(Evan Soltas – Bloomberg)
Are free-trade agreements protectionist? It sounds like a silly question, but it’s always worth asking of regional (as opposed to global) trade pacts – like the ones the U.S. is seriously considering with the European Union and the Pacific Rim.
Economists are often mocked for free-trade worship, but they’re skeptical when appropriate. Jacob Viner, a University of Chicago economist, argued in 1950 that free-trade agreements don’t necessarily promote free trade.
Trade deals have two effects, he said: They create trade by lowering the cost of international exchange, but they also divert it by the selective reduction of barriers. Whether the first or the second effect predominates determines whether the deal is good or bad.
To see this more clearly, imagine three countries, Viner wrote, and call them A, B and C. Country A can import a good from B and C. At the beginning, A has the same import tariffs against both. B produces the good less efficiently than C, so A buys the good from C. Then A and B make a trade agreement, but they leave out C. The reduction in tariffs leads A to buy the good from B, the less efficient producer. Now the world is worse off and trade more distorted. Read more here.
Date: June 18, 2013