On Some of the More Difficult Questions About Trade Policy, Continued.

In my previous column, I argued that for a policy of free trade, some especially difficult questions cannot be answered in the abstract. There are questions that cannot be answered independently of the particular facts of the real-world situations that give these questions their relevance. Reasonable responses in the abstract to such questions can do nothing more than identify the relevant trade-offs that are in play. It’s wise to recognize that reasonable people can, and likely will, disagree with each other over how much weight to assign to the ‘cost’ side of any specific trade-off, relative to that trade-off’s ‘benefit’ side.

Consider Europe’s importation of substantial amounts of petroleum and natural gas from Russia. Now that Russian strongman Vladimir Putin has ordered Russian military forces to invade Ukraine, European countries find themselves, in effect, as the customers of a nasty brute with nuclear weapons. If Europeans were now to refuse to continue to buy energy supplies from this brute, they would impose on themselves a hardship. Because oil and gas are crucial sources of energy, this hardship would be unusually harsh. Europeans’ self-interest is thus perhaps too likely to lead them to continue to buy Russian oil and gas, despite the fact that doing so helps to power Putin’s war machine.

Wouldn’t it have been better for Europeans not to become dependent in the first place on substantial amounts of Russian oil and gas?

Even with today’s full knowledge that Putin invaded Ukraine, this question is impossible to answer in the abstract. The downside of European dependence on energy supplies from the Russian aggressor is real and obvious. This dependence raises Europeans’ costs of halting their commercial exchange with Russia, a commercial exchange that helps to support a detestable and dangerous war machine. But there’s an upside to this dependence that could, under certain circumstances, outweigh the downside. It’s an upside that is typically ignored. This upside is the dependance of Russians on whatever it is they purchase with their export earnings from European (and European allied) countries.

Precisely because Russia profits from selling oil and gas to European countries, Russia depends on Europe no less than Europe depends on Russia. This dependence of Russians on Europeans is rooted in Russians’ use of the earnings they reap from their oil and gas exports to buy imports. If Russians received in exchange for their exports no real goods and services from non-Russians, Russian energy exports would be unambiguously harmful to Russians (and unambiguously beneficial to people outside of Russia). Under such circumstances, Russians, in exchange for nothing but cash, would send valuable oil and gas to other countries and thus better enable Europeans and other non-Russians literally to fuel their opposition to Putin’s aggression. If, in other words, Russians received in exchange for their oil and gas only money (that is, only cash, real or digitized) Russians would receive nothing of any use for waging a war. Cash as such, hoarded rather than used to purchase real goods and services, cannot be eaten, woven into military uniforms, or provide troop transportation. And as a military weapon, cash is utterly ineffective.

Putin, therefore, can successfully use Russia’s energy exports to strengthen his hand militarily only insofar as he and other Russians spend the earnings from these export sales on acquiring real goods and services from abroad. And so Russia’s exports of oil and gas make Russia dependent for real goods and services upon other countries.

What goods and services do Russians import as a result of their energy exports? If these Russian imports are frivolous (if, say, these imports are limited to children’s toys and high-fashion clothing) any reduction in Russia’s energy exports to Europe would practically impose a lesser burden on Russians than on Europeans. The reduction in Russian exports would result in Russians having less access to toys and fancy clothes, while Europeans would suffer reduced access to energy. But if Russians’ imports are more substantial (say, of food and materiel used as inputs in heavy industry) then if Putin follows through on threats to cut Russian energy exports, he and his fellow Russians would, in consequence, have to eat less or devote more labor and resources to food production. Russians would also have fewer inputs to use for producing weaponry.

While hardly guaranteed, it’s more than remotely possible that the costs to Russians, including to Putin and his generals personally, of cutting off Russian energy exports would be so great as to render empty Putin’s threats to cut off these exports. If so, Europeans would then have to trade off the costs of continuing to supply, in the form of their own exports, goods and services to Russia, against the benefits to them (Europeans) of continuing to import Russian oil and gas.

Whatever might be the ‘best’ way to make this trade-off in any real-world instance, discussions of one country’s or region’s dependence on imports from another country or region should stop being conducted as if this dependence is unilateral. It never is. Great confusion is stirred up by the failure to recognize that any country’s dependence rooted in international trade on other countries is always multilateral. It follows that if the government of the home country restricts imports today in order to avoid being dependent for supplies on a foreign country tomorrow, that import restriction will also reduce the economic dependency that the foreign country will have, either directly or indirectly, on the home country both today and tomorrow.

This reality points to yet another important trade-off that should be considered whenever proposals are aired for the government of the home country to reduce commercial ties with a foreign country that is a potential military adversary. Because the dependency of one country on another is always mutual, this dependency, while not eliminating the prospect of a shooting war, does diminish this prospect. The more extensive and long-lasting are commercial ties between two countries, the more each country stands to lose by going to war with the other. And so if today the government of (say) Germany, fearing the possibility of war with Russia tomorrow, decides to restrict imports of oil and gas from Russia, that decision increases the chances of the very event (war) the fear of which prompted the import restriction.

The fact that a particular trade restriction increases the chances of war is not alone a sufficient reason to conclude in every case that the trade restriction is unwarranted. By how much does a particular trade restriction raise the chance of war? And what is the military, strategic, or economic value to the home country of being free of worrisome commercial entanglements with a potential belligerent? These questions cannot be answered in the abstract. But the fact that using import restrictions to avoid worrisome commercial entanglements with a foreign country comes at the price of raising the prospects of war should at least be acknowledged.

Reality is messy. It seldom presents to us “solutions.” Much more often we are confronted only with trade-offs. Principled and informed defenders of a policy of free trade accept this fact. I wish that more defenders of protectionism did likewise.

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