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Free versus fair trade. It is a question drawing a lot of attention these days due to the push by the current White
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House administration looking for fair trade and using tariffs to try and reach that goal. But from a variety of
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different senses, the question to ask is, is it better to want to see free or fair trade? John Zang is a professor of
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marketing here at the Wharton School. He recently penned an opinion piece for Fortune talking about that topic
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specifically and he joins us right now. Hi John, how are you? >> Very good. How about you Dan?
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>> I'm doing well. Thanks for your time. Uh obviously this is a very important topic
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right now and give us your sense of why it was something that you felt you needed to talk about at the moment.
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Well, you know, free trade is the ideal and it is good if everybody believe in it and also everybody will practice it
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and but in the real world you know that that's not the case and uh so that's why
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in fact that we need to actually talk about the free trade we also need to talk about the merits of fair trade
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simply because uh a lot of other countries put tariffs on the US exports And uh it's really a uh I think a very
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easy point to make that US probably need to do the same thing. >> Yeah. So I guess it's not that
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surprising that at some point we were going to see a push by an administration round tariffs and the topic of fair
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trade be brought up. Correct. >> Yes. And uh in fact in my piece I was basically making the point that uh it's
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not easy and uh to actually talk about fair trade in this country simply because uh lot of people believe in the
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uh free trade free trade is almost like a religion. If you look into the theory that supports the free trade and there
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are lots lots of assumptions that need to be made for free trade uh to be the ideal and yet in practice those
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assumptions are just not uh very realistic. And so what I was trying to look into is why exactly that given that
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those assumptions are not very realistic and uh yet a lot of people still talking
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about free trade and that they really want to stick to it. Is it the is it the historic pattern I guess that we've seen
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here in our country around free trade that makes it so much harder to talk about fair trade? Yes, you can imagine
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that uh if you want to go ahead and raise the tariff and uh one of the first things you notice is that uh consumers
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may have to pay a higher price which basically means a large number of consumers in the country and may have to
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pay a higher price for the goods they purchase that are imported by the US and uh but if you actually and uh in the
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meantime and uh raise lower the tariff okay if you lower tariff a lot of people in the country will benefit from it. But
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if you look at the other side of the coin and when you actually raise the tariff and you would protect the workers
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who are in the import competing industries and uh and so which means that those people will benefit but on
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the other hand if you lower the tariff you may actually hurt those people and very very badly. So essentially what
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you're looking at is that on the one hand if you add and uh lower the tariff
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and you're going to hurt some of the uh workers in some small communities really
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badly but on the other hand if you lower the tariff you're going to benefit large
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number of people and by a small amount. So this is really the case where in the Chinese proverb they're basically saying
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that uh instead of try instead of injuring 10 fingers probably it's better to break one finger. In fact American
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politicians always follow that rule you always break the one finger instead of trying to injure 10 fingers.
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>> But at some point don't you run out of finger run out of fingers if you if you
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follow that path. >> Let me say it again actually here. So essentially in that kind of a situation
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either you're going to injure 10 fingers which means you raise the tariff and uh
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let everybody pay a slightly higher price or you're going to bring uh break break one finger which in that case is
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lower the tariff and uh hurt the some of the uh uh small number of people in the
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community badly. Right? Politicians always favor and in and uh break one finger instead of injuring 10 fingers.
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Now, now part of of the reason why we're seeing this, and you bring this up, is
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the topic of economic security, and it's part of the reason why we are seeing
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certain companies make moves to support the US economy, to bring home manufacturing, to, you know, think about
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different ways that they can, you know, boost the the economy of the US so that uh our economy, you know, continues to
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thrive and and be at the level with some of other countries around the world. Well, under free trade in the past few
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decades, you notice that a lot of American companies move away from from US and go to some other countries and uh
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in fact that that's indeed what you expect when you have a asymmetric trade,
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right? So if you are company and that produces in US and uh you're going to sell in domestic market and uh and uh
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and uh easily and uh but on the other hand that in fact they have to pay high tariffs to sell in foreign countries. So
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in that case it's probably much easier for you to relocate and to some other
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countries where and uh and when you sell to the US you don't pay tariffs and when
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you sell in domestic market in those countries you also don't pay taxes. So that's a much better situation for
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companies. So that's why there has been a giant sucking sun and uh as was what
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Ross Perau was saying and uh for American capital and American companies. >> Part of your article does talk about the
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political ramifications of free versus fair trade and the challenge that it can really be for politicians when they
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start to discuss one over the other. >> Yeah. When you do a finger arithmetic
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and you're always going to be in favor of uh free trade simply because free trade will benefit large number of
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people out there and uh fair and uh but only help uh and uh only hurt a few very
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few uh people and uh if you do fair trade you're going to hurt a large number of people and uh only benefit uh
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and uh hugely a small number of people. So that's why and uh in terms of uh the
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political calculus it's always a good idea to uh support the free trade and also the other factor is that uh you
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know the capital is mobile and uh workers are not so which means that when you have a free trade if I have the
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capital I can go around the world and deploy my capital and uh make a slight higher return right but in the meantime
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that of course that going to hurt some of the communities very very badly simply because you closed the factories
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and you would want a middle-aged uh worker and then to uh transit into some other different trade and uh to make a
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living. >> Do you expect that at least the way we have gone in the last few months under
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this new administration that we're going to probably try and follow the path of
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fair trade more so than free trade for the foreseeable future? Well, the Trump administration is
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certainly trying to do that. Of course, you can imagine that uh there is a lot of resistance. That's really one of the
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reasons why I want to write that particular piece. And uh so I was uh I really want to and uh articulate and
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what exactly is behind this free trade and the fair trade uh uh debate and also that uh what I really want to point out
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is that uh probably we all need to and uh have and share the sacrifice and probably I sorry uh probably we want we
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all want to share the sacrifice to give a fair trade a John, always great to talk with you.
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Thanks very much for your time today, sir. >> Thank you so much. >> Thank you. John Zang who is marketing
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professor here at the Wharton