Free Trade Then And Now

The classic story of free trade deals goes like this. A special sales tax levied on chairs that are made in foreign countries has a small negative impact on a wide range of Americans. It pushes up chair costs both for household consumers and also for a wide variety of firms that use chairs as production inputs. Intelligent policymakers would be working for repeal of the chair tax. That’s the case for free trade, and deals have nothing to do with it. But they have a problem. Domestic chair producers get a huge benefit from the chair tax, and since it’s a case of concentrated benefits and diffuse costs, it may be difficult to build a political coalition that can overcome their clout. So you need to find some other industry that’s sad about some tax being levied by foreigners. So say Canada has a robust chair industry that really wants the tax lifted, but Canada also has heavy taxes on imported American pigs. Then the U.S. and Canadian governments sign a deal where the U.S. reduces chair taxes and the Canadian government reduces pig taxes. That way the pig lobby becomes a force in Congress capable of neutralizing the power of the chair lobby (and vice versa in Canada), so the deal gets done.

But note that the deal here is purely a political sleight of hand. The actual case for lifting the chair tax has nothing to do with export-promotion or pigs or anything else. It’s just dumb to have a special tax on foreign chairs. And, indeed, before World War II, the argument over trade policy was largely an argument about unilateral trade policy. It’s only after World War II that the deal paradigm has become hegemonic.

And it worked for a good long time. But over the past 10-15 years, I think we’ve gotten saddled with a pretty fallen and perverse version of it. The trade deal was supposed to be a political vehicle for overcoming special interest politics, but it’s really just become another venue for interest group politics. Read, for example, this account of U.S. efforts to use trade agreements to coerce foreign governments into paying higher prices for pharmaceutical products. The pharmaceutical industry has a lot of clout in the U.S., because we’re a major pharma producer. Most foreign countries aren’t like that, so they’re only willing to pay relatively low amounts for drugs. Since the marginal cost of producing pills is low, drug companies generally agree to sell at these low prices. But now pharma can leverage its political clout into the United States into turning the USTR’s office into an extension of its lobbying operations. Ultimately, I think people who believe in the core argument for free trade are going to have to go back to the original argument for unilateral steps.