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WHY FREE TRADE IS REQUIRED BY JUSTICE*

  • Fernando R. Tesón (a1)
Abstract
Abstract

The article argues that free trade is required by any plausible conception of justice. Free trade is supported by a host of consequentialist and deontological reasons. Empirically, trade increases global and national wealth, and in particular helps the poor. Morally, those who benefit from protectionist laws are not deserving beneficiaries of wealth redistribution. Both economic theory and evidence amply warrant the view that trade is beneficial. Protectionism by rich countries is harmful, not only to those countries' consumers, but to producers in poor countries. Given this, and given the fact that protectionism is almost always the result of political pressure by inefficient producers, there is no plausible moral reason to support it. Protectionism by poor countries is equally harmful. Relying on the institutionalist literature, the article shows that protectionism is yet another bad institution that contributes to economic stagnation in those countries. The article considers and rejects two criticisms of free trade: the problem of stolen goods, and the pauper-labor argument.

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1 Trade barriers differ in their restrictive effect. See Anderson James E. and Neary J. Peter, Measuring the Restrictiveness of International Trade Policy (Cambridge, MA: MIT Press, 2005).

2 See the discussion below, Section VII.

3 Economic models of international trade generally fall into two categories: the law of comparative advantages, which in turn has two versions, the Ricardian original version (see next note) and the Hecksher-Olin version; and the endogenous-growth model. The first model supports the view that liberalized trade is good for general economic growth and for the poor in particular. The second model is a version of the infant-industry argument and, while conceding that open trade is generally beneficial, it makes the case (I think unconvincingly) for sometimes supporting trade barriers in developing countries. For a full discussion of these trade theories, see Fernando R. Tesón and Jonathan Klick, “Global Justice and Trade: A Puzzling Omission,” FSU College of Law, Public Law Research Paper No. 285; FSU College of Law, Law and Economics Paper No. 07–24. Available at SSRN: http://ssrn.com/abstract=1022996.

4 The first proponent of the theory was David Ricardo. See Ricardo David, On the Principles of Political Economy and Taxation, section 7.15 (3d. ed. 1821), available at http://www.econlib.org/library/Ricardo/ricP.html. Country 1 has a comparative advantage in the production of good A relative to Country 2 if its opportunity cost of producing good A (i.e., how many units of good B it can no longer produce if it produces an additional unit of good A for a given stock of resources) is lower than Country 2's opportunity cost of producing good A. Or, more succinctly, Country 1's marginal rate of transformation between Good A and Good B is lower than that of Country 2. Ricardo offers an example in which England and Portugal both produce wine and cloth. If it takes 100 English workers one year to produce quantity X of cloth and 120 English workers one year to produce quantity Y of wine, and it takes 90 Portuguese workers to produce X units of cloth and 80 Portuguese workers to produce Y units of wine in the same time period, Ricardo claims that Portugal will import its cloth from England and export wine to the country. To see this, if Portugal allocates its 90 cloth workers to wine-making, in principle, it can ship 9/8 Y units of wine to England. In turn, England can now allocate its wine workers to cloth production, sending 6/5 X units of cloth in return to Portugal. After this trade, employing the same total amount of workers as before, Portugal has 20 percent more cloth than it previously produced (and the same amount of wine), and England has 12.5 percent more wine than it previously produced (and the same amount of cloth). While the exact split of the surplus generated by the trade will differ depending on the relative demands for wine and cloth in the two countries, in Ricardo's example both countries have the potential to expand their consumption of both goods without using more resources. Joint consumption of both goods across the two countries is guaranteed to rise even though Portugal can produce both goods more cheaply than England can. That is, economic growth occurs even if Portugal has an absolute advantage in the production of both goods. Earlier, Adam Smith had argued the case for free trade when a nation has the opportunity to trade with a country exhibiting an absolute advantage in desired goods. By specializing in the good in which its comparative advantage lies, trade effectively allows both countries to shift their production possibility frontiers outward. I owe this explanation of the law of comparative advantages to Jon Klick. For a full treatment, see Fernando R. Tesón & Jonathan Klick, “Global Justice and Trade: A Puzzling Ommission.”

5 Grossman Gene and Helpman Elhanan, “Protection for Sale,” American Economic Review 84 (1994): 833 present their rent-seeking model as a plausible way to look at trade policy. An individual engages in rent seeking when he tries to obtain benefits in the political arena, as opposed to trying to obtain them in the market. See David Henderson, “Rent-Seeking,” in the Library of Economics and Liberty, at http://www.econlib.org/library/Enc/RentSeeking.html.

6 See the collection of essays in Bhagwati Jagdish, ed., Going Alone: The Case for Relaxed Reciprocity in Freeing Trade, (Cambridge, MA: MIT Press, 2002).

7 See Ben-David Dan and Loewy Michael B., “Knowledge Dissemination, Capital Accumulation, Trade, and Endogenous Growth,” Oxford Economic Papers, 52 (2000): 646.

8 Mercantilism was refuted more than 230 years ago, notably by Smith Adam, An Inquiry into the Nature and Causes of the Wealth of Nations, Campbell R. H. and Skinner A. S. ed., vol. 2 [1776]; (Indianapolis: Liberty Fund, 1981), 642–66.

9 See Pugel Thomas A. and Lindert Peter H., International Economics, 11th ed. (McGraw-Hill, 2000): 33.

11 Thus, “imports are part of the expanding national consumption that a nation seeks, not an evil to be suppressed.” Ibid. Equally problematic is the claim that imports reduce domestic employment. See Laura LaHayes, “Mercantilism,” Concise Encyclopedia of Economics, http://www.econlib.org.

12 Pincione Guido and I analyze this phenomenon in Rational Choice and Democratic Deliberation: A Theory of Discourse Failure (Cambridge, UK: Cambridge University Press, 2006).

13 This rhetorical argument was criticized more than a hundred years ago by Henry George. See George Henry, Protection of Free Trade: An Examination Of the Tariff Question, with Special Regard to the Interests of Labor, chap. 6 (1886), Library of Economics and Liberty, http://www.econlib.org/library/YPDBooks/George/grgPFT6.html.

14 As Jagdish Bhagwati writes: “The fact that trade protection hurts the economy of the country that imposes it is one of the oldest but still most startling insights economics has to offer.” Jagdish Bhagwati, “Protectionism,” in The Concise Encyclopedia of Economics,” http: www.econlib.org/library/Enc/Protectionism.html.

15 I owe this insight to Jon Klick.

16 This is what critics of globalization mean by the cliché that “trade helps big business.” Even philosophers of the stature of John Rawls echo such sentiments. Referring to the European Union, Rawls writes:

The large open market including all of Europe is aim of the large banks and the capitalist business class whose main goal is simply larger profit. The idea of economic growth, onwards and upwards, with no specific end in sight, fits this class perfectly. If they speak about distribution, it is [al]most always in terms of trickle down. The long—term result of this—which we already have in the United States—is a civil society awash in a meaningless consumerism of some kind.

Rawls John and van Parijs Phillipe, “Three Letters on The Law of Peoples and the European Union,” Revue de Philosophie Économique 8 (2003): 9. Phillipe van Parijs approvingly calls this passage Rawls's “most explicitly ‘anti-capitalist’ text.”

17 As an aside, all theories of justice have difficulty identifying the appropriate entity (class, family, individual) that should benefit from redistribution of resources.

18 The specialized research converges on this point. See Winters L. Alan, “Trade and Poverty: Is There a Connection?” (2000), www.wto.org/English/news_e/pres00_e/pov3_e.pdf; Srinivasan T. N. and Wallack Jessica S., “Globalization, Growth, and the Poor,” De Economist 152 (2004): 251; Dollar David and Kray Aart, “Growth is Good for the Poor,” World Bank Policy Research, Working Paper, no. 2587 (2001).

19 The evidence for this proposition is overwhelming. For a nontechnical account, see Bhagwati Jagdish, In Defense of Globalization (Oxford, UK: Oxford University Press, 2004), pp. 5167. For a more technical analysis, see McCulloch Neil, et al. , Trade Liberalization and Poverty: A Handbook (Centre for Economic Policy Research 2001), and Bhagwati Jagdish and Srinivasan T. N., “Trade and Poverty in the Poor Countries,” American Economic Review 92 (2002): 180. As these authors show, the argument that free trade helps the poor are static (freer trade should help in the reduction of poverty in the poor countries which use their comparative advantages to export labor-intensive goods), and dynamic (trade promotes growth; and growth reduces poverty).

20 Bannister Geoffrey J. and Thugge Kamau, “International Trade and Poverty Alleviation,” Finance and Development 38 (2001): 50.

21 See Bresson Jean-Cartier, “Economics of Corruption,” OECD Observer (May 2000), www.oecdobserver.org/news/fullstory.php/aid/239; and Contreras Joseph, “Argentina's Fiasco,” Newsweek, December 21, 2001.

22 See, e.g., Bhagwati, In Defense of Globalization, p. 55.

23 Thus, for example, critics of sweatshops claim that, due in part to lax work conditions, “clothing companies benefit from free trade through BIG profits, and garment workers lose out.” See http://www.sweatshopwatch.org/index.php?s=36

24 The literature on the importance of good governance is extensive. A seminal work is North Douglass C., Institutions, Institutional Change, and Economic Performance (Cambridge, UK: Cambridge University Press, 1990).

25 See the 2010 World Index of Economic Freedom, published by the Heritage Foundation and the Wall Street Journal, at www.heritage.org/index/. The study evaluates economic freedom generally, not just trade openness. However, trade openness is one of the components, and the ratings can be found in the section “Executive Highlights” of the report.

26 The Food, Conservation, and Energy Act of 2008 (Pub.L. 110-234, 122 Stat. 923, enacted May 22, 2008, H.R. 2419, also known as the 2008 U.S. Farm Bill) is a $288 billion, five-year agricultural policy bill that was last passed into law by the United States Congress on June 18, 2008. This bill has been roundly criticized from right and left. See “A Disgraceful Farm Bill,” The New York Times, May 16, 2008.

27 For a useful description and summary of criticisms, see “Common Agricultural Policy”, at www.economicexpert.com/a/Common:Agricultural:Policy.htm

28 See Thomas Pogge, World Poverty and Human Rights 2d ed. (Polity, 2010): 17–19.

29 See “The Farmers Ruined by Subsidies,” The Times Online, www.timesonline.co.uk/tol/news/world/africa/article1629405.ece.

30 Loren Lomasky and I explore this issue in Justice at a Distance (unpublished manuscript).

31 See Miller Richard, “Cosmopolitan Respect and Patriotic Concern,” Philosophy and Public Affairs 27 (1998): 202; Rawls John, The Law of Peoples (Cambridge, MA: Harvard University Press, 1999), pp. 113–20; and Nagel Thomas, “The Problem of Global Justice,” Philosophy and Public Affairs 33 (2005): 113. There are important differences among these authors, but all favor a preference for compatriots in tax-based help (as opposed to voluntary charity.)

32 I avoid the word “harm” here because it prejudges the issue.

33 Joel Feinberg, Harm to Others (Oxford, UK: Oxford University Press), p. 65.

34 Mill John Stuart, On Liberty [1859] in Mill John Stuart, Utilitarianism, Liberty and Representative Government (New York: Dutton 1971), 72.

35 Here I follow Ripstein Arthur, “Beyond the Harm Principle,” Philosophy and Public Affairs 34, no. 3 (2006): 215. Writes Ripstein: “[I]f you defeat me in a fair contest, you do not deprive me of any of my powers. I merely failed at something that I was trying to do. That failure may disappoint me, but it doesn't deprive me of means that I already had, it only prevents me from acquiring further ones. My defeat may change the context in which I use those powers in future: if you win the championship, other people may no longer hire me to endorse their products. But I had no entitlement against you to a favorable context or to have those other people enter into cooperative arrangements with me.” (At pp. 238–39.)

36 A useful discussion of competitive harm can be found in Epstein Richard A., “The Harm Principle—And How It Grew,” University of Toronto Law Review 45 (1995): 369.

37 Mill makes exactly the same point: “Restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraint, qua restraint, is an evil: but the restraints in question affect only that part of conduct which society is competent to restrain, and are wrong solely because they do not really produce the results which it is desired to produce by them.” On Liberty, Section V, “Applications.”

38 There is yet another reason to oppose protectionism: even if the protectionist is right that the state can legitimately aid workers disadvantaged by trade, erecting trade barriers is a bad remedy. Domestic transfer policies such as industrial retraining are more efficient and fair ways to help those workers.

39 The politics of protectionism are well summarized in McGinnis John O. and Movsesian Mark L., “The World Trade Constitution,” Harvard Law Review 114 (2000): 521–31. See also Gene Grossman and Elhanan Helpman, Protection for Sale cit.

40 For Latin America, see de Soto Hernando, The Invisible Revolution in the Third World (New York: Harper & Row, 1989); for Africa, see Ayittey George B., Africa Betrayed (New York: St. Martin's Press, 1992).

41 For the example of Hugo Chávez in Venezuela, see Llosa Álvaro Vargas, “The Rise of Hugo Chávez,” The Independent Institute, September 19, 2007, www.independent.org/newsroom/article.asp?id=2028.

42 The argument is made by Risse Mathias, “Justice in Trade I: Obligations from Trading and the Pauper-Labor Argument,” Politics, Philosophy, and Economics 6 (2007): 356, and more fully by Weinar Leif, “Property Rights and the Resource Curse,” Philosophy & Public Affairs 36 (2008): 2.

43 See Leif Wenar, “Property Rights and the Resources Curse.”

44 Under traditional international law, any government (with some exceptions) with effective political control over a territory is deemed to be, internationally, the legitimate government of the state. Moreover, international law is generally indifferent about how the resources of the state are internally distributed: they may be in private hands, or they may have been expropriated by the government in whole or in part. See, e.g. UN General Assembly, Declaration of Principles of International Law Concerning Friendly Relations and Co-operation Among States in Accordance with the Charter of the United Nations, 24 October 1970, available at: http://www.unhcr.org/refworld/docid/3dda1f104.html [accessed 25 April 2011], especially the principle that (e) “Each State has the right freely to choose and develop its political, social, economic and cultural systems.” This rule allows governments to expropriate private property and do exactly what Wenar criticizes: sell them. Even more explicit are the principles in the Declaration on Permanent Sovereignty over Natural Resources, G.A. res. 1803 (XVII), 17 U.N. GAOR Supp. (No.17) at 15, U.N. Doc. A/5217 (1962), cited approvingly by Weinar: “4. Nationalization, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognized as overriding purely individual or private interests, both domestic and foreign.”

45 Risse, “Justice in Trade I,” 362.

46 This same point was made by Pogge Thomas, “Recognized and Violated By International Law: The Human Rights of the Global Poor,” Leiden Journal of International Law 18 (2005): 717; Singer Peter, One World : The Ethics of Globalization (New Haven: Yale Univeristy Press, 2004), 96105; and, in general terms (not specifically in reference to the trade system,) in my book A Philosophy of International Law (Boulder: Westview, 1998), 12.

47 Wenar, 20–21.

48 Risse, “Fairness in Trade I,” 366–69.

49 See Risse's example of the 1930 U.S Tariff Act, ibid., 367. Horacio Spector has identified labor standards precisely along these dimensions, and concluded that most of them do not reflect moral principles but rather rent-seeking, desire to avoid competition, etc. See Spector Horacio, “Philosophical Foundations of Labor Law,” Florida State University Law Review 33 (2006): 1119.

50 For a refutation of these arguments, see Zwolinski Matt, “Sweatshops, Choice, and Exploitation,” Business Ethics Quarterly 17 (2007): 689727.

51 Of course, parties must abide by their contracts, so employers could be contractually committed to paying higher wages even if cheaper labor is available elsewhere.

52 Quite apart from this, the evidence does not support the view that trading with developing countries has depressed wages in rich countries. Rather, trade with poor countries may well have improved wages, in the sense that it has moderated the decline that might have occurred due to non-trade factors, such as labor-saving technological change. Jagdish Bhagwati, In Defense of Globalization, 124–25.

53 I am even unsure about the claim that safety standards are morally required. Why not think of different levels of safety as labor benefits offered by businesses, so that workers can freely choose between various combinations of accident risk and economic welfare? But I don't pursue the matter.

54 I owe this point to Matt Zwolinski.

55 Matt Zwolinski and Ben Powell make a similar point in “The Ethical and Economic Case for Sweatshop Labor: A Critical Assessment” (unpublished, 2011). Here again, the evidence does not support the much feared “race to the bottom”, i.e., the view that allowing imports from countries with low standards will cause governments to relax theirs, thus creating a desperate race to lower production costs. Rather, the evidence shows exactly the opposite, a race to the top. As incomes rise in poor countries, their growing middle class expects and demands improvements in the workplace conditions. See Bhagwati, In Defense of Globalization, 127–34.

56 The World Trade Organization was created in 1995, and it is the international organization that deals with trade rules among nations. It is the successor to the General Agreement on Tariffs and Trade, which had been in place since 1947. See http://www.wto.org/english/thewto_e/thewto_e.htm.

57 See McGinnis & Movsesian, The World Trade Organization, 529–47.

58 For an earlier appraisal of the protectionist features of the WTO (then the GATT), see Bhagwati Jagdish, Protectionism, in The Concise Encyclopedia of Economics, (1988), available at http://www.economlib.org. My criticism of the WTO is diametrically opposed to the criticism by the anti-globalization forces, who blame the WTO for being too biased toward free trade. I believe, on the contrary, that the WTO does not do enough to promote free trade.

59 The most favored nation clause is the centerpiece of the international trade system. It prohibits discrimination among trade partners by obligating members to extend any trade concession they make on a product to the same product exported by everyone else. Article 1 of the GATT 1947 (one of the constitutive agreements of the WTO), reads: “any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties.”

60 See Sen Amartya, “How to Judge Globalism,” American Prospect (Winter 2002): 2 (“Global interchange is good; but the present set of global rules needlessly hurts the poor.”).

61 See Pogge Thomas, World Poverty and Human Rights, 2d ed. (Malden, MA: Polity, 2008).

62 Ibid., 1–32.

63 Risse Mathias, “Do We Owe the Global Poor Assistance or Rectification?Ethics & International Affairs, 19 (2005): 910.

64 Risse Mathias develops a full (and I think definitive) response to Pogge in his article “How Does the Global Order Harm the Poor?Philosophy and Public Affairs 33 (2005): 349–76.

65 Landes David, The Wealth and Poverty of Nations, (New York: Norton, 1998), 6768. See also his description of the ideal wealth-creating society, 239–40.

66 Pogge is aware that his views are contradicted by mainstream economic research. That is why he, uncharacteristically, dismisses economists in totum. He writes that we should take the economists' findings with a great deal of caution, because “while economists like to present themselves as disinterested scientists, they function today more typically as ideologists for our political and economic ‘elites’—much like most theologians did in an earlier age.” Pogge Thomas, “Real World Justice,” Journal of Ethics 9 (2005): 29.

67 See Kym Anderson, Agriculture, Trade Reform, and Poverty Reduction: Implications for Sub-Saharan Africa, http://www.unctad.org/en/docs/itcdtab24_en.pdf. The author shows that while trade liberalization in the agriculture sector can bring important gains, developing countries need to change their “anti-agriculture, anti-export and anti-poor bias of current policies.” The extremely complex empirical issues are set forth in Aksoy M. Ataman & Beghin John C., eds., Global Agricultural Trade and Developing Countries (Washington, D.C.: World Bank, 2004).

68 At several points Pogge suggests that this emphasis on domestic factors, which he calls explanatory nationalism, may be self-serving. See World Poverty, pp. 4, 6, and 15.

69 The seminal paper is Brander James A. and Spencer Barbara J., “Export Subsidies and International Market Share Rivalry,” Journal of International Economics 18 (1985): 83.

70 Id. at 84.

71 For a full discussion of the strategic-subsidy debate, see Irwin Douglas, Against the Tide: An Intellectual History of Free Trade (Princeton: Princeton University Press, 1996): 207–16.

72 See the discussion in Irwin, Against the Tide, See also Krugman Paul's criticism, “Does the New Trade Theory Require a New trade Policy,” The World Economy 15 (1992): 423.

73 For the effect of import substitution policies in Latin America, see Love Joseph L., “The Rise and Decline of Economic Structuralism in Latin America: New Dimensions,” Latin American Research Review 40 (2005): 105, (“it is universally agreed that ISI has not been a viable policy for some time.”) For a useful account of the debate, see generally Burton Henry J., “A Reconsideration of Import Substitution,” Journal of Economic Literature 36 (1998): 903.

* I am heavily indebted to Jonathan Klick of the University of Pennsylvania, who did the research summarized in Section II. Many thanks also to the Social Philosophy and Policy Center of Bowling Green State University. The summer I spent there in 2008 as a Visiting Scholar allowed me to conduct part of the research for this essay.

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