Wednesday, August 23, 2017

EPSTEIN: Trump’s Flawed Protectionism

By Richard A. Epstein

In the midst of the din over Charlottesville, let’s not overlook the Trump administration’s controversial stance on free trade. This smoldering problem has risen to the surface in the delicate negotiations that the United States now is undertaking with China over the status of American intellectual property rights, and with Mexico and Canada over the North American Free Trade Agreement. Before looking at the particulars of these two disputes, it is instructive to set out the intellectual case for free trade, which Trump has consistently misunderstood.

The basic insight here is that ordinary contracts between private parties are not neutral; they produce gains for each party. If I swap my horse for your cow, it is tempting, but wrong, to say that no value has been added for the parties because we have the same horse and cow after the transaction that we had before it. So why worry, the argument goes, if the trade does not take place? This facile argument ignores that these transactions are costly to complete. Why would two parties waste money to organize a trade from which neither side has gained? Even this simple trade is a positive-sum game that produces for each side a net advantage that exceeds the costs of putting the deal together. I could desperately need a cow for milk or breeding, and you might need the horse to pull a plow. The trade allows both of us to get greater value by the more efficient deployment of existing resources. That short-term advantage has long-term effects, by letting me breed horses while you breed cows.

But there is a catch. In general, bartering is inefficient because it is rare that any random pair has the goods that the other side wants in just the right amount. But introduce money, so that the sale of each animal no longer depends on the purchase of the other, and the gains from trade become ever more salient.

What applies to two individual traders can be easily generalized in two ways. The first is that trade makes sense no matter how many parties join together in a voluntary transaction. So long as each party subjectively values what it receives more than what it sells, the deal will create a social improvement for all the parties to it. Even better, the gains to the contracting parties open up opportunities for outsiders, a positive externality that it is all too easy to overlook. The second is that gains from trade among multiple parties also arise in the international arena, so that the reduction of tariffs and other import or export barriers will increase trade from which all nations will benefit.

It is true that free trade breeds competition and leads new innovative firms to displace old ones. But that is as much true in domestic markets as it is in foreign ones. Yet no one thinks that

Read the rest here.


  1. Epstein's chief error is this: "Their chief misdeed is to engage in the widespread theft of intellectual property, which includes the theft of trade secrets, the infringement of patents, and the shipment of counterfeit goods into international markets."

    You cannot "steal" intellectual property, because the creator of such "property" still has it after the alleged theft. Intangibles can be used by infinite people at once. To physically punish someone (via fines or imprisonment) for using your idea is to violate that person's property rights for no just reason.

    1. Further, I would imagine that even an advocate of IP would concede that IP theft is far from China's "chief misdeed" when it comes to commerce, and pales to things like regulation, massive subsidization of favored industries, and following the US's lead in manipulating its money supply.

    2. Also, note that Epstein suggests in the first paragraph that NAFTA is an example of "free trade". Epstein appears to be delusionally tilting at windmills once you notice his obvious confusion regarding free trade.