Gains of trade
2007-04-28 · Original WordPress address
Sometime, long ago, I got the religion that free trade is good. It seems so obvious that freeing people to trade at will must make them better off. If it didn't, they wouldn't trade. Right?
I don't know if I should be more bothered by the fact that I just *believe* this economic dogma without knowing precisely why its true or that some of the best economists can't agree on why its true (or if its true at all).
It seems to me the argument is over how fast it takes economies to shift from one equilibrium to another*. Proponents of free trade are saying "in the long run and under ideal conditions, trade makes everyone better off" and opponents are saying "the day after trade is made free, some people are made worse off." If this is a good characterization of the debate, then it seems the policy implication is pretty clear. Let's make trade free, but figure out ways to ease the transition to the new, better world.
UPDATE: Tyler Cowen weighs in.
UPDATE 2: macroblog talks theory vs. reality.
*Saying factors are not mobile is equivalent to saying the transaction costs for moving factors are really high. A legal trade barrier doesn't make it physically impossible to move factors, for example, it just means its really expensive to do so (because if you do so and are caught they call you a smuggler and you suffer punishment or, worse, opprobrium). Adjustment costs add interesting dynamics to models, but if they change the welfare implications of a model I don't see why the policy isn't to just remove the the adjustment costs. In other words, if Rodrik is right about Heckscher-Ohlin being a better model than Ricardo, why not remove the barriers that are making capital immobile (e.g. remove trade barriers, increase access to capital markets, etc)? If the observed dynamics can only be replicated by adding transaction costs to our models (e.g. immobile capital, CIA restrictions in money models, etc), shouldn't the policy be to remove those frictions? Go ahead, start lecturing me about second best policies, but you have to explain why we're in the second best world to begin with.