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.

[MissAmericanPie]

"This emphasizes that there is no distinction between trade and international trade in principle"

In principle? There is a big difference between free trade within the nation and enriching unfriendly foreign nations using child and slave labor at the expense of the US manufacturing and industrial base.

I think we have had about enough of these elite think tanks that can't find their rear ends with both hands.

[Luis Gonzalez]

"I think we have had about enough"

Dictionary Information: Definition Self-aggrandizement
Thesaurus: Self
Description and Meaning: The Self

Self-aggrandizement (Self`-ag*gran"dize*ment) (?), n. The aggrandizement of one's self.

Back to speaking for all the people I see.

[Luis Gonzalez]

I somehow just knew that you would be all in favor of protectionism, which in all actuality is an elite few who are unwilling to compete in the business sector, seeking protection from the government for their income and their inneffective industries, at the expense of the rest of the nation's people.

[lewislynn]

Back to speaking for all the people I see.

She can speak for me any day of the week.

[neutrino]

I think we have had about enough of these elite think tanks that can't find their rear ends with both hands.

You can certainly include me in that "we". I've said it before, and I'll say it again - China and India have high trade barriers and strong protections for their economies. We don't. They are growing more rapidly than we are. This is a logical inconsistency.

Free traitin' - just UN sponsored global welfare that the US taxpayers get stuck for.

[neutrino]

Offshoring ping!

If you'd like on or off the offshoring ping list, please FReepmail me!

[Luis Gonzalez]

I never expected you to actually have a mind of your own.

[greenwolf]

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.

There is a little club consisting of authors of dead theories from previous centuries, and Adam Smith is a charter member. The United States was built upon the ideas of Friedrich List and not those of Smith. Had Smith's thinking been the model, we'd still be an English colony.

[neutrino]

at the expense of the rest of the nation's people.

Do tell that to the millions of unemployed and underemployed Americans who are being financially destroyed as a direct result of "free traitin". In fact, why not go to some working-class neighborhood bar and tell them face to face?

No?

Now who's views are elitist?

[greenwolf]

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.

There is NO area of endeavor in this world in which Americans can compete with slave labor or people living in thatch huts. That's the basic problem.

[Luis Gonzalez]

"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?

[Luis Gonzalez]

So, did slave labor and thatch huts just get invented?

We seem to have been doing just fine competing in that world up to now.

[lewislynn]

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jcox

[swampfox98]

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.)

Is this the policy Bill Clinton was following when he gave missile guidance secrets to the Chinese for campaign cash? Another part of his bargain was taking all the jobs in Japan and sending them to China, causing a collapse in Japan's economy. This was a brutal assault against our friends the Japanese, and offering our enemy, the Chinese Communists, America on a platter.

From then on it has been down hill, as American jobs are being destroyed in a free for all attitude by our government and their friends the corporations.

Pat Buchanan was certainly right about NAFTA and the horrors it would bring on this country. America gets millions of unskilled illegal workers, and jobs Americans once held are being down graded to match those unskilled workers demands. Meanwhile, the American taxpayer is going broke subsidizing these illegals and their families. I see nothing good in any of this, and it all began with so called, free trade that rewards our enemies, and destroys the American worker.

[lewislynn]

Laissez Faire

Opposition to mercantilism and state paternalism also motivated Adam Smith, father of classical economics, whose name more than any other is connected with British laissez-faire doctrines. Smith believed that individual welfare rather than national power was the correct goal; he thus advocated that trade should be free of government restrictions. When individuals were free to pursue self-interest, the “invisible hand” of rivalry or competition would become more effective than the state as a regulator of economic life. Smith did not believe in laissez-faire in an absolute sense; he found a place for government activity in public works, such as the building of canals and docks to facilitate trade, and in the regulation of foreign commerce to protect certain home industries.

[dgallo51]

You can substitute any Democrat's name for Dick Gephardt's in the article linked below. It wouldn't mean a damn difference. Question...Would Paul O'Neil and Bono have to travel the world so much for debt relief if the U.S. and our G7 partners didn't impose protective tariffs and impose "minimum wages" on our trading partners? We've been under very heavy attack by the E.U., lead by the French and Germans.

I have maintained that our 'moral superiors', the 'progressive Europeans' are racist. Just ignore what they tell you and look at the actual results of their 'moral' policies. Getting that information won't be easy because the media is controlled by progressives, and they choose not to focus on the effects of their policies. They had a lock and a sweet deal until Fox News Channel screwed things up by focusing more on the results as opposed to spinning Democratic talking points Liberals use for their stated justifications for inflicting their policies on lesser developed countries. Fox News is the crack in the dike. Progressives like to offer 'their' filter of 'reality', and it just really messes up all their hard work to have Fox not play along.

What am I talking about? Next time you hear a Democrat lament the loss of our European allies, ask them about the effects of their trading practices.

Liberals practice racist trade, employment and currency policies designed to keep the non-Western Europeans under their boot heel and OUR LIBERALS support them and their racist policies. If it walks like a duck...

A politician's public service
Walter E. Williams
November 12, 2003

http://www.townhall.com/columnists/walterwilliams/ww20031112.shtml

[Luis Gonzalez]

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

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

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

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.

More work outsourced to US than away from it

[Luis Gonzalez]

"From then on it has been down hill, as American jobs are being destroyed in a free for all attitude by our government and their friends the corporations."

Histrionics.

[Luis Gonzalez]

Yes, that's the source I listed on the article header.