Monday, January 23, 2017

A Note on Confusion About Free Trade and Regulations

I am seeing a lot of comments like this one made at the post, Trump Tells Business Leaders That He Will Cut Regulations by 75%:
His free trade stuff is terrible, but if he drastically cuts regulation and business taxes the need for companies to leave will be reduced. 
There is no direct correlation between regulations and firms operating plants overseas, that is, comparative advantage tells us that some companies will move their operations overseas even if there were a total elimination of regulations and taxes.

As Don Boudreaux writes:
[I]t’s not true that, were all businesses in the United States to have their tax and regulatory burdens greatly lightened, Americans would import less, that fewer American companies would be threatened with extinction by foreign rivals, or that American businesses would no longer find it profitable to expand their foreign operations or to relocate outside of America.
Trade patterns reflect the pattern of producers’ comparative advantages (whether these advantages be ‘natural’ or the results of business or policy choices).  Raise taxes or lower them, and increase regulations or decrease them, comparative advantages will still exist (even if they differ from what they would be under alternative tax and regulatory schemes).
Judging from the pronouncements of many of the people who write to me, as well as from much of the commentary that I encounter in various outlets, there’s a widespread belief among conservatives that taxes and regulations in the U.S. put American producers in general at a great disadvantage in global markets and cause Americans to import more than we would were taxes and regulations here lighter.  But this belief is mistaken.  Not only, again, do those who hold this belief ignore the reality of comparative advantage, they also wrongly assume that businesses in the United States all operate under the burden of uniquely oppressive taxation and heavy regulations.
Note that my argument here is emphatically not that tax rates should not be cut and regulations not reduced.  I support radical tax cuts and the abolition of nearly all government-imposed regulations.  Cutting taxes and reducing regulations would increase Americans’ prosperity (and, importantly, also our freedom, regardless of the economic consequences).  But cutting taxes and reducing regulations will not reduce our imports (quite the contrary, most likely) or shield American firms generally from the rigors of global competition.


1 comment:

  1. I don not understand. Wouldn't changing the government burden change the comparative advantage and have an effect on trade?