By Austin White
This essay is basically just my raw notes and arguments that I used in a formal debate over protectionism in November 2010.
I
For far too long, support for protectionism has been present in the liberty movement. I have noticed a large amount of the conservatives and libertarians demanding smaller government simultaneously demand bigger government when it comes to free trade. This essay is meant to show the reader why this must stop.
One of the most basic pillars of capitalism is that market competition is good. Competition and a large division of labor are what we owe our prosperity to. Competition puts pressure on suppliers to reduce their production costs and to figure out the most efficient methods of producing, leading to lower prices for all of us. It puts pressure on entrepreneurs to be the best stewards of capital that they can possibly be. It puts pressure on businesses to serve consumers to the best of their abilities. And the greater the amount of competition there is in the market, the greater these wonderful effects are.
Any good capitalist wants to see the maximization of these effects by allowing as much competition as possible to take place, by allowing commerce to flourish without restriction. Restricting trade reduces these effects and results in increasing prices and decreasing quality of goods.
It’s a pretty simply concept. The best man for the job gets the job. If you don’t get the job then you need to keep improving yourself. Don’t cry to the government, the paternal nanny-state, and demand some bureaucrat intervene and bludgeon your competitors. Acquire new job skills, offer your goods and services for a lower price, and if that doesn’t work just accept that you’re not the best man for that job and that you need to find one where you have a comparative advantage.
Protectionism, through tariffs, import quotas, and other trade restrictions, is a form of wealth redistribution. You have the businesses and labor unions lobbying the government to artificially increase their businesses’ and employer’s abilities to survive at the expense of other people - all consumers.
Some lobby the government to restrict the rights and abilities of people to engage in free commerce for the sake of what they fallaciously consider the “greater good of the Nation” – which is just a more attractive way of saying “for the good of the collective.”
Some lobby the government to restrict the rights and abilities of people to engage in free commerce for the sake of what they fallaciously consider the “greater good of the Nation” – which is just a more attractive way of saying “for the good of the collective.”
By embracing protectionism even a little bit, a person is revealing that they, in fact, don’t think capitalism is good. They are saying that only a certain, arbitrary amount of capitalism is acceptable. The proponents of tariffs are not only revealing their doubts about capitalism, but are demonstrating their approval of opposite ideologies and economic systems, namely socialism and mercantilism.
By demanding mercantilist tariffs, the protectionist is not only saying free commerce is bad, but that government interference is good. That government interventionism and central economic planning are the answer. The genuine, honest protectionist believes that the market, if left alone, is a destroyer of prosperity and that only the regulatory state can bring us more wealth.
Economic nationalism is contrary to liberty. It is based on the ancient statist idea that it is okay for the government to restrict the natural rights some people for the benefit of others. The right being violated under protectionism is the right of people to freely buy goods from whoever they want and to employ whoever they want; it tramples on the freedom of contract as well as the freedom of association.
It’s no surprise that some of the biggest opponents of free trade are outright leftists and socialists like Ralph Nader, Michael Moore, and trade union leaders. If you go to the Socialist Party USA website, the very top plank of their economic platform is cracking down on free trade; as well as the Communist Party USA.
In The Communist Manifesto Marx and Engels denounced what they considered the unconscionable freedom of trade.
When the socialist Fabian Society in Britain began gaining power and influence in the late 19th century ,their very first target was free trade.
One of the first developers of German National Socialism, Friedrich List, is known almost completely for his, now debunked, theories supporting protectionism.
During Obama’s first year in office he slammed a 35% tariff on Chinese tires – which immediately stirred up the global market with China and several other countries threatening to implement tariffs on American exports in retaliation. Luckily, the tariff has been seen for the failure that it is and Obama has decided to start reducing it.
Protectionism, in its most extreme form, is autarky – where a country completely cuts itself off from the international division of labor with the goal of becoming self-sufficient. A famous historical example of a country striving for autarky is Nazi Germany. A current example would be North Korea – who, according to the Heritage Foundation’s annual ranking of the world’s economies, has the least capitalistic economy in the entire world and whose GDP is literally a fraction of a percent of America’s.
If it is true that protectionism and the restriction of trade would bring America more prosperity, then wouldn’t it follow that autarky – the complete cessation of trading with other countries – will bring us even greater prosperity.
If restricting trade between countries is a good idea, why not stop trade between the fifty United States? Why not end trade between the counties within the states? Why not end trade between the cities within the counties? After all, according to a consistent protectionist, if Orlando imports goods from Tampa that means Tampa is “stealing” jobs from Orlando. Why not restrict trade between city blocks? Why not between individuals? If I “outsource” the job of cutting my hair to a barber that means I just lost a hair cutting job. That barber took my job!
Though most protectionists probably oppose total autarky, they are inconsistent when they do so because all the arguments for restricting trade at all are the same arguments used in support of autarky.
Likewise, most protectionists would also probably agree that it would be bad if Orlando citizens were prohibited from importing goods from Tampa, but if it isn’t a good idea at the city level why is it a good idea at any level?
I am convinced that the core reason for the persistence of economic nationalism is people’s lack of faith in liberty, capitalism, and the miracles of spontaneous order, combined with a simultaneous and dangerous faith in bureaucracy and government.
All human beings are born with the natural right to buy goods from whoever they want and from wherever they want. If your money is truly your private property, then you have the right to spend it however you wish. Saying that a person doesn’t have the right to purchase foreign goods or doesn’t have the right to purchase foreign goods without paying the tariff is to say that a person’s money is not in fact their private property.
The state has no right at all to wedge itself in between peaceful transactions. It has no right to impose penalizing tariffs or quotas. Nor does it have the right to steal money from people and then use that money to subsidize exports.
Tariffs are taxes and if you’re pro-tariff, you’re pro-tax.
If we truly want to rollback leviathan we would be wise to not beg for additional taxes. I don’t see how giving the government yet another source of revenue will do anything to bring us smaller government.
The aim of all libertarians should be to abolish as many of the government’s revenue sources as possible; as quickly as possible. We should be just as opposed to tariffs as we are to income and property taxes.
II
The key reason why people seem to oppose free trade is a lack of understanding of comparative advantage and opportunity cost.
Having a comparative advantage means that compared to someone else you can produce a good or service at a much lower cost than someone else.
Consider this example (which I have completely ripped off of Walter Block):
Costa Rica has a comparative advantage in the production of bananas. Compared to the rest of the world, Costa Rica can produce a lot more bananas at a much lower cost.
Canada on the other hand, has a comparative advantage in the production of maple syrup. In Canada, they probably have entire lakes and rivers of maple syrup. It’s everywhere. Canadians probably have to get maple syrup insurance in case a flood of maple syrup destroys their homes.
Ok, so imagine if Costa Rica decides, in an effort to become more self-sufficient, to start producing maple syrup. The Costa Rican government spends an enormous amount of tax dollars subsidizing the construction of giant, 200-ft tall refrigerators that maple trees can be grown inside of.
Now imagine at the same time, Canada, in an effort to become more self-sufficient, decides to start producing bananas. The Canadians vote to blow billions of tax dollars subsidizing the building of giant greenhouses that banana trees can be grown in.
Now are these good ideas or bad ideas?
They’re terrible ideas. Both countries will be poorer and overall productivity will decrease.
In Costa Rica, the amount of resources that will have to be diverted from banana production just to make a modicum of the amount of maple syrup Canada makes will be enormous. Just to produce a gallon of maple syrup, Costa Rica might have to forgo the production of hundreds if not thousands of bananas.
In Canada, they might end up forgoing the production of ten gallons of maple syrup just to produce a single banana.
There is no way Costa Rican maple syrup producers will be able to compete with Canadian producers and they will be quick to demand tariffs. The Costa Rican maple syrup producers will cry out about how if they don’t get their tariff they’ll go out of business and all of their employees will lose their jobs and lose their income and they won’t be able to buy other Costa Rican goods and services and it will be a drain on the entire economy.
The same will happen in Canada. The Canadian banana industry will demand the banning of all Costa Rican bananas and if that doesn’t happen then the Canadian banana farmers will go bust and lose their jobs to those dirty rotten Costa Ricans.
So what should Canada and Costa Rica do in this scenario? They should let the market determine what each country has a comparative advantage in and let go the industries that they don’t have a comparative advantage in. Canada should realize that their banana industry isn’t worth propping up with tariffs, Costa Rica should do the same with maple syrup, and the market should be left alone so that entrepreneurs in both countries direct resources to their most valued uses instead of being wasted on producing goods that they suck at producing. If they do this and then agree to let the citizens of both countries freely trade with one another overall productivity will increase and both countries will be richer. It’s a positive-sum game. Everyone wins. Costa Rica gets cheap maple syrup from Canada and Canada get cheap bananas from Costa Rica.
III
Myth: Free trade destroys jobs!
When Sony makes a TV in Japan and then exports it to America, the American dock worker who carries the imported TV off the boat gets paid. The truck driver who delivers the TV from the dock to Best Buy gets paid. The sales clerk at Best Buy who sells the TV gets paid. The repairman who fixes the TV a few years later gets paid. And when the TV finally breaks, the garbage man who hauls it off to the dump gets paid. Millions of jobs are supported in America because of the importing of foreign goods.
If the government all of sudden put a big a tariff on foreign TVs, yeah it would increase the likelihood of a domestic TV industry emerging that might create some jobs, but only after the tariff destroys other American jobs and causes an inefficient redirection of capital and labor.
Think about this scenario: You have an American TV company who sells TVs for $500, but the Japanese are so efficient that they can sell the same quality TV for only $100. What will happen if we have free trade? The American TV maker goes out of business. But since American consumers can now buy TVs for only $100, they’ll have $400 left over to spend on other goods, at least some, probably most, of them American goods – which will stimulate demand and create employment elsewhere in the economy. We used to spend $500 and only got one TV. Now we get a TV for $100 and have another $400.
And what will the Japanese do with the $100 they get with from every TV sale? Well those U.S. dollars won’t do them much good in Japan, so eventually Japan will have to spend them on American goods – stimulating more demand for American goods and creating more employment- or invest the dollars in America, providing more capital and putting downward pressure on interest rates for the benefit of American job-creating entrepreneurs - or trade those dollars with other countries who will do these things.
So, the benefit of protectionism that a small minority of inefficient jobs are temporarily preserved, but the cost is many, many more efficient jobs are sacrificed or never come into existence at all and valuable capital and resources will continue to be locked into inefficient enterprises, only surviving due to tariffs, and not available to more efficient producers.
As a side note, Asian producers aren’t the ones putting American firms out of business – it’s the American people. The American people are the ones deciding with their dollars that they prefer the Asian products over American products.
For a much longer debunking of common protectionist myths see Tom DiLorenzo.
IV
The Smoot-Hawley Tariff
One reason there has been an increase in support for protectionism recently is the recession. Unemployment is high and we’re importing from foreign countries and the protectionists come to the conclusion that it is this importing that is causing higher unemployment. The politicians love this and enjoy reinforcing this theory because it shifts blame away from the government, who is responsible for the severity and prolonging of the recession, and onto foreigners. The final resort of government – BLAME FOREIGNERS!
The protectionists believe that if we impose and raise tariffs on foreign goods our economy will strengthen and employment will improve.
Well, this theory has been put into action before and every time the results are disastrous. The best example of this would be the Smoot-Hawley Tariff.
In 1930, President Hoover signed into law the Smoot-Hawley Tariff. Before he did so, over a thousand economists signed a protest letter urging him not to. Hoover did this because he thought it would help America out during the depression and strengthen the economy – exactly what the protectionists today are saying we should do.
This law increased tariff rates on over 800 different goods. The average tariff rate sky rocketed to 59%, the highest tariff rate in the American history at that point. Just imagine what that must have done to the standard of living in America to have an average tariff rate of nearly 60% imposed on 800 separate items.
Immediately trade wars broke out and twelve countries retaliated. Spain basically banned the importing of American automobiles. Switzerland completely boycotted all American exports. Canada raised tariffs on 125 American exports. Within three years the seventy-five most active trading countries experienced an 83% reduction in trade-a complete meltdown in world commerce. The United States suffered most with exports declining by 53% by 1932. The depression got worse.
(Also see Rothbard on the tariff here)
V
Free Trade Deters War
Free trade is the road to peace. Countries that trade with other countries, plug themselves into the international division of labor, depend on other countries, and have other countries depend on them are less likely to fight with each other. It would be economically ruinous for them to do so. Even the country that “wins” would be devastated. I don’t get in fights with my boss and he doesn’t get in fights with me because then I lose a job and he loses an employee. It is in both of our interests to get along, even if we hate each other.
So not only would free trade make us more prosperous, but if we had more of it, it would further deter these multi-trillion dollar wars and greatly reduce the amount of taxes we have to pay. I’ll take a trillion dollar tax-cut, free trade, less war, and less foreigners being murdered; the protectionists can have their tariffs, keep paying income taxes to fund never ending wars, and keep burying the troops.
For much better elaborations on the relationship between capitalism and peace, see Mises (here and here) and Bastiat.
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