Tuesday, 17 March 2009

Jane Kelsey makes no sense

Yes I know what you are thinking, so what's new? Kelsey never makes sense. But in this article from the New Zealand Herald Kelsey is attacking free trade agreements. Now there are some reasons for concerns about FTAs. Jagdish Bhagwati's outlines these in his book Termites in the Trading System: How Preferential Agreements Undermine Free Trade. I have discussed Bhagwati's ideas here. These are not the arguments Kelsey is making.

Kelsey tells us
The careful stage management of announcements on free trade agreements is not new. But the US decision should encourage us to look beyond the simplistic assumptions that the more free trade agreements we sign, the better off we will be, based mainly on some fanciful modelling of the gains to agricultural exporters.

We in New Zealand stand to learn a lot from the debate that is unfolding in the US under the new administration
Let us assume that the FTAs we sign are sensible - if they are not, Why do we sign them? - then the more we sign, the better off we are. Free trade does makes us better off. This is the basic point Kelsey doesn't accept.

Free trade doesn't make us better off because of "some fanciful modelling of the gains to agricultural exporters". The gains to our agricultural exporters are not fanciful, they are very real. But the important point about free trade is that it increases our national income, on average people are better off. "On average" because there will be those who lose from greater trade, but those people lose less than the those who gain, gain. And thus the gainers could compensate the losers and still be better off.

The gains from additional trade don't come just via gains in agricultural exports, as welcome as these are, they come from an increase in our exports in general and, just as importantly, an expansion in our imports. Extra imports means we can get a wider range of cheaper, better goods to consume. This increases the welfare of consumers and lowers the input costs of producers. An important point in times like these. Also we will change the composition of what we produce. We will move towards those things we have a comparative advantage in and away from those we don't.

But Kelsey is right about one thing: "We in New Zealand stand to learn a lot from the debate that is unfolding in the US". We do have much to learn this debate.

Economist Edward L. Glaeser writes in the Boston Globe on the situation the US in this article, Building walls with US trading partners. He says
FREE TRADE is a child of economic confidence; protectionism is pessimism's progeny. In today's fearful economic climate, policy-makers have again cried "buy American," and embraced interventions that support domestic producers at the expense of our trading partners. Protectionism is bad economics and worse foreign policy, for many of our trading partners have only a tenuous link to peaceful democracy. To avoid the terrible path of the 1930s that led to prolonged depression and global conflict, the United States must maintain its commitment to globalization.
Let us learn this lesson, let us not cry "Buy New Zealand", let us realise that protectionism is bad economics and let us ignore Jane Kelsey.

An additional point we can learn from the US is the effect that vote buying can have on trade outcomes. There are votes in protectionism. Those who are protected will support you, because they know you have helped them. Those who lose from your actions don't know, for sure, that they are losing because of your actions, and thus may not oppose you. It looks like a good deal for politicians, and good deals for politicians should worry the rest of us.

Let us keep in mind the point that Greg Mankiw makes: when asked their view on the proposition
Tariffs and import quotas usually reduce general economic welfare.
93% of economists agree.

(HT: The Inquiring Mind.)


StephenR said...

It's not just a simple matter of imports/exports though, is it? You might've seen this piece from Hickey a while ago:


Paul Walker said...

Stephen: There is nothing really new there. Note I did say "Let us assume that the FTAs we sign are sensible" and Hickey just makes some well known points about what is sensible. He is right about the lobby groups in the US. But see the comments I make about Bhagwati's book.

StephenR said...

Point taken.