Alia email -
In your discussion of free trade, you note that one of the benefits is that it gives consumers the opportunity to buy goods and services from the best producers in the world. However, is it not consumers in developed countries that benefit the most? Many argue that globalization and free trade also cause great disparities, making the rich richer and the poor poorer. What role can free trade play in ameliorating these disparities? When and how do you think developing countries should restrict free trade, if ever?
Dr. Boudreaux writes:
Good questions.
In fact, though, those who benefit most are consumers in developing countries. Americans, Canadians, and Brits, for example, would suffer if their governments blocked foreign trade. But because industry and market institutions in those countries are so well-developed, a sufficient amount of production would go on internally so that people's there would hardly become destitute.
But if, say, Guatemala or Mauritius each more severely restricted trade with the rest of the world, the industrial, agricultural, commercial, and financial capacity in those countries is so small that sever reductions in consumer well-being would be come manifest in short order.
Now about inequality: the data show that increased trade is NOT associated with increasing inequality within countries. The data DO show that countries that restrict trade grow less than do countries more open to trade.
George MacArthur email -
Given that, with trade, "cooperation spreads naturally and without much attention to political boundaries," does this implicate government as gouging the consumer surplus that would have been there without trade barriers?
Dr. Boudreaux writes:
If I understand Mr. MacArthur's question correctly, the answer is yes.
Trade restrictions protect domestic sellers from competition -- from foreign competition, to be precise. That's the political reason such restrictions exist; it's the monopoly power that such restrictions bestows on domestic sellers that prompts domestic sellers to lobby for such restrictions.
And whenever monopoly power exists, consumer surplus is reduced. That is, the gains from trade that consumers get from purchasing the good or service in question shrinks.
Dave email -
What is your response to the anti-globalization movement? It claims that private corporations are plunderers of resources and that globalization is a "top down" initiative taking advantage of the underdog while advancing the privilige of the rich. Can this view be justified on any level?
Dr. Boudreaux writes:
Dave,
My view of the anti-globalization movement is quite dim. To be blunt, most persons in that movement seem to be utterly unaware of economics, history, or the reality of politics.
Economically, globalization is the default mode. It is what happens naturally when government does not restrict consumers' options to purchase goods and service produced abroad. What must be imposed is not globalization but, rather, it's opposite: protectionism. And whenever protectionism exists, you can bet big money that some powerful corporation play a prominent role in pressing for it.
Remember, protectionism shields sellers from competition. Such shielding is anti-consumer and pro-corporate. It would be amusing, if its consequences weren't so dangerous, to observe the anti-globalization folks unwittingly doing the bidding of powerful, greed corporations as these folks think themselves to be harming the corporations.
Laszlo Galambos email -
I'd be interested to know your views on how free trade is beneficial in cases where products are manufactured by companies which do not uphold basic human rights? In other words, does free trade offer incentives for such companies for improving their treatment of their employees?
Dr. Boudreaux writes:
Freer trade is unambiguously and positively associated with higher standards of living. And higher standards of living -- greater per-capita income -- is unambiguously associated with greater workplace safety (and consumer-product safety, too).
So if a rich country restricts trade with a poor country on humanitarian grounds, the goal will likely backfire. The poor country will remain poorer longer and, thus, take longer to improve workplace safety.
Another important point to keep in mind is that there is no "right" level of workplace safety. The level that exists today in the U.S., Canada, and western Europe is higher than it was 50 years ago. And it will surely be higher still 50 years from now. Workplace safety is a costly good no less than is a more beautiful home or a more luxurious car. If a people can't afford some level of such safety, we persons in developed countries do these people no favors by forcing them to (try to) produce those levels of safety.
Ben Stam email -
Would you say that the biggest barrier to free trade is political organization? As you've explained it I would guess that trade barriers shrink potential market sizes, and thus diminish economies of scale for exporters. How can citizens call for the abolishment of protectionism when government seeks to please interest groups?
Dr. Boudreaux writes:
Ben, you've hit the political nail square on its ugly head. Trade barriers exist chiefly because organized interest groups (namely, producers) lobby for them. The benefits (that is, higher, monopoly profits) that result from trade barriers are shared by the relatively small number of persons who agitated for these restrictions (producers) while the costs of these restrictions are spread over countless -- often literally millions -- of consumers.
Although the total cost of restrictions exceeds the benefits that the producers receive, because these costs are spread so thinly, few consumers ever even notice them. And the few who do notice these costs have little incentive to lobby against the restrictions.
Ray Hamilton email -
How much lower do you expect the cost of food would be if agricultural protectionism ceased to exist?
Dr. Boudreaux writes:
It's impossible to give an accurate, precise answer to the question of how much lower food prices would be if agricultural protectionism were abolished. But there is no doubt that (1) food prices would indeed fall, (2) the quality and variety of foods would improve, and (3) the environmental consequences of agriculture would be less harmful (because less fertilizer, pesticides, and water-from-irrigation would be required to produce agricultural outputs).
Laszlo Galambos email -
Do government regulations and red-flag issues raised by environmental groups promote the lowering of cancer rates from pesticides/chemicals, cleaner air, safer drugs, improved sanitation? In other words, isn't it due to regulations and some level of interference in free-market operations that we've achieved the above mentioned improvements? Have there been cost-benefit studies performed, on a per industry basis, on the optimal level of regulations in a free-market economy for the attainment of not only prosperous, but healthier societies, as well?
Dr. Boudreaux writes:
This question is very good yet very complicated. I can here only hit a couple of themes.
First, be careful about "safer drugs." Government regulation can, and likely has, resulted in the stock of pharmaceutical products legally sold on the market being safer than it would have been without government regulation. But this fact doesn't mean that people/consumers are better off.
The higher safety standards are the greater the number of drugs kept off of the market. Many of the drugs prohibited from being legally produced and sold might well have saved the lives of persons who died -- persons who died not because they took the drug but precisely because they were prevented from doing so.
Do this mental experiment: suppose government will strictly outlaw any drug that isn't at least 99 percent safe. Well, you can then be sure that all drugs on the market will be 99 percent safe. But you can also be sure that this policy itself was very toxic, for it led to the unnecessary deaths of many people who were denied the opportunity to use less safe, but still often effective, drugs.
One other point: government is not the only entity capable of regulating. Private hospitals, for example, would no doubt devote more resources to testing and warranting drugs if the government weren't in that business.
Alex HR email -
Is there a role for governments in protecting nascent/underdeveloped industries, like new medicines, electric cars, or Canadian media?
For example, the Korean keiretsu and Japanese zaibatsu enjoyed significant initial protection to grow their industries to a critical mass, and those barriers have been gradually reduced. Now, those industries (such as automaking) are more efficient than North American counterparts.
Dr. Boudreaux writes:
No.
Industries aren't really like human infants, needing protection until they mature. Any firm that exhibits sufficient promise to be profitable in the future will have access to private capital. It's the way markets work. Very few firms start showing a profit from day one; it takes time for each of them to start doing so. Investors understand this fact and are willing to loan money to make it happen. Indeed, that is THE critical role of capital investment. (Ok - capital markets aren't perfect; they might miss some golden opportunities. But so, too, are politicians and bureaucrats less than omniscient.)
If a firm can't find sufficient private funding, that fact is powerful evidence that that firm will be unprofitable in the future. If, on the other hand, the firm is likely to be profitable in the future, it will likely secure private financing and, hence, not need to be protected from foreign rivals.
Lindsay Pereault email -
If the government forfeited its role as a regulator, would the market step in to do the job? For example, would it be only products that lived up to the consumer's desired level of safety that would reap continued profits and thus survive in the marketplace, or would this create room for producers to take advantage of consumers?
Dr. Boudreaux writes:
I have every confidence that private means of regulation and certification would arise to replace government regulations that are withdrawn.
These private means would not arise out of any altruism on the market so much as it would arise from (1) consumers' understandable reluctance to blindly trust producers' claims, and (2) producers' understanding that their long-run profits will be higher if they do not kill, maim, or otherwise make their customers unhappy.
Of course, these private regulations would not be perfect. But nor is today's system of government regulation. The question is: which system would be best in any particular circumstance? My understanding of economics, and of economic history, tells me that private means of regulation are surprisingly robust and effective -- and that government regulations often have effects quite the opposite of the effects that they are advertised as having.
....
Thanks!
Courtenay email -
Great questions everyone. Thanks again to Dr. Boudreaux for joining us today. Next time we'll be discussing Unintended Consequences with Professor Christopher Coyne (West Virginia University) on July 23rd at 11:00 am PST. Don't miss it!
