The Undercover Economist

Content Warning: This section includes descriptions of the famine of the Great Leap Forward.

Chapter 9 begins with the example of Bruges, a town that was known for its prosperous trading from the ninth century onward. However, in the 15th century, the river on which Bruges sits “began to silt up” (216). No trading ships could reach Bruges, and the trading moved up to Antwerp instead. Bruges quickly became a “backwater.” Meanwhile, Antwerp became the “greatest economic power in Western Europe” and remains powerful to this day (216). Through this example, Harford makes it clear that wealth requires development; cities that stagnate, like Bruges, cannot remain an economic force.

Harford then introduces the economic concept of “comparative advantage,” which is the principle that people, countries, and institutions should not do what they are better at than others but what they are best at as a whole. The United States, for example, curtails trading with China in order to help American manufacturers since China is able to make goods like TVs and furniture more cheaply. However, Harford believes that America should not use trade barriers to artificially alter the economy. Without trade barriers, China and America can trade with one another and both be better off. The fact that the Chinese worker can make more items faster does not cost the American worker anything. The Chinese do not trade with America out of charity: They do so because America has resources they want. By focusing on what America can sell most effectively, both America and China will benefit. Trade simply gives citizens of each country more access to cheap goods and more innovation in industrial techniques.

While Harford believes that “[trade] barriers will always cause more harm than good” (224), he acknowledges that free trade does not benefit everybody. Competition from cheaper or better foreign goods cannot put domestic industries out of business—if it did so, no one could afford to buy the foreign goods. However, free trade can wipe out entire industries, leading to unemployment. While the country will benefit from free trade as a whole, it is difficult to convince the unemployed worker that their hardship is worth it. The economist David Friedman observed that there are “two ways for the United States to produce cars: they can build them in Detroit or grow them in Iowa” (225). To grow them in Iowa, the US uses trade to turn wheat into cars. They grow wheat and then send it out on a ship to Japan, and the ship comes back with Toyotas in exchange for the wheat. Import restrictions on cars might help the car manufacturers in Detroit, but it will harm the car manufacturers (or farmers) in Iowa.

Harford acknowledges that trade does cause environmental damage and that this is a global concern. However, he doesn’t agree with critics of globalization who use the “race to the bottom” argument to claim that industries rush to countries with more lenient environmental protection laws to make their goods more cheaply and quickly (229). He says that rich countries mostly trade with other rich countries that have similar environmental regulations. Also, environmental regulations are negligible in terms of cost for production, regardless of location.

Critics of globalization also argue that moving goods across the world consumes resources and causes pollution. Harford says that they are focusing on the wrong aspect of the problem. All industries can have a harmful effect on the environment, but trade barriers do not prevent this. Environmental regulations that are far-reaching and instituted according to the geographic area, not the national borders, are the solution to environmental damage. Externality charges are also the best way to address environmental damage caused by transportation.

The third critique regularly levied against globalization is that economic growth makes people richer, and as people get richer, they become more capable of harming the environment and less worried about the consequences of that harm. Harford argues that poor people, too, suffer from the effects of pollution, like the carcinogenic smoke from wood-burning stoves or the diseases caused by unsafe drinking water. Being poor is no protection from environmental problems. In fact, once people get rich, they start to demand improved environmental standards from their technology and their society in order to improve their lives and the lives of their children.

Several critics of global trade also object to the poor working conditions of the laborers involved in global trade. The author argues that those poor working conditions, including long hours, low wages, and unsafe working conditions, are actually the result of global poverty, not global trade. The depressed economies of these regions lead people to become desperate for work, which ruins the idea of the perfectly competitive free market. He says that people should always have the freedom to leave abysmal conditions and bad pay for a better job; however, if there is no better job, then their other options are starvation or perhaps crime. The effects of free trade often improve these conditions instead of worsening them. Harford introduces the differences between North and South Korea in terms of wealth, showing the clear improvement in national well-being created by South Korea’s embrace of free trade and the misery caused by North Korea’s isolationism.

Harford says that nations impose trade barriers despite free trade’s many obvious benefits because of special-interest groups that oppose free trade and take steps to sabotage it. Tariffs are imposed on foreign goods to encourage domestic production, and they have great benefit to particular sectors of industry. However, the poorest countries often have the highest foreign trade tariffs. The United States’ average tariffs are 1.49%; in comparison, in Cameroon, it’s 12.7%. The reason for this foreign trade discouragement is that “international isolation is good for political stability” (241). Dictators use sanctions to isolate their countries so that they can continue to rule them.

Coffee farmers are famously struggling in the global economy. One of the reasons for this is that coffee grows in many places, so coffee growers have little scarcity power. Another is that coffee does not grow in areas where farmers can become rich from farming, like Florida or France. Rich farmers can lobby for high tariffs on foreign versions of their own production, like beef, rice, and grain. These high tariffs exclude poor farmers from starting these more lucrative farming operations, so they are left with coffee. The only way to help coffee farmers escape this quagmire is to encourage “broad-based development of poor countries [to] lift the living standards of the very poor” and give them other opportunities to earn wages so that coffee growers can develop some scarcity power (244).