Trade Agreements, Deals, Wars, and Extortion

When Donald Trump became President he promised to replace the horrible“trade agreements” of his predecessors with his own great “trade deals.” His trade negotiations have resulted in agreements that include a few new trade deals that border on extortion and a continuing trade war with China. Such negotiations are defended as being necessary for the U.S. to realize the economic benefits of free trade extolled by economists. In reality, international trade today bears so little resemblance to the mutually-beneficial free trade of classical economic theory as to border on blasphemy.

In classical economic theory, gains from trade are rooted in a common sense analogy of two individuals freely choosing to trade with each other. If I have something that you value more than you value something you have, and I value the thing you have more than the thing I have, then if we each trade the things we have to each other, we will both be better off than before. We will both have things after the trade that we value more that the things we had before the trade. This is the basic premise of mutually beneficial “free trade” in economic theory.

This same basic rationale is used to explain the potential trade benefits of two nations, or multiple nations, trading with each other. A number of specific conditions are essential for trade to actually be mutually beneficial. These conditions apply to individual and international trade. However, international trade is complicated by a number of differences between trade among individuals and trade among nations. Furthermore, a number of conditions in the today’s global economy basically nullify the classical economic arguments in support of free trade.

The most important condition essential for mutually beneficial free trade is that both trading partners must be free to “not trade.” Free trade can occur only between two sovereign individuals or nations. In order to be truly sovereign or free to choose, both trading partners must also have accurate information regarding the actual value of what they are trading to the other party and the value of what they expect to receive in return. Traders are not really free to choose unless they know the relative values of what is being traded.

Whenever one person or nation knows the value of something they traded away is less than the other believes it to be, this is a trade deal, not free trade. Likewise when the person or nation receives something from a trade knowing that it is worth more than the person trading it away believed it to be, this is dealing, not trading. Trade dealers intentionally take advantage of the others’ lack of information or knowledge. Trade deals may result in agreements, but one trading partner benefits at the expense of the other.

Trade wars result whenever one or both negotiators are trying to negotiate a trade deal that takes advantage of the other—rather than trying to reach a mutually beneficial agreement. Sometimes trade wars lead to trade deals, when one negotiator gives in to the other. However, trade wars are rarely if ever mutually beneficial, and in the long run, are far more likely to be mutually detrimental.

Whenever trade agreements are reached only after the threat of a trade war, they are neither free trade agreements nor trade deals; they are extortion—by negotiation.  Extortion is the act of obtaining something either by force or the by threat. Extortion threats can be financial, such the threat of imposing tariffs or quotas on existing or new imports. Threats can be physical, as in cases of individual bullying or nations threatening to withhold humanitarian aid or renege on military aid or protection agreements. Extortion can also be political, as when powerful nations threaten to impose “regime change” on weaker nations if their leaders refuse to enter into exploitative trade agreements.

I will leave it up to the reader to decide which of President Trump’s trade negotiations are best described as trade agreements, trade deals, trade wars, or extortion. In all fairness, he never claimed that he intended to negotiate mutually beneficial trade agreements. His stated objective has always been to make deals that benefit the U.S., regardless of the consequences for U.S. trading partners. In addition, he has never given any indication that he sees any problem with using coercion or threats to negotiate trade deals that he feels are beneficial to the U.S.  And when he fights a trade war, as with China, his intent is to “win,” not to reach a mutually beneficial agreement. “U.S. first” is the current trade policy of the U.S.

Many in the U.S. have been willing to replace past trade agreements with trade deals because past “free trade” agreements simply have not resulted in the promised benefits for U.S. workers or taxpayers. They were negotiated and sold to the public based on the classical economic benefits of free trade. The public was not fully informed that unrestrained free trade among even sovereign nations differs in important respects from trade between two sovereign individuals.

International trade is almost always beneficial to some people and detrimental to others within a nation, even if it is beneficial to the nation as a whole. To economists, if the gainers gain more than the losers lose, the trade is considered beneficial. The losers experience it quite differently. Second, economics is about benefiting people first and foremost as consumers, not necessarily as workers or taxpayers. Domestic workers in specific sectors of the economy are often the losers in trade agreements, even if consumers overall gain more than the workers lose. In such cases, consumers theoretically could compensate the workers and still have something left—but they rarely if ever do.

Finally, today’s global market simply does not reflect the conditions at the time Ricardo, Smith, and other classical economists developed the basic economic theories of free trade. In those earlier times it was simply assumed that a nation’s labor force would be employed at home, that investors would show a strong preference for investing at home, and that productivity depended mostly on natural resources that were permanently at home. The basic idea of free trade was to allow domestic land, labor, and capital to be used to produce products that could be traded to other countries, as well as meet domestic needs. Nations would export products in which they had a “comparative advantage”—meaning could produce relatively more efficiently. They would import things they couldn’t produce at home or could produce only with less relative efficiency.

However, the multinational corporations of today have no allegiance to any particular country. They simply move their capital, including technologies, to wherever in the world they can make the most profit for their shareholders. They frequently move from one country to another to exploit cheaper labor or extract the natural resources of less-developed nations. This leaves the workers of many nations unable to find employment at home; so they migrate to other countries searching for work. Too often, free trade agreements have been used to remove restraints to such corporate extraction and exploitation. This a major reason for the willingness of people in the U.S. to accept President Trump’s promise of great trade deals to replace failed trade agreements. In this case, the “devil we know” is being traded for the “devil we may soon get to know.”

Classical economic theory of free trade is simply not applicable to today’s global economy. I have long contended that every nation has a sovereign right and a moral responsibility to protect its natural resources and its people from extraction and exploitation—by either foreign nations or corporations. Every nation has the right to use import quotas, tariffs, or other trade policies to ensure the sustainable development of its natural resources and to protect its workers and consumers from economic exploitation. Every nation also has the right and responsibility to participate in international trade that is mutually beneficial and does not threaten its sovereignty. It’s time to restore social and ecological integrity to free trade, rather than fight trade wars or negotiate “great trade deals.”

John Ikerd