Just a couple of days after Eric writes about Free Trade, Paul Krugman writes briefly about it. Funny that.

Before we start getting carried away with arguments for or against Free Trade, we have to define it. Free Trade is the minimization of transactions costs associated with international trade, where transaction costs are time delays, money spent, and/or any other hurdle that may arise in shipping product (goods or services) from one country to another.

Barring any policy decisions, the only reason we'd trade with another nation is that they can make a product cheaper than we can. Were it more expensive, we wouldn't purchase it there, and if it were the same price, we wouldn't care.

The smaller the total transaction costs are, the larger our net savings from international trade grow. As transaction costs fall, more product can be profitably traded between the countries. And for each of these additional products traded, we reap more savings as a nation.

For example, say transaction costs were uniformly 5% for all products traded between two nations. The only products that would be traded would be the goods that cost 95% or less of the domestic price in the foreign market. Anything in the domestic market that traded at greater than 95% would end up costing more than 100% in the domestic market, and no one would buy it.

From a money perspective, everyone should enjoy saving money, which is precisely what Free Trade does. But that's not the only concern (this gets back to that Barring any policy decisions clause I sneakily put in earlier).

The big policy concerns regarding Free Trade are:

  1. It exploits foreign workers
  2. It exploits the environment
  3. It hurts domestic workers
  4. It adversely affects national security
Regarding 1, Free Trade will create demand and some of this demand will be met by businesses run on exploited labor. We can lean on countries to change their policies, but keep in mind that child labor was only prohibited in 1936 with the Walsh-Healey Act (largely because nobody wanted cheap child labor competing for "adult" jobs in the Great Depression).

Regarding 2, we can again lean on countries to pass anti-pollution laws. But we have only recently started greening ourselves (skipping over our objection to the Kyoto Protocol).

3 is only problematic if changes happen quickly. For example, we just killed 2 million US jobs during this last recession. That means we now have 2 million people to retrain. That's bad, but this doesn't continue forever. As we lose jobs, we bid down the cost of labor in the US, which makes more product cheaper to make in the US.

4 is a biggie. Since technology has been able to reduce massive destruction until it fits in cute little packages, we have a hard time defending against this threat. We then have to scan all suspicious items, which just increases transaction costs (clearly anti-Free Trade). Beyond this, people will argue that we have to provide for the production and distribution of food, clothing, shelter, and weaponry to our citizenry in case of war. If any of this is dependent upon another nation, we're hosed (if this were the real reason, we'd get off of oil in a hurry).

To counter these, Free Trade works to eliminate the differences in standards of living between countries. And when most people are fat and happy, there should be less war (at least that's the hope).

Depending on how you feel about those 4 policy items versus decreasing disparities in standards of living, that'll determine how you feel about Free Trade.

Thanksgiving was beyond good this year; yes, there was some family stress, but that was negligible. My dad and stepmom are taking care of my stepmom's aunt, Ethel. The bad thing is that Ethel can't be with my stepmom's mom, and it's disturbing to see sibling rivalry stuck in fight mode at such an old age.

But that was minor; I got to relax and enjoy the dull gray landscape of early Winter in Vermont, which was very much brightened by the lack of billboards. There's nothing like listening to punk and thinking about a paper for Marketing 520 to fill your head with the evils of outdoor advertising.

The rest and relaxation gave me time to reflect on some of my posts here. It seems that when I have stress in my life that I can't voice, I pull out the old US punching bag. While it's good to beat up on the government, I need to:

  1. Do more research.
  2. Start writing actual legislators.

My mom recently got laid off from the American Cancer Society, and took a pay cut to get another job. She was worried about being able to retire at 65, so we sat down and reviewed her finances and goals for retirement. She's in good shape, and her goals are attainable, so that was reassuring to her. But she left one thing off her list of assets, so I think she's going to have a hard time coping with a future event. The only good thing is that I'm forewarned, as I'm going to need help helping Mom on this one.

And Dad's still having fun in his retirement, although I'm spicing up his life by lending him Financial Statement Analysis. I'll keep touching base with him to see how he's coming with that material. It'll be another important tool in the money toolbox.

But that minor victory was followed up with my step-brother whooping my ass in Stratego. There will be a rematch over Christmas, I assure you.

And to cap it all off, Arjun was in town when I got back. Kevin, Arjun, and I did the traditional El Rodeo discussion run, the nexus of psychology, economics, and life. Arjun's going to send me some links, and I'll post more on our discussions.

Back to work, and a mountain of email. ;)