The Paradox of Free Trade and the Left.

What caught my eye in this particular WSJ article on McCain's free trade focus is this quote coming out of the Obama camp: "If he wants to highlight trade, he should be doing it here in Ohio and Michigan and the states that are most affected by trade." This reflects the standard, but misguided, view of international trade. We import more things, pushing some people out of jobs, and we see those jobs disappearing. And sure, this hurts those whose jobs are lost. But while the sound bytes reflect only this effect, there are many more effects that will occur, all positive, which actually create more value than is being lost when jobs disappear. Despite the left's close ties with labor, I still find it paradoxical that the left should be so anti-free trade.

The reason these jobs disappear is because Americans are importing goods that were previously produced domestically, and the shift from domestic production to imports happens because the price of the imported goods are lower. Lower prices mean American consumers are able to acquire more goods and services with their incomes than they otherwise would. Walmart has built an empire on the business model of buying inexpensive imports and selling them at dirt cheap prices to working class Americans. And herein lies the paradox. To a political ideology so centered around the plight of the poor, free trade should appear to be a good policy. The poor are able to import products that are less expensive than those produced domestically, thus allowing them to buy more stuff in total.

If they really care about the poor, shouldn't they want more free trade, not less?

Please, Keep Your Money?

As free traders appear to be winning the argument over trade v.
protectionism, I think that the protectionism of the future will look a lot more like this case, where the Australian Government has put the kibosh on Chinese mining firm Sinosteel's attempt to acquire a large portion of Australian Murchison Metals. I would imagine that, to the non-economist, there would not seem to be much similarity between restricting trade in goods and services and restricting corporate ownership. I would argue that the two are one and the same.

Why would one firm buy another one? The standard intuition is that the purchaser believes he can make a greater profit than the current owner can make, and the current owner will only sell if he is offered more than he believes he can earn in profit. How can the purchasing firm take the exact same set of resources and generate more profit? By having a better plan, or a better business model, or better corporate structure. So in the case of allowing a foreign firm to take over a domestic one, we should simply view this the domestic country importing a better plan or a better model, which is good for their economy. Increased profits will generally lead to some combination of increased output, lower consumer prices, and/or higher wages for workers in the firm.

So what is the upshot of all this? We should treat foreign investment in the exact same way as we treat international trade, meaning the less restrictions on it the better.