Tyler Cowen invokes a case frequently made (among Americans) in favor of free trade:

...I am still waiting for someone to defend trade barriers across the 50 states.

It's important to note that even among the 50 states, textbook "free trade" does not exist. There are no tariffs, but the United States is riddled with internal "export subsidies". When a state or locality puts together a deal to attract a factory, retain a corporate headquarters, or support a local industry, what is that about? Those tax breaks, underpriced loans, and infrastructure buildouts are explicit subsidies whose purpose is to ensure some economic activity happens "here rather than there", for reasons that elude sterile Econ 101 models of trade. They are usually granted to firms or industries that produce for markets much larger than the subsidizing locality, and, as with export subsidies, the benefits are shared by far-flung shareholders, managers, and customers, while the direct costs are borne locally by taxpayers. Yet they are still popular. States worry openly and realistically that they may lose industries without competitive incentive packages. The usual justifications for these programs precisely match the arguments for export subsidies — jobs (first and always), fighting poverty and blight, creating "clusters" ("Silicon"-everywhere in the late 1990s), and defending against depredation by other localities. Lots of governors, mayors, state legislators, and city councilman routinely defend these trade barriers across the 50 states.

Using the United States, plural, as a standard-bearer for "free trade" argues for a world with few tariffs, but a whole lot of strategic government subsidy. That might be a good model, actually, but it is not the model free trade ideologues usually have in mind.

Update History:
  • 12-July-2007, 5:15 a.m. EET: Gently reorganized sentence beginning "They are usually granted..." (for style, not substance).
Steve Randy Waldman — Wednesday July 11, 2007 at 6:16pm permalink
Gabriel (mail) (www):
Well, that's a bit much... Would you say that two neighboring countries, with no tariffs or quotas, but with different marginal tax rates are not engaging in "free trade"? (We could ask the same question replacing marginal tax rate with any policy instrument, from reserves requirements to minimum wages.)

And, if I'm allowed to complain a bit, reasons that elude Econ 101 are usually very bad reasons. As you say, have local taxpayers subsidize the consumption of foreigners and such.

So, yeah, there's a lot of bad fiscal policy in the US and elsewhere. What else is new? -- But I think you're stretching it thin to go from this to "no real free trade within the US" or so. :-)
7.11.2007 6:39pm
Steve Randy Waldman (mail) (www):
Gabriel — Of course you're right that there's a slippery slope. Any two jurisdictions whose governments make different policy choices implicitly favor or disfavor some actors over others, and could be said to engage in "subsidy" or "tariff", but going that far would rob all meaning of the words. Actually, the fact of ordinary policy difference may be a strong argument for free trade, as production can migrate to the most efficient jurisdiction given divergent policy preferences with unintended effects on the production of some goods and services. [If those effects were intentional, the issue becomes more contentious, whether it's desirable that trade undermine some policies and effectively limit options available to policymakers. Maybe yes (the "freshwater" view?), maybe no, maybe it depends.]

But I was trying to make a stronger point, that in fact many policies that are quite ordinary in the US don't affect interstate trade incidentally, but are structured and argued for in precisely the same terms as export subsidies in international commerce. US states give important industries all manner of tax breaks and outright credits, waive years of tax revenue and throw in free, expensive infrastructure to persuade a factory or firm to locate within its borders. Policymakers expressly justify these grants as means of preventing firms, industries, jobs, whatever from moving to other states. The alleged export subsidy isn't an accident of unrelated policy — it looks, feels, and smells like giveaways to "champion firms" and "critical industries" in international trade. We don't notice this much only because we're used to it. At worst it's tolerated like "pork", and at best it's considered a beneficial form of competition. (BTW, I don't have a general view of whether this is good or bad — while these subsidies always gives rent to rent seekers, they do occasionally seem to be worth the cost to paying localities. But what about localities that "lose"? It depends...)

I didn't mean to say there is "no real free trade" within the US, except in the trivial sense that there can be no "textbook" free trade anywhere, the real world is too distorted. Trade freedom is a matter of degree, and qualitatively, intra-US trade is much freer than most international trade. But, it is worth noting that the variant of relatively free trade within the US involves a great deal of strategic subsidy by states and localities, and if that variant is to be held up as a successful model, the fact of that subsidy should be acknowledged, and arguably imitated.

"[R]easons that elude Econ 101 are usually very bad reasons." Here, alas, we diverge. I like Econ-101-ishness too. Much of the art of the world may involve creating the preconditions under which Econ 101 reasoning mostly holds. But I don't think those preconditions don't create themselves, and we have to deal with that. I think most success stories involve large deviations from simple economic reasoning. As time goes by, I am ever more chastened by a fictionalized long-dead man who talked to ghosts. "There are more things in heaven and earth... Than are dreamt of in your philosophy." That applied to libertarian-ish me. I'm sure someday it'll apply to whatever me I am now.
7.11.2007 8:30pm
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