01/25/2011 05:47 pm ET Updated May 25, 2011

Why Free Trade Can't Abolish International Economic Rivalry

A recent article criticizing my work contained this multifaceted gem of fallacies:

Even a dumb lawyer like me can see that modern global supply chains have made "a world of ruthless economic rivalry" a thing of the distant past, and that trade (i.e., voluntary, mutually beneficial exchanges) has never, ever been a zero sum game.

Let's take this apart, step-by-step.

1. The idea that modern global supply chains have abolished international economic rivalry is trivially false. Even if aircraft, say, are now made out of components manufactured all over the world and brought together for assembly, this doesn't change the fact that the steps of the supply chain with high value-added per man-hour will take place in some nations and not others. And high value-added per man-hour is the only possible basis of sustainable high wages. That's why Alabama paid $153 million in incentives to land a Mercedes-Benz plant, and governments all over the world are in a similar race.

2. The statement that "trade (i.e., voluntary, mutually beneficial exchanges) has never, ever been a zero sum game" is, by virtue of its id est parenthesis, strictly speaking a mere tautology. I assume that what the author meant to say was that "trade consists of voluntary, mutually beneficial exchanges and has therefore never, ever been a zero sum game." (He is welcome to correct me if I misunderstand him here.) There are three problems with this idea:

a) Trade doesn't have to be a zero-sum game to be a rivalry. Football isn't a zero-sum game, because even if you lose, you still have the fun of playing the game. But that doesn't mean there aren't winners and losers.

b) By the "mutually beneficial" standard, it is advantageous for a starving man to sell his shoes! True enough, narrowly speaking, but it avoids the much more important question of how he got to be starving and without any other assets in the first place. Selling his shoes is a response to a particular bargaining position that he finds himself in; it does nothing about how he got into this position or how to avoid ending up thus. Analogously, America borrowing money from abroad to buy flat-screen TVs (as we do) is indeed better for us than going without the TVs. But what would be even better for us is if we had the capacity to produce them for ourselves, as then we would not only enjoy the TVs, but also the high-paying jobs associated with hosting a technologically advanced major industry.

c) The calculation of what is "mutually beneficial" depends, in a market economy, on prices being right. And there are any number of reasons why they can be wrong in international trade. Let's start with the obvious fact of China's government artificially manipulating its currency to gain competitive advantage. If prices are wrong due to state intervention, then free-market responses to those prices will be wrong, too. As I've noted before, libertarianism only works in a perfect world.