The Concise Guide to Economics: Free Trade vs. Protectionism

conciseguidetoeconomics.com ^ | Unknown | Jim Cox

[Luis Gonzalez]

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.

[Luis Gonzalez]

"Is this the policy Bill Clinton was following when he gave missile guidance secrets to the Chinese for campaign cash?"

If you can prove that, and have another person who can testify to it, then you can charge Bill Clinton with treason.

Unfortunately, you can't, nor can anyone else.

That makes your post nothing more than histrionics.

[neutrino]

One in three thousand people have had their jobs "offshored", the rest of the hundreds of millions working owe their success to free enterprise.

If it is, in fact, that small a number then eliminating free trade won't have much effect on our economy, now, will it?

Why don't you quit the histrionics and try posting some actual numbers?

You want numbers? You got it!

You can get lots of numbers here

They show an increasing trade deficit for combined goods and services. Note that your chart takes one small area and generalizes based on that subcategory. Such tactics smack of histrionics.

And if offshoring is such a damned evil thing, then we should shut down all those Toyota and Honda plants here...right?

We need to encourage domestic companies to open those factories instead of depending on foreign compaines to do so.

One more thing...hard for you to prove the negative financial aspects of our economic system in light of the constantly rising wages, and industrial productivity these past two hundred plus years.

No, most of that two hundred years of growth was enjoyed with strong protections for domestic producers. Only recently has "free traitin" come into vogue.

[neutrino]

"China and India have high trade barriers and strong protections for their economies. We don't." So, your solution is for the US to govern itself like China and India.

They are shi%holes, and you want us to be shi%holes as well.

If China and India were so damned smart, they would be us...they're not. They're not because they limit their people's freedom to trade freely. They are growing because they are starting to adopt our system, and you want to counter by us adopting theirs.

But, it's a lot for you to figure that out, isn't it?

(Chuckle) Getting a little desperate, are you, Luis? That's OK. Anger and denial are all part of the process of saying goodbye to old, flawed patterns. Free traitin', for example.

[familyofman]

Case closed - there are no arguments left for not outsourcing & free trade. It's all so clear to me now. Thank you, thank you - I can put all my worries about the US economy & defense contracts to rest now. I feel much better now that my eyes have been opened!!!

All questions and arguments have been put to rest by this fine posting.

[Luis Gonzalez]

Slave labor is not free trade, but not that you would see the difference.

Come on big guy, post somehting other thanm empty rethoric.

[swampfox98]

That makes your post nothing more than histrionics.

And that makes your post a giant suck up. There are people who don't want the truth about what is happening to this country to be discussed. In order to shut up the people like me, the word has gone out that my arguments mustn't be discussed, but that I must be insulted. If you think this is going to stop me, you are wrong.

There was proof that Clinton gave the guidance system to China for campaign cash. Yeah, try Clinton for treason? The Senate Republicans would laugh at that, seeing as how they acted when the House sent over boxes of proof that he was a liar, among other things. Have we sunk so low that we'd try to cover this over just to get back at me?

[MissAmericanPie]

Yes, Luis you are right, I am a patriot, and a protectionist regarding the security and safety, economic, and otherwise, of my country.

[MissAmericanPie]

Thank you lewislynn

[Luis Gonzalez]

"No, most of that two hundred years of growth was enjoyed with strong protections for domestic producers."

Post proof of America's protectionst past.

Go ahead.

[Luis Gonzalez]

Rethoric.

You want the government to restrict if not control, the flow of trade, that makes you a communist at worst, a socialist at best.

[international american]

I travel all over Asia. We are being suckered in so many ways. If you want to work for Hewlett Packard, you need to live in Kuala Lumpur, Malaysia.And work for 1000 or less a month.

[Luis Gonzalez]

"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?

Your model=more government.

Not a conservative value, hardly a "patriot".

[Luis Gonzalez]

"There was proof that Clinton gave the guidance system to China for campaign cash."

Much as I would have liked to actually have that be true, it isn't.

To qualify as treason under the Constitution, you would need two people testifying that they saw Bill Clinton either give the guidance system to a ChiCom agent in return for cash, or gaving those specific orders for that express purpose.

That's not a "suck up", that's the Constitution.

Section 3. Treason against the United States, shall consist only in levying War against them, or in adhering to their Enemies, giving them Aid and Comfort. No Person shall be convicted of Treason unless on the Testimony of two Witnesses to the same overt Act, or on Confession in open Court.

[swampfox98]

Fox News is the crack in the dike

Then I'll be waiting for the dike to break. Or does that sound too much like the "histrionic" talk I was accused of in another post? :-)

[Luis Gonzalez]

Or you could get Bill to confess in open Court.

[Luis Gonzalez]

You would also be hard put defining China as an enemy...most favored trading partner status and all that.

[swampfox98]

Why don't you answer my argument that free trade and NAFTA has destroyed the country, and brought millions of illegal immigrants here who are taking jobs away from American workers?

Why don't you answer my argument that the American tax payers are being taken to the cleaners by having to pay for health care, schooling, and housing for illegal's children?

Why don't you answer the argument?

[lewislynn]

Thank you lewislynn

You're welcome.

Luis Gonzalez is consistant on his support of protectionism as long as it isn't for America but rather for places like India and comminists/communism in China.

As long as his underpaid dishwashers have cheap shit to buy to keep them happy and hence his profits up, then he'll be happy.

[upcountryhorseman]

This does not take into consideration that since 1974, when
so-called free trade began in the U. S., real wages stated
to decline. Also, the rate of productivity stated to decline.

[Luis Gonzalez]

"This does not take into consideration that since 1974, when so-called free trade began in the U. S., real wages stated to decline. Also, the rate of productivity stated to decline."

Free trade has existed since the inception of the Republic, protectionism and excessive tariffs were either the cause of the Great Depression, or made it worse, depending on which school of thought you believe, but you're welcome to prove me wrong, and welcomed to substantiate your claims.

Here's my shot: you're dead wrong.