On Some of the More Difficult Questions About Trade Policy

Gale Pooley, Brigham Young University at Hawaii economist and co-author of the splendid new volume Superabundanace, emailed me yesterday. Here’s part of Gale’s e-mail:

My International Econ students are working their way through your book [Globalization] this semester.

How do you explain the trade complications with Europe and Russia?

Maybe trading with a tyrant carries risk?

Especially if it has a monopoly-like power?

Questions such as these are among the most difficult for proponents of free trade to answer. The difficulty here isn’t confined to the always-present obstacle of making seen that which is unseen. When my students ask me “Don’t imports destroy jobs?” my challenge is to help the students to see that, while the decisions of fellow-citizens’ to buy more imported (say) steel do indeed ‘destroy’ some jobs in the American steel industry, jobs elsewhere in America are created. This job creation is fueled chiefly by foreigners either spending or investing their additional dollar earnings in America.

Opening students’ eyes to this reality, and to its role in supporting a case for free trade, is not without challenges. “But what if foreigners hoard their dollars?” “What if the steelworkers who lose their jobs are in their mid-50s and can’t easily find new jobs?” “What if foreign steel producers are subsidized by their governments?” Such important questions are naturally asked, and they deserve answers. Solid answers, though, are  available. And if grasped, these answers amount to a sort of informal ‘proof’ that a policy of free trade is economically and ethically superior to the practice of protectionism, at least as far as the concern about the availability of employment in the home economy goes.

Matters differ with questions of the sort that are asked by Prof. Pooley’s students. As with more basic questions about trade, answering these more-difficult questions involves the uncloaking of aspects of commercial exchange that are easily overlooked. But even when all of these ‘unseen’ aspects of trade are revealed and accepted as important, what emerges isn’t the sort of informal ‘proof’ of the superiority of free trade that arises after answering the more commonplace, simpler questions such as those in the previous paragraph. What emerges, instead, is a catalog of tradeoffs, the management of which sparks disagreement among even the most reasonable of people.

By the nature of these sorts of difficult questions, each one is highly fact-specific. A conclusion reached with great confidence about one particular case provides only suggestive guidance for assessing similar yet distinct cases. Nevertheless, to perform each such assessment, it’s wise to begin by asking several pertinent questions.

Consider as a real-world example the current war between Russia and Ukraine. When Vladimir Putin ordered Russian forces to invade Ukraine in early 2022, about 40 percent of the Europe Union’s consumption of natural gas was of gas imported from Russia. Many European countries depend on Russia also for a great deal of petroleum. Europe’s dependence for much of its energy on Russian gas and oil obviously subjects European countries to an increased likelihood of suffering supply disruptions caused by physical damage to, or destruction of, the infrastructure used to transport gas and oil from Russia to its European customers. And so it’s fair to ask: Shouldn’t European governments have avoided energy dependence on a militarist country such as Russia in order to escape the possibility of suffering disruptions in the supplies of an input as critical as energy?

Even if we rule out physical damage to the supply infrastructure, at least two other questions loom: What if Putin restricts Russian exports to Europe as a means of dampening Europe’s willingness, and perhaps even its ability to support Ukraine? And is it ethical to participate in commercial exchange the profits of which can be used by a tyrant to help fund his aggression?

These questions not only point to problems that have no ‘solutions.’ Much more frustrating is the fact that the best answers to these questions are always only tentative, embedded as they are both in the uncertainties of highly detailed facts that are unknowable to any single mind, as well as in our ignorance of how each of the different government officials on all sides of the conflict will react to the strategic moves of the other officials. The best we can do is to identify the relevant, inescapable tradeoffs.

It’s true, of course, that when EU countries before the Russia-Ukraine war imported gas and oil from Russia, Europeans came to depend, to some degree, for their standard of living on the government of Russia. Even a first-grader understands that if the Russian government later restricts its citizens’ ability to export, Europeans will suffer as a result.

But the reality of this suffering by Europeans today does not imply that European governments were earlier myopic or otherwise unwise not to obstruct their citizens’ ability to import energy from Russia. The pre-war gains that Europeans reaped as a result of this trade are real and must be counted against whatever harms Europeans now experience as a consequence of their dependence on trade with Russia.

And so we encounter one important tradeoff: The gains to the home country from pre-war trade with a foreign aggressor must be weighed against the losses that result from whatever dependence on this trade pinches on the home country during the war. In the heat of battle it’s tempting to leap to the conclusion that those pre-war gains cannot possibly have been worth their costs. But this conclusion might be mistaken; it’s an empirical question that cannot be answered in the abstract.

By acquiring gas and oil from Russia before the war, Europeans were able to devote more of their resources than would otherwise have been the case to producing goods and services other than gas and oil. Is the cost of Europe’s dependence today on Russian supplies of gas and oil greater than the accumulated benefits that Europeans reaped from this same dependence before the war?

In this particular case, much of what Europeans were instead enabled to produce as a result of buying gas and oil from Russia were inputs and infrastructure for a move to a ‘green energy’ economy. My own assessment is that this government-driven forcing of ‘green energy’ on itself was a calamitous policy mistake by Europe. And so if today it is in fact true that Europe’s dependence on Russian gas and oil isn’t worth the cost, the ultimate reason isn’t grounded in Europeans having had too much freedom of trade but, instead, in Europeans unwisely and myopically pursuing what we can now ironically describe as unsustainable sources of energy.

This fact points to a second tradeoff: Empowering the home government today to use trade policy to protect against unfortunate commercial entanglements in the future raises the prospect of failure by the home government.

The only practical way to have ensured that Europeans would avoid trading with Russians in ways that strengthened Putin militarily was for European governments to assess how their trade with Russians might be restricted in order to best protect against Putin’s militarism. Commercial decisions by individual European consumers and businesses would likely not have promoted this admirable goal. But European governments, like all governments, are limited in what their officials can know, and are prone to abuse their powers even in ways that harm their own citizens. So while it’s easy to see the (very real) costs of being dependent today on supplies from a country with which our own country is now belligerent, trusting our government earlier to have prevented these trade ties – and, indeed, trusting our government even now to sever these ties – is to trust an inherently imperfect and potentially dangerous government with a power that it might well abuse. The cost of this abuse could turn out to be greater than the cost of simply enduring the dependency on supplies from the foreign country.

The relevant tradeoffs don’t end here. Others must be considered. I’ll identify some of these other tradeoffs in my next column.

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