originally posted by MrJiveBoJingles
How is free trade a zero-sum game? |
Basically because national welfare increases with an optimal-level tariff, and both countries engaging in trade know it.
I've posted this several times already, but nobody has ever responded.
| quote: | Originally posted by Lebezniatnikov
Free trade is not the norm in the international system - autarky is. Free trade necessitates the lowering of tariffs in order to reach parity on both sides, where goods and services can flow between countries unimpeded. Under Ron Paul, this would never happen for several reasons.
First, his unwillingness to negotiate bilateral trade agreements (which is really what the GATT is) is telling - he wants to eliminate all prior agreements for trade liberalization and start from scratch. Ok. But how do we reach freer trade from autarky if we don't craft bilateral agreements with other countries, thereby giving up some of our precious national sovereignty? We can't. Autarky will not only be the state of nature, but it will also be the norm under Ron Paul. He may not profess to be a protectionist, but the international system will force his hand.
Second, bilateral trade negotiation privileges have in the past been given to the President to allow the Executive branch the authority to arrange bilateral arrangements with other countries. It should be mentioned that the provision has been allowed to sunset, and is not one that the Administration currently enjoys. However, taking a look at the method of these negotiations is illuminating. Namely, the United States Trade Representative, not the President, is the official trade liason abroad, and it is her office that has wide-ranging authority over trade agreements. As it should be - she is an economist and understands optimal tariff levels, etc. But it is the USTR that evaluates tariff levels in the United States and reaches out to other countries under the provisions of the GATT to negotiate trade liberalization. Congress simply couldn't handle that today, especially not since they seem to struggle getting so much else done. That is the main reason the President is sometimes granted that fast-track authority - Congress entrusts him to delegate the authority to make decisions to someone both knowledgable and capable of actually getting them done.
Third, going away from free trade would be tremendously bad for the economy. Economists are almost unanimous on the point that free trade is indeed good for countries. Not necessarily individuals, as some certainly are hurt (particularly labor forces in import-competing industries), but on the aggregate, more people are positively affected in greater ways than those fewer who are affected negatively.
Let me illustrate the following point to make this a bit more clear. If you take two countries, the United States, and say, Lira's Brazil, you can see why free trade is a superior strategy to autarky. Under free trade, let's say that both countries have an overall national welfare equal to 100 GDP. Both countries are relatively well off. However, if one country decides to implement a tariff in order to increase government revenue and protect it's domestic industries (protecting domestic industries is the main function of a tariff, and is something that Ron Paul has pledged to do), it's general welfare goes up, as the exporting industries of the other country are hurt and welfare there goes down. Macroeconomic theory demands that the tariff drive a wedge between the national welfare of the two countries - the increase in welfare of the tariff-implementing state is equal to the decline in welfare of the exporting state plus the government revenue the other state gains at it's expense. So in other words, if the US implements a tariff, the US economy stands to gain, but Brazil stands to lose at an even greater rate. So let's place the US welfare at 110 GDP and Brazil at 85 GDP.
So what will Brazil do? They will levy a retaliatory tariff, driving up their own national welfare at the expense of the welfare of the United States. Assuming both countries to be equal in exports for the sake of easy math, Brazil's welfare gains will be equal to the gains made by the US when it implemented a tariff of its own. But since Brazil initially lost greater than the US gained, Brazil will not be able to recapture that pre-tariff level. It will have lost 15, and gained 10, for a net loss of 5. Brazil's welfare stands at 95 GDP, below what it did at free trade levels. The United States similarly will not be better off. From its point at 110, the US will also lose more than Brazil has gained, and will fall 15 to 95 GDP.
So you can see that with tariffs both countries stand to lose... so why do they end up there?
John Nash (the Nobel-winner portrayed by Russell Crowe in A Beautiful Mind) came up with the theorem of Non-Cooperative Equilibrium in order to argue this point. His theorem suggested that countries act in their best interest based on the actions of their counterparts. So given that the US is in a state of free trade, Brazil's best course of action is to enact a tariff, driving it's own national welfare up to 110. And history has shown that this is what countries do. So under this assumption, what will the United States do? Given that Brazil has implemented a tariff, the United States will retaliate in kind, driving its GDP up from 85 to 95. Now both countries are losing.
So why don't they revert back to free trade? Because it's a classic prisoner's dillemma [EDIT: ZERO-SUM GAME]. Both are constrained by the actions of the other country. For the United States to revert back to free trade and remove their tariff, their overall welfare will decline once again back to 85. Hardly seems the politically-expedient thing to do. The same is true for Brazil - there is no incentive for liberalizing trade unilaterally, which is what Ron Paul pledges to do. And if the US does unilaterally liberalize, then Brazil stands to maximize its gains, so it will certainly NOT follow suit with liberalization.
That is where the GATT was born - the GATT is a global governance institution designed to facilitate the arrangement of BILATERAL trade negotiations between countries. The argument that the GATT or WTO takes away national sovereignty is silly and naive - there are no negotiations with the WTO itself, it is simply a conduit for negotiations between governments, and a monitoring organization to ensure that agreements between countries are not infringed in order to cheat the system - in other words, the Dispute Settlement Process under the WTO is in place in order to make sure that once free trade is established, Brazil doesn't secretly implement a tariff to maximize it's profit at the expense of the US. If Brazil continues to cheat, the WTO authorizes the United States to enact retribution measures with no fear of retaliation.
The GATT is simply the framework under which countries liberalize trade - because history has shown that without it, tariffs are levied willy-nilly and trade is greatly curtailed.
Which is why Ron Paul and free trade seem completely mutually exclusive to me. |
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