The Volokh Conspiracy

As longtime VC readers know, one of my pet peeves is denouncing the harmful effects of widespread political ignorance and irrationality. As a general rule, the things voters don’t know often hurt them. On rare occasions, however, political ignorance can actually be beneficial. The issue of free trade and protectionism is one such example.

In this article, Chicago Tribune columnist Steve Chapman laments the two presidential candidates’ pandering to public ignorance about the benefits of free trade:

Both candidates indulge the superstition that while exports are good, imports and outsourcing are bad. In reality, it makes no sense to make something at home if we can buy it cheaper from elsewhere. The point of producing is to allow consumption. Raising the cost of consumer goods by shutting out imports makes us poorer, not richer.

Outsourcing is a competitive necessity in a global economy. If a U.S. firm can’t compete with companies producing in Mexico or China, it’s wiser to relocate its factories abroad than to go on losing money here.

The assumption promoted by Obama and Romney is that unless we act against the Chinese, our manufacturers will be unable to compete. In fact, the value of American manufactured goods, adjusted for inflation, has risen by 10 percent over the past decade.

That’s easy to forget because the number of jobs has shrunk—a consequence of rising productivity, which allows companies to do more with less. Another reason it’s easy to forget is that Chinese output has grown. But as of 2010, the World Bank says, the U.S. remains the world’s biggest manufacturer. And we are far better off with China exporting manufactures than exporting virtually nothing, as was the case a generation ago.

Economists across the political spectrum agree that free trade is better for the economy than protectionism. Take it from Paul Krugman, if you don’t believe me. But polls show that the public is mostly protectionist. For example, a 2010 NBC/Wall Street Journal poll finds that 53% believe that trade agreements have generally hurt the US, compared to only 17% who believe they helped. As Bryan Caplan describes in detail his book The Myth of the Rational Voter, this divergence between public and expert opinion is mostly due to economic ignorance on the part of the former (the divergence persists and even grows after you control for income, economic self-interest, partisanship, ideology and other factors). Because the benefits of trade (lower prices for goods and effective use of comparative advantage) are often counterintuitive and difficult to explain to rationally ignorant voters, politicians like Obama and Romney have strong incentives to pander to protectionist prejudices.

Yet, Chapman notes, presidents’ actual policies on trade are much better than their campaign rhetoric:

If there is any good news about the candidates, it’s that their policies will most likely be better than their rhetoric. Aside from tires, Obama has generally avoided protectionism, while signing free-trade deals with South Korea, Panama and Colombia.

Romney will hear from plenty of Republican CEOs who favor freer trade. Few experts believe he will keep his pledge to label China a currency manipulator, setting off a trade war. Obama, after all, slammed President George W. Bush for failing to do so—but followed suit.

Obama reneged on his 2008 campaign promises to renegotiate NAFTA and impose sanctions on China. If Romney wins this year, his protectionist pandering will likely be forgotten after election day too. How can they get away with ignoring public opinion on this issue? Probably because most voters don’t follow trade policy closely and don’t notice when presidents renege on protectionist promises. As a result, Obama has suffered little political damage for ignoring his promises on these issues. The same ignorance that leads most voters to be protectionist in the first place also prevents them from punishing presidents who fail to act on their protectionist campaign rhetoric.

But the ignorance here is not entirely blissful. We have less protectionism than we would if the public closely monitored trade policy and severely punished politicians who deviate from its preferences. But we have much more than would exist if the majority of voters understood the benefits of free trade in the first place, and used their votes to punish protectionists. As things stand, many harmful protectionist policies still get enacted – partly because politicians cater to industry interest groups that benefit from them, and partly because they can’t completely ignore majority opinion on the issue.

In this case, ignorance does indeed have some beneficial effects. But that’s mostly because ignorance in one area partially offsets the harm caused by ignorance in another. Greater knowledge across the board would be better. But it’s not likely to happen any time soon.

UPDATE: I have corrected a couple of minor but annoying snafus in this post, most notably omitting Steve Chapman’s name in the first sentence mentioning his column. I apologize for the mistake.

Purchasing certified fair-trade, organic coffee helps improve the living conditions of coffee farmers in developing nations, right? Not necessarily. As Lawrence Solomon reports, a new study published in Ecological Economics found that over a ten-year period certified organic and organic fair-trade producers became poorer relative to conventional producers. Solomon comments:

The fair-trade business is filled with contradictions.

For starters, it discriminates against the very poorest of the world’s coffee farmers, most of whom are African, by requiring them to pay high certification fees. These fees — one of the factors that the German study cites as contributing to the farmers’ impoverishment — are especially perverse, given that the majority of Third World farmers are not only too poor to pay the certification fees, they’re also too poor to pay for the fertilizers and the pesticides that would disqualify coffee as certified organic.

Their coffee is organic by default, but because the farmers can’t provide the fees that certification agencies demand to fly down and check on their operations, the farmers lose out on the premium prices that can be fetched by certified coffee.

To add to the perversity, it’s an open secret that the certification process is lax and almost impossible to police, making it little more than a high-priced honour system. Although the certification associations have done their best to tighten flaws in the system, farmers and middlemen who want to get around the system inevitably do, bagging unearned profits. Those who remain scrupulous and follow the onerous and costly regulations — another source of inefficiency the German study notes in its analysis — lose out.

Labeling coffee as “fair-trade” enables merchants to charge a premium, but it’s not clear those consumers who are willing to shell out extra money for “fair-trade” coffee are getting what they pay for.

Over at Balkinization, guest blogger Michael Greve offers an excellent post explaining the Competitive Enterprise Institute’s pending cert. petition in a case challenging the tobacco cartel. In short, the 1998 Master Settlement Agreement for the lawsuits initiated by some state Attorneys General against the largest tobacco companies is a violation of the Compacts Clause. Article I, sect. 10, of the Constitution list some things that states may never do, and other things that states may only do with the consent of Congress.  The Compact Clause mandates: “No State shall, without the Consent of Congress...enter into any Agreement or Compact with another State...”

As Greve explains, the Supreme Court has not done much to enforce the Compact Clause for the last quarter century; but Greve points out that in 2009, the Roberts Court enforced another provision in section 10 (the Tonnage Clause) which had last been heard from in 1935. Even the Court’s most lax interpretations of the Compact Clause have not left the clause without meaning, and Greve persuasively argues that if the Compact Clause has any legal meaning, it must prohibit the MSA.

The CEI website has a page with links to various documents in the case, including an amicus brief in support of the cert. petition, signed by the impressively diverse and brilliant team of Kathleen Sullivan, Richard Epstein, and Alan Morrison.

As a practical matter, the MSA is a scheme by which a few tobacco giants, all of which were accused of decades of substantial misdeeds, including fraud, were allowed to create a system to cartelize the tobacco market, and to insulate their market shares against competition from smaller companies which had committed no wrong-doing. The VC’s Todd Zywicki participated in an antitrust professor amicus brief in favor of the cert. petition. That brief points out that the tobacco cartel is a classic violation of the Sherman Antitrust Act. As the Sherman Act has been interpreted, price-fixing is per se illegal, and price-fixing is the only antitrust violation which frequently results in criminal prosecution. While some precedents allow Sherman Act violations if they are part of a regulatory system supervised by a state, the antitrust professors argue that the tobacco cartel doe not fit within the scope of exceptions which have been authorized by Supreme Court precedent.

Today the United Steelworkers filed a complaint alleging that China is unfairly (and illegally) subsidizing clean energy exports, such as wind turbines and solar panels.  China has become one of the world’s largest producers of such technologies, but the Steelworkers allege it has gained market share through unfair trade practices.  The Obama Administration has 45 days to respond to the complaint and determine whether it will take formal action.  The NYT reports on the story here.

This filing places the Obama Administration in an awkward position. On the one hand, the Administration would like to support its union allies.  On the other, the Administration has sought to promote the deployment of clean energy technologies, including solar and wind.  The legal merits of the steelworkers’ case aside, China’s actions have made the purchase and installation of wind and solar technologies less expensive in the United States.  Given that cost is the greatest barrier to the proliferation of wind and solar power, China’s allegedly unfair trade practices have been a blessing for clean energy development in the United States.

Bradford Plumer has more here.

In the (UK) Independent, Robert Fisk, who has wide contacts in the Middle East, reports on “secret meetings . . . by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on” an Arab scheme that “will mean that oil will no longer be priced in dollars.”

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China‘s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China‘s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

Note that the Euro, but not the US dollar, is projected to be part of the basket currency.

This effort parallels efforts to replace the US dollar as the world reserve currency. One aspect of having a multicultural president who doesn’t embrace American exceptionalism is that this administration seems to be “quite open” to international proposals to replace — and thus undermine — the dollar.

UPDATE: On CNBC on Tuesday morning, Saudi Central Bank Governor Muhammad al-Jasser denied Robert Fisk’s report of a plan to replace the dollar in oil trading, but he didn’t rule it out for the future.