One Finite Planet

Free Trade: Why everybody has budget deficits

First Published:

debtGovernments of developed countries all around the world are running budget deficits right now, and the reason follows from free trade.  I have posted before on how every ethical decision our society makes comes at an economic cost. In many cases, this economic cost is a government cost and require increasing taxes, but in today’s free trade world international competition now dictates low tax rates to be competitive. The result is inescapable deficits.

What is good about free trade, and why is too much free trade a disaster?

The free trade dream.

Agriculture provides the classical example. Country A has cool climate and can very effectively grow strawberries.  Country B is tropical and grows great mangos.  Each country could try and grow both types of fruit,  but it will be expensive and problematic with one of the fruits.  If each country focuses on what that country does best, and trades their excess for the other fruit from the other country, both countries can enjoy both fruits with optimum efficiency.

This is the dream of free trade.  Different countries each have things they do best.  Free trade allows each country to focus only on what they do best, and trade with other countries for all other goods.  The world has every product produced by the most cost efficient producer,  leading to the lowest possible cost for all products.

How can too much free trade can be a problem?

With the dream example, the climate is the reason for the different skills, but climate really only applies to agriculture, which for example in Australia, now accounts for 1% of all employment.  For most actual jobs, reason why one country is more efficient than another does comes not from geography.  The real differences come from the economic system.

The dream is example highlights, with two countries that are each different, shows the motivation for free trade.  But if the whole world has free trade, many countries that are actually no so different become part of the free trade marketplace.  With our climate dependant fruit example, the whole band (or bands to include northern and southern hemispheres)  of countries with similar climate are all competing with each other. In many cases there is no reason from the environment why one country should outperform another.  When there is no natural advantage, this is where the scope for free trade to break society.

Ethics vs Economic Efficiency.

Every ethics decision a country makes comes at an economic cost.  Want to ensure the environment is not damaged?  This adds economic cost.  Want safety standards for workers?  This adds costs to production, and cost to taxation for regulation. Should the disabled and disadvantaged be cared for? This adds a taxation cost to the economy, as does universal education and health care.

With free trade, countries with no other economic difference are competing.  Every ethical decision makes industry less competitive.  Every ethics decision could result in a loss of jobs to another country.  The decision to ensure better and safer conditions for workers, or that an industry does not pollute, may simply move the workers or the pollution to another country.   This can provide a clean conscience for the society that makes the decision, and saves any resulting increased costs of goods since the goods are still produced without the costs of the ethical decision in another country.

The Conclusion.

Ethical decisions that move jobs offshore not only damage the economy, they also damage taxation revenue.  Ethical decisions to provide for the disabled and less fortunate, to provide ideal universal health care and education require increases in taxes,  but those taxes reduce competitiveness, so if taxes are raised, industry moves offshore and taxation revenue falls again.

The end result is that developed countries cannot raise the taxation revenue to provide for the ethical choices the population desires.  Perhaps the population is prepared to pay that 10% extra for their toaster resulting from higher taxes,  but in the end the country would become non-competitive if the taxes are in place.   Tax companies and the businesses move offshore.  Tax the rich and they move themselves or their wealth offshore.  While there is no barrier to moving across borders to finding the lowest cost,  countries with an ethical conscience are going to find huge problems balancing the budget.

 

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