The Biden administration’s decision this week to raise import duties on some Canadian lumber has US trade policy back in the headlines. Since taking office President Biden has moved to end a pair of trade spats with the European Union, while simultaneously leaving in place the Trump administration’s tariffs on Chinese exports. Despite the wide-ranging applause Biden received for his transatlantic deal making, this freeing up of trade has been an exception to the general trend. Indeed, since taking office Biden has tended to follow his predecessor’s protectionist bent, even while polls show that a majority of Americans still support free trade, though it has suffered a sharp decline of late. While there are several factors to be considered when measuring the benefits of free trade versus protectionism, on the whole, free trade comes out ahead.
First, protectionism always creates one clear loser: consumers. Whether as individuals or as firms, they pay more than a free market would dictate. Consider the results of the four principal tools of protectionism as experienced by consumers. Tariffs, by taxing the incoming import, raise the price paid by consumers for that good. Import quotas cap the amount of a given good that can be imported, protecting the ability of domestic firms to charge higher prices, again, paid by consumers. Export subsidies are tax dollars given to private firms so they can afford to sell their products more cheaply abroad than they do domestically. Lastly, individual or industry subsidies are devoted to encouraging the production of a good or service the government deems desirable—that is, of course, when they aren’t simply being doled out as favors to politically connected favorites.
Indeed, in virtually every instance the motivating impetus for the adoption of protectionist legislation is to be found in a core group of constituents who benefit from it. They are an example of what happens when the benefits of a policy are concentrated while the costs are diffused. A dollar here and a dollar there from every single citizen in the country over the course of years or even decades likely goes unnoticed by them, even though it adds up quickly, making the recipients eager to see the policy continued, whatever its public cost. Concentrating their focus and resources, small groups of wealthy beneficiaries effectively capture billions to split between themselves in this way.
It is a pernicious problem, and no industry is immune to the moral hazard of profitability by government welfare, through protection or subsidy rather than by working to improve products, methods, or management. Once entrenched, these policies are difficult to reverse. Consider the decades-long subsidy of mohair. Passed in 1954 in the name of national security, mohair being the key ingredient in US military fabrics, it was rendered irrelevant a decade later by the adoption of synthetic fibers. Still on the books in 1998, the subsidy was costing nearly $200 million dollars each year, over half of which went to the top 1 percent of producers. It continues in modified form to the present day.
The inefficiencies of protectionism are well known, and are part of why free trade results in greater economic growth than alternative protectionist regimes. If it can be gotten for less elsewhere, competing US producers should shift capital toward increasing productivity in order to compete or else steer their capital into other profitable ventures; labor will follow, acquiring any new or necessary skills required to continue their employment should they choose. This is to say that the cost of free market efficiency and its higher standard of living is the occasional temporary dislocation of both capital and labor. If these processes are not artificially hindered by government policy, however, they will not come as sudden shocks, but will rather take place gradually over time. Firms seeking survival and profit maximization will take steps as necessary to adapt to changing conditions. Subsidies, tariffs, and quotas offer domestic firms an easy alternative to the work of proper management. And though they lead to an overall lower economic outcome, for the firm or industry in question the difference is irrelevant.
The Buy American campaigns of Presidents Biden and Trump have grabbed headlines over the past five years, but behind the scenes the US has been moving steadily away from free trade since the early 2000s. Part of this was a reaction to the North American Free Trade Agreement. Despite its impacts having been a net positive in terms of trade, it was rosily oversold and seriously disappointed and angered many, particularly those employed in certain manufacturing industries where job losses were concentrated. All told, it is estimated that NAFTA cost the US about six hundred thousand manufacturing jobs, but a far bigger contributor to American manufacturing job losses was China’s accession to the World Trade Organization in 2001, which cost an estimated 3.7 million manufacturing jobs over roughly the same period.
The personal costs imposed on those dislocated by the competitive pressures of free trade are worthy of our personal sympathies, but the costs of protectionism far outweigh the narrow benefits it provides recipients. Free trade reduces inefficiency by forcing firms to constantly compete to the benefit of consumers; it reduces moral hazard, results in higher economic output, lower prices, a smaller state, lower taxes, and higher standards of living. No free trade deal will ever be perfect, and there will always be winners and losers, but good free trade deals result in winners and losers dictated by market forces rather than government favoritism.
