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