The Free Market 14, no. 5 (May 1996)
To the outside world, it appears that all economists agree: free trade can never be compromised. Inside, the picture is far more complicated. Good economists, preeminently the Austrian School, favor liberty across the board. Yet among the mainstream, economists who favor big government at home likely reject free trade abroad.
That’s no credit to the profession, but it’s not anything new. Arguments against free trade go way back. Adam Smith believed that protection should be used against countries who refused to reduce their own trade barriers. He was wrong: that policy only makes domestic consumers suffer for the mistakes of foreign governments.
John Stuart Mill wanted to protect infant industries from foreign competition. He too was wrong. The government cannot know if the industry should stay small or grow bigger. An industry that expands thanks to protection does so without the benefit of real competition and is dependent on government instead of consumers.
In this century, John Maynard Keynes considered tariffs a way to increase demand for domestic goods, thereby alleviating unemployment, an argument we still hear today. Tariffs increase demand for the protected industry, but decrease foreign demand for other domestic goods. Jobs are gained in one industry but are lost in another.
Paul Krugman of MIT currently leads the pack among the new “strategic trade” economists attacking free trade. His models show that in certain theoretical instances, protection improves social welfare. When would this happen? When a company’s profits, just by luck, are higher than the normal rate.
In his view, the government should keep profits up by restricting foreign competition. In fact, high profits are due to the ability of entrepreneurs to fulfill consumer demands. There is no reason to believe that protection can shift entrepreneurial ability from foreign to domestic firms.
The strategic traders also forget that resources are scarce. Encouraging one industry with protection tends to shrink other industries. Under a free-trade regime, countries tend to export goods in industries where they are relatively more efficient. Protection shifts resources to industries where the country is relatively less efficient.
Strategic traders want the government to choose the correct industries to protect in order to reap these gains. However, the world is more complicated. A government would need to know the current world supply and demand for all traded goods and know all future conditions. That’s beyond the ability of any person, much less government.
Once the government starts favoring one group or industry over others, industries naturally will spend their resources attempting to reap political benefits instead of satisfying consumers. That creates an entirely new and wasteful market for government favors.
The most popular argument against free trade comes from the fair traders. In the political world, Messrs. Clinton and Dole prescribe protection in the name of fair trade. To them, all trade requires a level playing field. Any foreign policies or institutions that confer an advantage on one’s rivals are unfair.
This completely negates the benefits from trade due to the advantages that come from the differences between countries. This argument once applied mainly to direct trade barriers such as tariff rates. It now extends to any policy or behavior that is different from our own.
So, Japan’s savings rate, its distribution system, and its keiretsus all are supposedly advantageous to its economy. On the other hand, U.S. companies are at a disadvantage due to environmental policies such as pollution abatement and our prohibitively costly tort system. Therefore, we must respond with barriers and pressure tactics. The Japanese must become like us or face government wrath.
This view has lead to ridiculous policies. More than 3,000 foreign companies have been penalized since 1980 for selling their products to American consumers at prices lower than the U.S. government approves of. Foreign companies are so afraid of antidumping charges that they tend to keep their prices artificially high—as inefficient producers at home cheer.
Companies charged with dumping must divulge reams of information to the U.S. government, and this confidential information has routinely ended up in the hands of rival domestic competitors. The Commerce department heavily burdens those charged with red tape, to induce them to abandon the case.
On one recent Friday afternoon, the Commerce Department commanded Matsushita to translate 3,000 pages of Japanese financial documents into English by the following Monday. Unable to comply, Matsushita withdrew from the case, giving up $50 million in exports of telephone products.
Countervailing duties are also imposed to remedy unfair advantages that foreign governments give to foreign companies. This has become an offensive weapon for U.S. firms to use against foreign competitors. The Commerce Department has alleged that the Thai government subsidized their rice at 0.8 percent and imposed a countervailing duty. Meanwhile, the U.S. government was lavishing millions of dollars in subsidies on American rice growers.
Not all retaliations are so low. Witness the recent threat to impose a 100% duty on some Japanese automobile imports. Meanwhile, the U.S. supports agriculture prices and floods world markets with cheap agricultural products at the expense of the taxpayer. This is exactly what we accuse other countries of doing in order to justify trade barriers.
The “fair trade” argument is ultimately based on the idea that if one nation imposes high taxes and regulations, it is unfair for other countries not to do the same. Our government burdens our producers, so if other countries do not follow suit, we burden our consumers with trade barriers.
This makes no sense. Is it fair to make U.S. consumers pay high prices when they already pay high taxes and get bad policy in exchange? Is it fair to prohibit U.S. citizens from making voluntary exchanges with whomever they choose? Is it fair to prevent foreign firms from charging our consumers low prices? Is it fair to harm workers in one industry in order to protect politically favored workers in another industry?
U.S. trade policy protects American consumers from the bane of low prices. If our prices are lower than theirs, we are being competitive. If their prices are lower than ours, they are “dumping” their products on us. Studies routinely show that “protection” costs the American consumers $100,000 to $250,000 per year for every job supposedly “saved.”
Instead of protecting our consumers from low prices, we should implement free trade on our own accord. Coupled with free markets internally, this would generate an economic boom of historic proportions. Other countries would be free to follow our good example, instead of our government’s bad one, of planning the economy and managing trade.
