Wednesday, December 11, 2019

Free Trade, No Trade and Crony Trade

At the post, BREAKING Trump and House Democrats are on Verge of a Handshake Deal on U.S.-Mexico-Canada Trade, Mike asks in the comments:
Why do you prefer a crony deal to no deal?
RW response:

First I want to make clear that free trade is preferable to crony trade or no trade. However, when the only choices are crony trade or no trade, crony trade is preferable since it means some trade is taking place which has to raise the general standard of living of a region versus no trade.

Consider, this example. There is a product made exclusively overseas because the key ingredients only exist overseas. The product cures some debilitating disease. Under a situation of no trade, say because of a trade war, no one would be able to get this product. That is horrific. On the other hand, full competition might result in a half-dozen firms competing to provide the product. That would be terrific. But let's say one of the foreign companies is a wholly-owned subsidiary of a US company with political power.

That US company has the pull to get wording into a trade deal that will prevent the foreign competitors from offering the product in the US. This would result in a crony deal that would likely make the product more expensive but available in the US.

So when the options are between a no-trade deal and a crony deal, clearly the crony deal is superior because it results in more goods flowing. Though as I stated at the start, free trade is much preferable.

While it is ok to support a crony deal over no deal, it should always be made clear that this is in the context of a free trade deal being superior and the ideal goal.



  1. I agree with crony trade is better than no trade, but I do find that the crony deals gives 'capitalism' a bad reputation. The higher prices and protected crony companies are now associated with what you get with capitalism. Most of the millennials don't like capitalism due to the outcome of these government interventions.

    1. Rei,
      I agree with you as it relates to capitalism getting a bad reputation because of crony trade deals. However, I think it would be helpful to look at the glass half full in that it gives us a chance to explain crony capitalism vs. free markets (I prefer that term to capitalism).

  2. Crony trade is not designed to allow in non-crony foreign products but at a more expensive price vs. not at all. The not at all portion remains, it simply then comes from the various regulatory bodies in the USA, not at the border. For instance you could have real free trade at the boarder crossing but that lifesaving whatever still can't legally be sold without FDA approval. Of course that's only in some things. In other things the crony trade deals have such a list of hoops its not worth doing.

    Crony trade is designed for large corporations to set up overseas and take advantage of lower costs and then import the products at the lowest cost possible while at the same time preventing smaller non-crony competition from doing the same. Sometimes it doesn't work out that way because of other players in the crony trade process (like NGOs) that have other goals like reshaping society.

    Do these deals have the occasional error of design or a good thing that happens because the cronies wanted something? Sure. But is it net better in the end than the old tariff way ("no trade")? I am not sure. Both have their 'no trade' implications, it just shuffles around where they are.