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ECONOMICS

Dispelling lazy thinking on trade deals

  • 20 March 2018

 

The recent furore about Donald Trump's imposing of tariffs on steel, from which Australian companies have been exempted, raises an interesting question about the economics discipline. Which is better, an oxymoron or a tautology?

The oxymoron in question is 'financial deregulation'. This is a logical impossibility, because finance consists of regulations, rules. To deregulate finance is like taking the hydrogen and oxygen out of water, or the narcissism out of Donald Trump. It cannot be done.

The tautology is the doctrine of comparative advantage, which is the basis of modern trade theory and the dogma that underpins the belief that all trade protections are, ipso facto, wrong. First devised by David Ricardo in the 18th century, this theory is described by the Nobel Prize winning economist Paul Krugman as a 'badge of honour': a cornerstone insight of the discipline that only a true economist would understand.

He makes the claim in his book Peddling Prosperity, and accompanies it with a table to show its mathematical force. It is superficially compelling, but a little examination of the arithmetic reveals that the whole thing is circular. It says that if countries transact more by specialising in what they do best, then the GDP (transactions) of both countries will rise. Restated, this is: 'the more transactions there are, the more transactions there are'. The disguised circularity is then used to argue that high wage countries specialise in high wage tasks and low wage countries do low wage tasks, with both sides benefiting.

In truth, comparative advantage theory says nothing about the consequences of trade, only that trade has occurred (which is hardly surprising, given that that was the starting point).

So, which is better? This writer's conclusion is that a tautology beats an oxymoron, because although it is telling us nothing, it is at least necessarily true, whereas an oxymoron is necessarily false. Financial deregulation is a dangerous lie; the theory of comparative advantage is really telling us nothing at all. Its danger is that it tricks governments into thinking they have done the hard policy work when they have not.

We see this laziness in the uncritical acceptance in Australia about trade agreements. Proponents enthusiastically confect dollar figures about the alleged benefits, which usually turn out to be chimerical. Take, for example, the Australia-US Trade Agreement (AUSFTA) in 2005, which was touted as a great positive for the Australian economy. According to Shiro Armstrong, a researcher at the

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