Heretical questions regarding free trade

[Originally published on a weblog called “What Is Liberalism?”]

William Greider writes:

An authentic debate might start by asking heretical questions: Why is the United States one of the few advanced economies that suffers from perennial trade deficits? Why do new trade agreements, despite official promises, always leave the United States with a deeper deficit hole, with another wave of jobs moving overseas? How do the authorities explain the 30-year stagnation of working-class wages that is peculiar to America? Are we supposed to believe that everyone else is simply more competitive or slyly breaking the rules?

At a very common sense level, everyone seems to agree that trade presents us with a Prisoner’s Dilema type game situation, where both parties achieve maximum gain if they co-operate, but either party can increase their own gain by cheating. This common sense intuition is why nations generally don’t trade with nation’s they are at war with – there is a the sense that the other nation will take advantage of the trade and “game the system” to work to their advantage. If we truly believed that trade was always a benefit and there was no way for another country to ever hurt us through trade, even if they wanted to, then we would of course continue to engage in trade during war time. Most prominent economists take a different line – that when a country games the system they only hurt themselves. That is the line that Krugman, Brad Delong, and Greenspan have all taken on the question of the Chinese currency – that by keeping the currency low China hurts itself, not us. But then, I’m left wondering, why would China do it? It is clear that China is suppressing the standard of living of its own people by keeping its currency suppressed, but isn’t this a case where the interests of the state is at odds with the interests of the people? Can’t a nationalistic, undemocratic, economically centralized nation aggrandize itself by exploiting its own people and the people’s in other nations that leave their borders open to trade?

I’ve no conclusions on this subject. Both sides seem to have strong arguments on their behalf.