Free Trade, Pareto Improvements, and Redistribution

James Kwak demonstrates that Greg Mankiw is talking through his hat on the trade issue, quoting Mankiw’s own textbook:

Trade can make everyone better off. … [T]he gains of the winners exceed the losses of the losers, so the winners could compensate the losers and still be better off. … But will trade make everyone better off? Probably not. In practice, compensation for the losers from international trade is rare. …

We can now see why the debate over trade policy is often contentious. Whenever a policy creates winners and losers, the stage is set for a political battle.

To put it formally:

Reducing barriers to trade creates potential Pareto improvements: making them actual Pareto improvements requires redistribution. But of course it’s precisely the people loudest in their support of “free trade” who are most vehement in their opposition to income redistribution, insisting (mostly falsely) that in a globalized economy capital and the people who own it are necessarily too footloose to be adequately taxed.

There’s no reason in principle that the same web of treaties that reduces tariffs couldn’t also restrain tax-dodging and the associated money-laundering, but that’s not what Greg Mankiw, or the people who support his work, are intersted in, so is mostly doesn’t happen.  If the corporate-lobby “free traders” were prepared to talk seriously about shared prosperity, most of the opponents of TPP would be more than willing to meet them halfway.

To be clear, I don’t have a clue about whether TPP is, on balance, good policy. If it helps strengthen a Western Pacific coalition against Chinese attempts at regional hegemony, maybe it’s worth doing for that reason alone. But the Theory of Comparative Advantage doesn’t answer the question, and pretending that it does is an insult to everyone’s intelligence. Thus the claim that “economics” supports “free trade” is no better than a verbal trick.

To be clear, I don’t have a clue about whether TPP is, on balance, good policy. If it helps strengthen a We  stern Pacific coalition against Chinese attempts at regional hegemony, maybe it’s worth doing for that reason alone. And on an international scale the distributional consequences are way positive; the Vietnamese wokers who benefit from better access to U.S. markets for their products are pretty damned poor, and – despite how badly they’re treated in the exporting industries – even very bad factory work kicks the crap out of tending a rice paddy.

But the Theory of Comparative Advantage doesn’t answer the question, and pretending that it does is an insult to everyone’s intelligence.

Footnote: All that is aside from the fact that deals like the TPP embody not very much actual reduction in trade barriers (which are pretty low by now to start with) and lots of less desirable (except to special interests) provisions such as imposing the absurdly inefficient and unjust “intellectual property” regime the patent- and copyright-holders have bought from the U.S. government on the rest of the world, and subordinating local health and safety rules to the whims of unelected international tribunals dominated by servants of big business. (For example, the international tobacco companies are challenging Australia’s plain-pack rule for cigarettes as a WTO violation.) In principle, trade deals could also require respect for labor rights and environmental interests, but  those provisions are mostly for show.

[Cross-posted at The Reality-Based Community]

Mark Kleiman

Mark Kleiman is a professor of public policy at the New York University Marron Institute.