19.
Free Trade vs. Protectionism
Economists of all
schools recognize the value of free trade: greater overall production. This greater production is due to the freedom of each
producer to specialize in that line where he or she has a natural
advantage. The natural advantage
of each trading partner results from the differences among people and
locations. A major reason the U.S.
economy is as productive as it is, is that there is a large geographic area of
free trade (the U.S. Constitution wisely prohibits protectionist tariffs and
quotas among the various states).
Adam Smith enunciated
the principle that it is foolish to produce at home that which can be obtained
more cheaply abroad. This is true
not only literally of the home, but of the county, state, region and country as
well.
This emphasizes that
there is no distinction between trade and international trade in principle--one
"exports" his labor to "import" goods consumed, as it is a
cheaper means of obtaining goods than producing the consumed goods directly.
Despite the value of
free trade there are continuous calls for disruption of an international
division of labor by way of taxes on imports (tariffs) and numerical
limitations on imports (quotas).
Such arguments are ultimately special interest pleadings advanced for
the sake of a transfer of income to the special interest at the expense of the
rest of the economy.
Henry George
summarized the fallacy of protectionism this way: "What protection teaches us, is to do to ourselves in
time of peace what enemies seek to do to us in time of war."
A review of the seven
most common protectionist arguments and their rebuttals follows:
Military Self-Sufficiency
This argument claims that some vital
military goods may be unavailable from other countries in time of war and
therefore a viable domestic industry is necessary for defense. A true concern with such a scenario,
however, can be dealt with by means of stockpiling the needed goods. Such a stockpiling program would leave
the consumer still free to shop the world and not disrupt the international
division of labor. One must
suspect many such arguments when those making the argument are the very firms
supplying those goods. Examples in
recent U.S. experience include even wool socks and steel--goods with easy
substitutes and existing viable U.S. production.
Further, a program of
reducing taxes and regulations would allow continued viable U.S.
production. As is so often the
case, any concerns should recognize the violence done to the U.S. economy by
current policies and the fact that it is economically more efficient and
just to reduce, not compound
government interference in the market.
Protection of Domestic Industry
The fallacy of such claims is that the
protection of any U.S. industry is to that same extent a detriment to other U.S. industries.
Protectionism against steel imports, for example, harms American firms which use steel as an
input in their production process--auto, washing machine manufacturers, all
firm's transportation expenses, etc.
Employment Protection
As Milton Friedman has stated, "we
work to live, we do not live to work." The concern should be with our production, not its
means--employment. Tariffs and
quotas to protect American employment reduce our standard of living as we
engage in lines of production that are not the most efficient in providing for
ourselves. The move to free trade
which would reconfigure employment patterns in the U.S. would not be necessary
except for the artificial pattern currently existing due to those tariffs and
quotas. In other words, the loss
of employment in certain lines of work which would undeniably occur with a
movement to free trade are due to the current absence of free trade. These particular jobs would not have
been created in the U.S. if policy had been one of free trade in the first
place.
Diversification for Stability
Though this argument has little
application to the U.S. economy, it is often used for say, Chile which is heavily dependent on copper
exports. The fallacy is that Chile
has a strong advantage in copper production and to forcibly diversify would be
to pay dearly in opportunity costs.
Individual entrepreneurs should make these decisions according to their
own assessments. (On an individual
basis this may be like cautioning a surgeon to find other means of making a living. While this would offer protection
against the risks of being unable to perform as a surgeon the lost income in
pursuing say, training as a lawyer would be vast.)
Infant Industry
Again this is not a currently fashionable
argument for modern day America.
But the basic notion of protecting new industries competing with
established foreign firms until they can "mature" and compete
toe-to-toe is still false. In
effect, this suggests the substitution of government officials' judgment for
that of private investors. A truly
viable firm can find investors who will be willing to absorb losses--as a form
of investment--for the sake of the future profits to be earned. This is in fact routine in the market
as most new businesses or products earn losses in the early stages yet
investors still see merit in such investments. The fact that such firms are not currently successful in
attracting investors voluntarily is strong evidence that there are no future
profits to be earned. Whose
judgment would be superior:
private investors with their own money to lose or government officials
with no personal financial stake in the outcome? If in fact this was a truly valid argument for
protectionism, it would logically be applicable not just to domestic firms
competing with established foreign firms but to domestic firms competing with
established domestic firms--a special tax on NBC programs for the sake of
newcomer FOX, for example?
Dumping
There are two versions of dumping.
The first is selling products abroad at lower prices than at home. But this is to be expected. Buyers are normally more loyal to
domestically produced goods (all other things held constant of course) than to
foreign made goods. The only way
to successfully sell to foreigners is therefore with price concessions. (Because of this loyalty factor, it
would be strange if dumping was not the norm.)
A second version of
dumping is a subsidy to firms to sell abroad. Naturally, American firms complain about such practices by
other nations. (And this is not to
say that American firms receive no such subsidies--as special interests using
the power of government for their own financial gain, it is common.) If other countries do subsidize their
sales in the U.S. then they are making a gift to American consumers. While this is not wise for the sake of
the economy doing the subsidizing, it is not right to correct the situation by
punishing the American consumer with tariffs and quotas. A consitent application of a prohibition
of gifts would prohibit
samples! The analogy often cited
in other countries resorting to this form of dumping is to consider each
economy to be a man in a lifeboat.
The lifeboat is the overall standard of living in the world. If one person in the lifeboat foolishly
takes out a gun a fires a hole into the bottom of the boat, the last thing
others should do is to retaliate likewise with additional blasts to the boat
bottom! Compounding mistakes is
not a solution.
Cheap Foreign Labor
This argument claims that American workers should not have
to compete unfairly with low paid foreigners. (Everyone comes up with some reason to except themselves
from free competition; low paid foreign workers claim it is unfair for them to
have to compete with high skilled American workers!) As do all protectionist arguments this one violates
the principle of not producing at home that which can be obtained more cheaply
abroad. Besides this self-interest
argument against protectionism, it is anything but humane to call for
sacrificing the living conditions of already poor foreigners to that of
relatively very wealthy American workers.
-
Bovard, James
The Fair Trade Fraud,
(New York: St. Martin's Press, 1991)
-
Friedman, Milton & Rose
Free to Choose,
(New York: Harcourt, Brace, Jovanovich, 1979)
pp. 38 - 54.
-
Friedman, Milton
Bright Promises, Dismal Performance,
(New York: Harcourt, Brace and Jovanovich, 1983)
pp. 357 - 372.
-
Hazlitt, Henry
Economics in One Lesson,
(Norwalk, Connecticut: Arlington House, Inc., 1976)
pp. 74 - 89.
-
Roberts, Russell D.
The Choice,
(Englewood Cliffs, New Jersey: Prentice Hall, 1994)
-
Taylor, Joan Kennedy, editor
Free Trade: The Necessary Foundation for World Peace,
(Irvington-on-Hudson, New York: 1986)
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