Equal Trade vs. Free Trade

The following article is the second in a ten part series written by Emeritus Associate Professor W. Raymond Mills.

Equal trade is presented here as a new idea, a proposed ideal, hopefully to be adopted by all nations. Free trade is an old idea (1776), also presented as an ideal to be adopted by all nations.

The first difference between free trade and equal trade is that the utility of equal trade, for any nation that adopts this ideal, is not dependent upon how many other nations adopt the same ideal. If the U.S. is the only nation to embrace equal trade, the gains for the U.S. will remain. Moving from a goods trade deficit of 881 billion to a much smaller number will benefit the U.S., regardless of what other nations do. That world trade will become sustainable is a side benefit enjoyed by all nations.

The utility of the free trade ideal, for any adopter nation that is not the leading manufacturing nation in the world, is totally dependent upon what other nations do. If all nations open their doors fully to imports, with no restrictions, this would maximize the ability of each participating nation to specialize in producing those goods in which they have a comparative advantage. This extreme degree of specialization would maximize total world production and each nation would maximize their GDP by using their own resources to maximum advantage. This is the vision which has entranced economists for years.

The reality is that all nations restrict imports, with the possible exception of Singapore.

Because exports add to GDP and imports detract from GDP, each nation that restricts imports gains an advantage over other nations that do not restrict imports. Subsidizing exports also increases the likelihood of creating a trade surplus. The incentives available to each nation, to move their nation toward a trade surplus, work against every nation following the free trade ideal.

The World Trade Organization has become a place where nations squabble with each other over who is deviating the most from the free trade ideal. The vision of every nation opening its door to imports without restrictions cannot become a reality. It has not happened and it will not happen, given the gains in GDP every nation can achieve by creating a trade surplus.

The proper trade policy for each nation is to seek to manage its trade so as to gain as much as possible from trade. This would encourage each nation that has a trade deficit to adopt the goal of equal trade.

The U.S. should withdraw from the World Trade Organization if that organization will not shift to the goal of equal trade.

Comparative Advantage shows that each nation will gain from trade, regardless of its productive efficiency, if it concentrates its productive resources on that product for which it has a comparative advantage AND THE PRODUCTS CREATED BY EACH NATION CAN BE SOLD ON THE INTERNATIONAL MARKET. The last requirement is not listed in the usual discussion of Comparative Advantage. Comparative Advantage demonstrates the ability of two nations to maximize joint production of goods when both nations specialize properly. But the production of goods is only part of the process. The products created must be sold or swapped for the greater production to benefit both parties. If one nation refuses to swap (or exchange via cash) the extra wealth each nation expects to gain disappears. The existence of equal trade is a logical requirement for the increased production possibilities to benefit both parties.

The heavy use of models by the economics profession provides another reason to use equal trade as an ideal. Modeling is made easier by assuming equal trade. Simple trade models assume both equal trade and no unemployment. If the economics profession would switch to equal trade as an ideal, that would make their models more congruent with the ideals they profess.

The U.S. government should abandon the attempt to support free trade and instead embrace equal trade as the goal.

Click here to read the first article in this series.

W. Raymond Mills is an Emeritus Associate Professor of City and Regional Planning at The Ohio State University. Mills' Ph.D was in Sociology from the U. of Michigan (in 1958), his specialty was forecasting economic and population growth in metropolitan areas in the U.S. He can be contacted via email: wrmills@wideopenwest.com