Posted on 06/11/2018 11:38:09 AM PDT by Thalean
https://fee.org/articles/why-the-uk-chooses-free-trade/
In The Wealth of Nations of 1776, Adam Smith first uncovered why freeing trade can generate wealth for all parties involved, because countries could export what they make efficiently and import what they cannot:
The tailor does not attempt to make his own shoes, but buys them off the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor… What is prudence in the conduct of every private family can scarcely be folly in that of a great kingdom.
Oh, OK.
https://fee.org/articles/the-smoot-hawley-tariff-and-the-great-depression/
In 1930 a large majority of economists believed the Smoot-Hawley Tariff Act would exacerbate the U.S. recession into a worldwide depression. On May 5 of that year 1,028 members of the American Economic Association released a signed statement that vigorously opposed the act. The protest included five basic points. First, the tariff would raise the cost of living by “compelling the consumer to subsidize waste and inefficiency in [domestic] industry.” Second, the farm sector would not be helped since “cotton, pork, lard, and wheat are export crops and sold in the world market” and the price of farm equipment would rise. Third, “our export trade in general would suffer. Countries cannot buy from us unless they are permitted to sell to us.” Fourth, the tariff would “inevitably provoke other countries to pay us back in kind against our goods.” Finally, Americans with investments abroad would suffer since the tariff would make it “more difficult for their foreign debtors to pay them interest due them.” Likewise most of the empirical discussions of the downturn in world economic activity taking place in 1929–1933 put Smoot-Hawley at or near center stage.
Economists today, however, hold a different view of the effects of Smoot-Hawley. While economic historians generally believe the tariff was misguided and may have aggravated the economic crisis, the consensus appears to relegate it to a minor status relative to other forces. We believe many modern economists are wrong because flawed modeling leads to two systematic understatements of the tariff’s negative effects. The first reason for this is that reliance on macro aggregates can sometimes mask serious underlying problems by dissipating their apparent impact over a broad area. For example, U.S. national income declined 36 percent in real terms from 1929 to 1933, and the view held by prominent economists, ranging from University of Chicago Nobel laureate Robert Lucas and Yale economist Robert Shiller to MIT economists Rudiger Dornbush and Stanley Fischer, is that since the foreign-trade sector was only about 7 percent of gross national product (GNP), the tariff (though misguided) could not explain much of this decline.
Viewed at the level of “macro magnitudes,” critical micro connections suffer from a “dissipation effect” and always look small. But size does not equal significance. While it is true that foreign trade represented only a small percentage of the overall domestic and international economy, it does not follow that the tariff was insignificant in its effects. The Panama Canal contains but a small fraction of the world’s ocean water, but if it were closed the effects would be quite devastating to world trade. A focus on aggregates risks missing the trees for the forest, and not all trees are created equal.
Here’s a second way Smoot-Hawley is underestimated: If regulations or tariffs are studied in partitioned models, their interrelationships are missed and their true impacts are trivialized. For example, recent attempts have been made to quantify price distortions caused by the tariff. Mario Crucini and James Kahn have tried to correct systematic underestimates of the harm of Smoot-Hawley found in a variety of macro studies that ignored the effect of tariff retaliation on the rate of capital accumulation. Using a general-equilibrium model, they calculate that the microeconomic distortion effects reduced U.S. GNP by only 2 percent in the early 1930s. Likewise economist Douglas Irwin computed the general-equilibrium inefficiencies caused by the tariff at nearly 2 percent of GNP.
So when even ostensibly free-market, free-trade economists such as Lucas, Irwin, and others downplay the negative effects of the Smoot-Hawley Tariff, what’s the verdict? Were the loud protests of over a thousand professors of economics just unsophisticated exaggerations? Were these pre-Keynesian classical theorists misguided because they lacked the tools of modern macroeconomics and econometrics? Or did their vision remain unclouded for the same reason? Were they Chicken Littles or Cassandras?
Hillsdale College economics professors are among the most recent to warn President Donald Trump and Congress against passing tariffs on steel and aluminum.
Along with 12 Nobel laureates and hundreds other economists across the country, at least five Hillsdale professors signed the conservative advocacy organization National Taxpayers Union’s open letter urging the federal government against protectionist measures of withdrawing from free trade agreements and levying tariffs on steel and aluminum.
A letter signed by 1,028 economists in 1930 against the Smoot-Hawley Tariff Act, which economists agree exacerbated the Great Depression, inspired NTU to begin its efforts and submit its letter that it hopes will have even more signatures than the original memo had. It plans to submit its letter on May 3 to commemorate the Smoot-Hawley letter’s 88th anniversary.
“Congress did not take economists’ advice in 1930, and Americans across the country paid the price [during the Great Depression],” NTU’s letter reads. “…Much has changed since 1930 — for example, trade is now significantly more important to our economy — but the fundamental economics principles as explained at the time have not.”
Trump has said he is looking to implement a 25 percent tax on imported steel and 10 percent duty on imported aluminum with a particular focus on balancing trade with China. The Smoot-Hawley Tariff Act raised taxes on more than 20,000 goods and was the second highest tariff in U.S. history. The U.S. Senate passed it by a margin of two votes.
Economics professors Michael Clark, Christopher Martin, Ivan Pongracic, Charles Steele, and Gary Wolfram said they have signed the letter. While the economists said free trade is one issue on which a majority of economists can agree, they said they are pessimistic that politicians in Washington, D.C., will heed their recommendations.
“Do politicians care? No, I don’t think so,” Pongracic said. “That doesn’t mean it’s not worthwhile. It’s important to have a public statement to stand up for these things.”
The letter cites at length from the Smoot-Hawley letter. In 1930, numerous influential economists signed the letter, which Steele said was “unprecedented” at the time.
“History tells us, ‘No, the letter wasn’t effective,’” Steele said. “They ignored what these guys said. I think it is important to go on the record and say, ‘We told you so.’ If the tariffs come into play, I’m quite sure it will be bad for the American economy and bad for Americans.”
Wolfram, the economic department chairman, agreed, noting that while the tariffs will be beneficial for steel and aluminum producers in the United States, companies that use those metals in their products will face higher costs. Ultimately, he said, that will hurt American consumers, because prices will increase.
The professors said calls for tariffs often come from special interests looking to score an advantage in the marketplace and from those who misunderstand trade deficits.
The United States has a trade deficit, which means it imports more than it exports. Wolfram, however, said this can be a good thing, because it means foreigners want to invest in the American economy.
“We tend to think of trade deficits as a bad thing, but a capital surplus — that’s a good thing,” he said. “They’re the same thing. If we are the country where people want to invest, buy bonds, then we have a booming economy.”
Wolfram, who has written against the proposed tariffs in The Detroit News and Investor’s Business Daily, said he signed the letter because he thinks it will gain some notoriety and foster discussion on the levies and the Smoot-Hawley tariffs.
“Friedrich Hayek in his ‘Constitutional Liberty’ said one of the benefits of democracy is that debating over the issues will advance the state of knowledge,” Wolfram said. “If we have a debate over tariffs, the state of knowledge will be greater.”
https://www.history.com/news/trade-war-great-depression-trump-smoot-hawley
n particular, experts have pointed to the failure of the Smoot-Hawley Tariff Act, passed in June 1930, to protect U.S. industries with tariff increases.
Although this came several months after the stock market crash of 1929, the U.S. hadn’t yet entered “the full onset of the Great Depression,” says Claude Barfield, a resident scholar at the American Enterprise Institute. The thinking among Congress and President Herbert Hoover was that by raising taxes on thousands of imports no matter what country they came from, the act would protect American farmers and secure the nation’s economy. But experts disagreed.
“Economists around the country argued to the Republican Congress that this would only hurt the world economy, and the United States economy,” Barfield says. (Before the political parties realigned in the mid-20th century, the Democrats were the “free trade” party.)
And they were right. Although it did not cause the onset of the Great Depression, it did help extend it. Other countries responded to the United States’ tariffs by putting up their restrictions on international trade, which just made it harder for the United States to pull itself out of its depression.
In effect, the Smoot-Hawley Tariff Act “prolonged [the depression] and possibly deepened it around the world, not just in the United States but for other countries,” he says.
The brilliantly free market Foundation for Economic Education. In my home town, and one of our best economics organizations.
https://fee.org/articles/free-trade-is-the-best-policy-no-matter-what/
Today’s quotation of the day is from Albert Gallatin’s January 1832 essay, “Memorial of the Committee of the Free Trade Convention” (available in full here), a part of which is quoted on page 169 of Douglas Irwin’s 2017 book, Clashing Over Commerce (emphasis added):
That by multiplying in any country the channels of domestic industry, a greater scope is given to its application, a market more diversified and less liable to be glutted procured to its products, and a larger field opened to every species of skill and talent, is undubitably true. But to direct that industry to unprofitable pursuits which cannot be sustained without exaggerated duties paid by the consumer, and a corresponding national loss, does not open new channels of productive industry, but only diverts it from profitable to unprofitable pursuits to the community. It is truly remarkable that the advocates of the restrictive system should pretend to consider your memorialists as wild theorists, when there cannot be a plainer matter of fact than that if a man pays two dollars more for his coat, his plough, or the implements of his trade, it is a loss to him, which he must pay out of the proceeds of his industry, and that the aggregate of those individual losses is an actual national loss.
From late September through early October 1831 there was held in Philadelphia a Free Trade Convention, about which I know very little other than what is revealed in this essay by Albert Gallatin.
Yesterday and Today
During the second quarter of the 19th century in the United States, Kentucky’s Henry Clay was the most powerful, vigorous, and (yes) uncompromising opponent of free trade. His “American System,” as it was called, was nothing but an early 19th-century version of economic nationalism. Clay and his followers saw the businesses and jobs made possible by government spending and by protective tariffs; they were blind to the businesses and jobs – and consumer goods – denied to the American people by these interventions.
One of the realities made clear by Doug Irwin’s account of the debate over trade policy that occurred back then is that the past is indeed prologue. The issues today are the same as they were back then even if the ‘feared’ trading partner today is different. (Back then that feared trading partner was Great Britain; today it’s mostly China.) The economic fallacies that fueled Henry Clay and his movement are identical to those that today fuel the hostility to free trade of likes of Donald Trump, Wilbur Ross, Peter Navarro, and Steve Bannon. And many of the accusations hurled against free trade by the protectionists of that past era differ in no substantial ways from the accusations hurled today.
There was the ad hominem. For example, Clay scurrilously accused the free(r)-trader Albert Gallatin of being hostile to American interests because he, Gallatin, was born in Switzerland.
And there was the simply mistaken – a frequent instance of which is nicely exposed in the above bolded portion of the Gallatin quotation. Protectionists (those whom Jon Murphy more accurately calls “scarcityists”), mistakenly supposing themselves to be profound, back then, as today, accused free traders of being idealists whose theory blinds them to reality. Yet as implied in Gallatin’s response, the theory that protectionists dismiss as speculative and unreliable is, really, a straightforward application of simple arithmetic and basic economic analysis: tariffs that force up the prices that domestic citizens pay for goods and services is a loss to those citizens, and because the domestic firms and industries that exist only because of trade restrictions and subsidies are generally ones that operate less efficiently than those domestic firms and industries that are destroyed by such interventions, the amounts of resources necessary to sustain any given standard of living (or rate of economic growth) are greater with such interventions than without. In short, such interventions make most people poorer than they would otherwise be.
Unproven Free Trade Is a Myth
It is a myth that free trade is unproven in practice. Forget that countries with freer trade have both higher per-capita incomes and faster rates of economic growth. Look instead at the essentials of the case. Each and every day you trade freely with many merchants. Do you think that you and your family would be enriched if your neighbor extracted punitive payments from you whenever you buy some item that your neighbor judges to be from a seller located too distant from your neighborhood? Every day Arizonans trade freely with Texans and Rhode Islanders. Do you think that Arizonans would be enriched if the government of that state obstructed their ability to trade as they choose with people located in other states?
People trade freely countless times, each and every day. Yes, yes, I’m well aware that such trade isn’t ideally free. Occupational-licensing restrictions, for example, unjustly and harmfully obstruct domestic trade. But the fact remains that today within each country – including within the U.S. – trade is not typically obstructed based on geographic location or political boundaries. And therefore people buy and sell freely within countries. If the case for a policy of free trade were not practical – if it were only a theoretical curiosity – then it would be true that ordinary people would be even richer if the state obstructed their abilities to trade with each other domestically.
It’s a myth also that the economic case for a policy of free trade in any one country requires that other governments also practice free trade. The case for a policy of free trade is, at bottom, a case for unilateral free trade: while nearly everyone in the world would be better off if all governments adopted policies of free trade, nearly everyone in the home country would be better off if the home government adopts a policy of free trade regardless of the policies of other governments.
Protectionism is a nasty mash of logical fallacies, half-truths, hubris, economic ignorance, and cronyist apologetics.
I see you know your free-trade history. I’ve spent my entire life working in a region (Latin America) that for a time rejected the idea of free-trade based on comparative advantage.
And we’re still dealing with the consequences of Import Substitution Industrialization (i.e., we can make all we need right here at home). As you would expect, all manners of protectionism (tariffs, quotas, subsidies, currency manipulation, exchange controls) were fundamental to the policy, and what a disaster it was!
Bewilderingly, these ideas persist.
As I mentioned earlier in the thread, I attended one of America’s finest educational institutions. We learned Austrian economics: Mises, Hayek, and the like.
Good for you! That explains it.
In my economics classes, Mises, Hayek, Rothbard, Kirzner, et al, did not exist. Had to self-study to complete my economics education.
A textbook by Thomas Sowell; I've forgotten the titl.
Economics of the Free Society by Wilhelm Ropke
Economics in One Lesson by Henry Hazlitt
Good books. A couple more in case you’re interested:
“The Economic Way of Thinking”, by Paul Heyne, Peter Boettke, and David Prychitko.
“Economics for Real People”, by Gene Callahan (kind of an updated version of Hazlitt’s Econ in One Lesson)
This shows a complete lack of understanding on your part. The USA was formed to combat European mercantilism. The colonies, just after the war, were basically independent countries with a confederation binding them. Free trade among them is NO accident. The lack of duty free trade with other nations no accident. It was designed that way and codified in the USC.
Your la la Utopian free trade world is NEVER going to happen - ever. The rest of the world does not believe in free trade so WE HAVE TO RETALIATE. Thank God for Trump and thank GOD you globalists are on the way out. Now shut up and let patriots do our "thing".
Ever read the book or seen the movie (from the ‘70s) “The Incredible Bread Machine”? The book is kind of a touchstone.
And anything Mises or Hayek.
http://enterpriseintegrators.com/flint/4thr/TomSmithsIncredibleBreadMachinePoem.txt
TOM SMITH AND HIS INCREDIBLE BREAD MACHINE
by R.W. Grant
This is a legend of success and plunder
And a man, Tom Smith,
Who squelched world hunger.
Now Smith, an inventor, has specialized in toys.
So, people were surprised
When the found that he instead
Of making toys, was BAKING BREAD!
The way to make bread he’d conceived
Cost less than people could believe.
And not just make it! This device
Could, in addition, wrap and slice!
The price per loaf, one loaf or many:
The miniscule sum of under a penny.
Can you image what this meant?
Can you comprehend the consequent?
The first time yet the world well fed!
And all because of Tom Smith’s bread.
A citation from the President
For Smith’s amazing bread.
This and other honors too
Were heaped upon his head.
But isn’t it a wondrous thing
How quickly fame is flown?
Smith the hero of today -
Tomorrow, scarcely known.
Yes, the fickle years passed by:
Smith was a millionaire,
But Smith himself was now forgot -
Though bread was everywhere.
People, asked from where it cam,
Would very seldom know.
They would simply eat and ask,
“Was not it always so?”
However, Smith cared not a bit,
For millions ate his bread,
And “Everything is fine,” thought he,
“I am rich and they are fed!”
Everything was fine, he thought?
He reckoned not with fate.
Note the sequence of events
Starting on the date
On which the business tax went up.
Then, to a slight extent,
The price on every loaf rose too:
Up to one full cent!
“What’s going on? the public cried,
“He’s guilty of pure plunder.
He has no right to get so rich
On other people’s hunger!”
(A prize cartoon depicted Smith
With fat and drooping jowls
Snatching bread from hungry babes
Indifferent to their howls!)
Well, since the Public does come first,
It could not be denied
That in matters such as this,
The Public must decide.
So, antitrust now took a hand.
Of course, it was appalled
At what it found was going on.
The “Bread trust,” it was called.
Now this was getting serious,
So Smith felt that he must
Have a friendly interview
With the men in antitrust.
So, hat in hand, he went to them.
They’d surely been misled;
No rule of law had he defied.
But the their lawyer said:
“The rule of law, in complex times,
Has proved itself deficient.
We much prefer the rule of men!
It’s vastly more efficient.
Now, let me state the present rules,”
The lawyer then went on,
“These very simple guidelines
You can rely upon”
You’re gouging on you prices if
You charge more than the rest.
But it’s unfair competition
If you think you can charge less.
“A second point that we would make
To help avoid confusion:
Don’t try to charge the same amount:
That would be collusion!
You must compete. But not too much
For if you do, you see,
Then the market would be yours
And that’s monopoly!”
Price too high? Or price too low?
Now, which charge did they make?
Well, they weren’t loath to charging both
With Public Good at stake!
In fact, the went one better
They charged “monopoly!”
No muss, no fuss, oh woe is us,
Egad, they charged all three!
“Five years in jail,” then the judge then said
“You’re lucky it’s not worse.
Robber Barons must be taught
Society Comes First!
Now, bread is baked by government.
And as might be expected,
Everything is well controlled:
The public well protected.
True, loaves cost a dollar each.
But our leaders do their best.
The selling price is half a cent.
(Taxes pay the rest!)
https://taxfoundation.org/adam-smith-trump-tariffs/
One of [Adam] Smith’s first sections in the Wealth of Nations dwells on the importance of trade in allowing us to specialize:
As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for. (Bk. 1, Ch. 3)
Here Smith is saying that a greater ability to transact with one another—across a community or across the globe—makes for a greater ability to specialize in any particular task. Specialization allows us to produce more goods and services with less time, effort, and raw materials, and a bigger market gives us more people to trade those goods and services with in exchange for our wants and needs.
As we highlighted last night, China has threatened to respond to President Trump’s steel and aluminum tariffs with unspecified actions that Chinese officials said could “seriously hurt the international trade order.”
And as Axios warned in a piece published Friday, investors shouldn’t interpret their lack of details as a sign of an empty threat: Rather, China actually has far more leverage with which to retaliate against the Trump tariffs than it did when George W Bush briefly imposed tariffs on imported steel in the early aughts. Back then, Bush rescinded the tariffs, it’s widely believed, because the European Union threatened targeted sanctions that would hurt swing states like Michigan and Florida - states that Bush needed to carry during his 2004 campaign. Unsurprisingly, the EU is embracing a similar strategy this time around.
But today, China’s ability to retaliate now rivals that of the entire European Union - which means this could be the last time the US can “set the agenda” in terms of its relationship with its largest economic rival.
Back in 2002, China produced less than 200 million tons of steel. As of 2016, China could churn out 1 billion tons, forcing Beijing to pare back production or risk a destabilizing glut.
https://www.nationalreview.com/2018/03/trump-steel-tariffs-bad-economics-bad-policy/
It’s not like nobody saw this coming: Trade protectionism — crony capitalism for well-connected and politically sensitive firms and industries — is bad policy, but it is one of the few issues about which Donald Trump has been consistent in his public statements going back decades, to the 1980s at least. He ran on a protectionist agenda and specifically named steel imports as a source of irritation.
The economics here are pretty straightforward. Trump thinks steel is just one more example of the Chinese getting one over on Americans, but China is in fact a minor player in the U.S. steel-import business, being No. 11 among nations exporting steel to the United States. A quarter of our imported steel comes from our NAFTA partners, mostly from Canada, which provides 16 percent of U.S. steel imports. Among Asian steel exporters, South Korea is our largest trading partner, not China. Moody’s projects that the country that will be most adversely affected by the tariffs is Canada, followed by Bahrain, a country that does not loom particularly large in our economic consciousness, having as it does an annual national economic output about one-fifth of the Ford Motor Company’s. It is better to punish one’s enemies than one’s allies.
And it is no good at all to punish producers and consumers both, which is what tariffs do. Tariffs are a sales tax, in this case on a raw material that is used in everything from buildings to automobiles and industrial machinery — and the latter two are a big part of the U.S. export portfolio, something that ought to occur to a president who obsesses about the balance of trade. Steel is a necessary part of the machinery that produces the agricultural commodities, electronics, and industrial implements that are the heart of U.S. exports of goods. Advantaging a small number of politically connected firms at the expense of the broader manufacturing economy — which employs vastly more people and represents vastly more in the way of both economic production and exports — is damned foolish. As an economic matter, it is illiteracy in action. There’s a reason Caterpillar shares sank after the tariff announcement, along with Boeing, United Technologies, General Motors, and others.
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