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The Revised Case for Free Trade The strategic trade policy arguments of the new trade theorists suggest an economic justification for government intervention in international trade. This justification challenges the rationale for unrestricted free trade found in the work of classic trade theorists such as Adam Smith and David Ricardo. In response to this challenge to economic orthodoxy, a number of economists, including some of those responsible for the development of the new trade theory, such as Paul Krugman of MIT, have been quick to point out that although strategic trade policy looks nice in theory, in practice it may be unworkable. This response to the strategic trade policy argument constitutes the revised case for free trade.18 Retaliation and Trade War Krugman argues that strategic trade policy aimed at establishing domestic firms in a dominant position in a global industry are beggar-thy-neighbor policies that boost national income at the expense of other countries. A country that attempts to use such policies will probably provoke retaliation. In many cases, the resulting trade war between two or more interventionist governments will leave all countries involved worse off than if a hands-off approach had been adopted. If the US government were to respond to the Airbus subsidy by increasing its own subsidies to Boeing, for example, the result might be that the subsidies would cancel each other out. In the process, both European and US taxpayers would end up supporting an expensive and pointless trade war, and both Europe and the United States would be worse off. Krugman may be right about the danger of a strategic trade policy leading to a trade war. The problem, however, is how to respond when one's competitors are being supported by government subsidies; that is, how should Boeing and the United States respond to the subsidization of Airbus? According to Krugman, the answer is not to engage in retaliatory action, but to help establish rules of the game that minimize the use of trade-distorting subsidies. This is what the WTO seeks to do. Domestic Politics Governments do not always act in the national interest when they intervene in the economy. Instead, they are influenced by politically important interest groups. The European Union's support for the Common Agricultural Policy (CAP), which arose because of the political power of French and German farmers, is an example. The CAP benefited inefficient farmers and the politicians who relied on the farm vote, but no one else. Thus, a further reason for not embracing strategic trade policy, according to Krugman, is that such a policy is almost certain to be captured by special interest groups within the economy, who will distort it to their own ends. Krugman concludes that in the United States:
To ask the Commerce Department to ignore special interest politics while formulating detailed policy for many industries is not realistic; to establish a blanket policy of free trade, with exceptions granted only under extreme pressure, may not be the optimal policy according to the theory but may be the best policy that the country is likely to get.19 |
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