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Aug 1, 2007. The Baby and the Bath Water: An Allegory for Free Trade


The Baby and the Bath Water: An Allegory for Free Trade

[posted August 1, 2007]




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See also:
The Club for Growth Petition


Once upon a time or as we economists like to say, “Hypothetically”, free trade was “a good thing”. This is “hypothetical” in the same sense that the technology that produced phone trees or the internet or intelligence gathering tools was also a good thing. Humans are capable of diverting, perverting, or otherwise abusing any technology: the internet connects our youth to predators; phone trees branch out haphazardly, leaving us with inadequate options and responses; intelligence sometimes finds weapons of mass destruction where they don’t exist – or doesn’t find them where they do.

But these are the marginal failures of technology, the tip of a very large iceberg whose successes are masked by the deep waters of “things taken for granted” and whose failures sow the seeds of improvement. With the right guidance, the internet is a marvelous educational tool for our children. Phone trees can be programmed to provide logically complete sets of options and quick responses to our needs. And new tools, such as visual analytics, are rapidly enhancing our ability to process intelligence data. The problem may not be with the tool, but rather with the use to which it is put or the hands into which it is placed. In redressing problems we should take care not to throw out the baby with the bath water.

As with technology, free trade gets a bad rap for the way in which it is misused. Free trade does not taint our pets’ or our own food supply; people do. Free trade does not force us to buy cheaper goods which we know to have been made in sweat shops; we choose to do so. Free trade does not impoverish our workers; inadequately progressive domestic tax and education systems can do that for us.

Free trade and technology are mechanisms to improve efficiency and productivity. But tools can be applied in more or less efficient ways. As voters, producers, and consumers, we need to periodically evaluate the consequences of how we choose to use them. Our ability to correctly identify and analyze inefficient use or unwanted consequences will determine the efficacy of our policy responses. This requires an understanding of the costs and benefits – immediate and long term, direct and indirect – of the way we invoke free trade.

Consider the example below contrasting imports that improve domestic efficiency with imports that may distort it by failing to recognize long term or indirect effects associated in this case with energy, not trade, policy.

- A ready supply of Imported semiconductors facilitated rapid spread of computer technology with its attendant benefits – and some admitted costs as well. These products have a relatively high ratio of price to size and weight. This means that transportation costs are a relatively small component of their overall cost and are not likely to be a significant barrier to trade.

- On the other hand, while some imported products complement seasonal variability of domestic supplies, they may be underpriced and overconsumed. Fruits from the southern hemisphere are much appreciated during our winters. These typically have relatively low ratios of price to size and weight, making transportation cost an important factor. The price of an imported peach may not fully reflect the cost of protecting the supply of fuel used to transport it or our concern for long term energy security. In this case we may overconsume imported peaches. This is not the result of free trade, but of our failure to recognize all the costs associated with it.

Free trade carries risks to be sure, but to insulate ourselves from those risks would preclude the expanded opportunities and returns it makes possible. Individual preferences or other benefits not noted here may still lead us to reach for that peach in December. Alternatively, by importing semiconductors, we may simply be passing on environmental problems associated with their production to a country more willing to absorb – or less willing to acknowledge – them. In any event, a better understanding of the indirect and long term consequences of how we use our tools – technological or free trade -- may improve our chances of living happily ever after in this increasingly interdependent world.


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Email: Liz at inkweb dot org