Is free trade solely of benefit to farmers/exporters?

Over at No Right Turn I/S states that we can’t simply view “free trade” as beneficial, we have to be mindful of the costs. Now this is true, as with any policy we have to look at the costs associated with change as well as the benefits before we decide what to do.

However, I am not convinced that the issue is exactly the way I/S has framed it – fundamentally, I fear the I/S views farmers (or potentially exporters more generally) as the only people who benefit from a free trade deal – while stating that the rest of society bears some “cost”. It is the benefit side of the equation I wish to discuss here:

To start with lets say that free trade deals do provide CHEAPER IMPORTS – this in itself is another benefit of such a deal, and as a result should be put down in the “benefit” column when analysing the issue. However, for fun lets assume that there is no benefit on the import side (a HUGE assumption). Even in this case, it is not solely exporters (and definitely not solely farmers) that benefit from a free trade deal.

A free trade agreement allows us to sell goods for a greater price in one of our markets, or it allows us to enter markets where we were previously capacity constrained. Overall, this should be viewed as an increase in income from foreign products.

Exporters still have to purchase some domestically produced goods. As their income rises, the price and quantity of domestic goods rises – which benefits the groups focused on producing for the domestic economy. Note I am not saying that more income is magically created – I am saying that some of the benefits from our improved trade position will feed into the domestic economy, by increasing demand for domestic products.

Furthermore, if the export of products we have a comparative advantage in is rising this allows the country to import more products – which effectively tells us that the country as a whole now has more stuff. This is the true REAL income boost associated with the free trade agreement.

So, there is more stuff overall and the ability to buy this new stuff is spread across our economy because i) exporters directly receive the income ii) domestic producers are exposed to the demand of domestic exporters.

It hardly sounds like a situation where the majority of society is giving stuff up “in order for New Zealand farmers to make a bit more money” as I/S suggests.

Also: I am impressed with the size of the consensus of people agreeing that a free trade deal between the US and NZ could be a good thing for us we have (the Standard), (the Hive), (Kiwiblog). It is good to see such a heavily trade exposed nation supporting policy that should be in its benefit.

Of course there are always protectionists, such as (No Right Turn), (Frog Blog) – and they are right to say that we must keep in mind the costs associated with these policies as well as the perceived benefits. However, they also have to be careful that they list the costs and benefits appropriately – rather than shifting to an anti-trade ideological position just because there are costs.

  • Kimble

    http://www.stuff.co.nz//blogs/showmethemoney/2008/09/23/why-an-american-free-trade-deal-is-a-ludicrous-and-dangerous-idea/

    Hickey goes against the grain, and it is hard to disagree with the idea that US trade is corrupted by vested interests.

  • http://tvhe.wordpress.com Matt Nolan

    “Hickey goes against the grain, and it is hard to disagree with the idea that US trade is corrupted by vested interests.”

    Indeed, so if our industries became dependent on US trade we would be vulnerable to a sudden shock from there economy. On thing to remember here is that this isn’t an issue of free trade – it is an issue of a lack of free trade, and US protectionism.

    Even so, NZ isn’t likely to be in a position where is becomes overtly dependent on trade to the US for industries. I believe we have sufficiently diversified our markets to protect ourselves from the problems we had when Britain entered the EEC.

    Ultimately, the purpose of this post was to criticise the idea that only exporters benefit from free trade. I still respect the idea that there are costs associated with opening up borders with another country, and these have to be taken into account

  • http://billbennettnz.wordpress.com/ billbennettnz

    While I agree with the notion that true free trade benefits everyone, Hickey is spot on about America’s distorted idea of a free trade deal.

    Australia has a free trade agreement with America. Where are the benefits to Australians?

  • http://tvhe.wordpress.com Matt Nolan

    “Australia has a free trade agreement with America. Where are the benefits to Australians?”

    Someone would need to do a large GE model of the Australian economy in order to answer that question – without an appropriate counter-factual I can’t really say anything :)

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