Saturday, January 2, 2010

Trade Protectionism Does Not Enhance National Security

As a general concept, free trade has many supporters. Most of us agree that trade with other nations is a good thing. We get stuff that we would not otherwise have and/or it is much cheaper. Examples include many food items that grow only in special climates, such as fruits and vegetables. Some foodstuffs cannot be grown here, or they can be grown only in special climate-controlled facilities. If the U.S. prohibited the importation of these foreign foods, we would not have them at all or they would be very high priced and, therefore, not available on the mass market. Therefore, it is not difficult to advocate free trade in these items, although even here the U.S. shamefully prohibits the free importation of sugar cane from poor Caribbean nations and corn from poor African nations, just to name two of the most egregious protectionist policies. These are nothing more than gifts to mostly rich American sugar and corn producers, at the expense not only of the American consumer but also, perhaps more importantly, at the expense of poor farmers in the Caribbean and Africa.

The Case for Trade Protection

But, I digress. The issue is protectionism as a necessary policy in order to enhance national security. Here the argument takes many forms. All involve the construction of straw men--meaning, the advocates of protectionism start from some extreme premise, whereby, once the premise is accepted, there appears to be no rational or logical alternative to protectionism. For example, one common argument assumes that some key industry just would not exist if Americans were to be allowed to purchase this industry’s product from overseas producers who had a natural advantage or were subsidized by their governments. The steel industry is often cited. It is assumed that the American steel industry is the target of foreign governments. These governments are hostile to the U.S., although not officially at war with us. These governments extend subsidies to their steel industries in order to monopolize the U.S. market, depriving American producers of necessary revenue and driving them out of business. Once the American steel industry has been destroyed, these governments can do two things. They now can inflate the price of steel so that our steel-dependent industries, such as autos, cannot compete internationally, or they can boycott sales to the U.S., making it impossible for us to arm ourselves with ships, tanks, artillery, etc. Under this scenario, our free trade posture makes us so dependent on one foreign producer that we would be forced to become a backward nation or surrender militarily. What is wrong with this argument?

The Impossibility to Monopolize the World Market

Well, first of all, when writing the above scenario, I found it difficult to construct this straw man so that the argument would appear possible. From a practical standpoint, the argument appears ridiculous. There are many nations eager to sell steel (or whatever good the protectionists cite) on the world market. If China, for example, subsidized steel to such an extent and for such a long time that it did manage to destroy American steel companies, what would it gain? As soon as it raised its price or refused to sell to us, other steel producers would rush in to sell on our market, for many countries have robust steel industries. What is China to do—sell subsidized steel all over the world in an attempt to destroy the steel industries in every country? This hardly seems plausible. But this practical objection is not the most powerful one against the protectionist argument. Read on.

The Inalienable Right for Man to Trade with Man

Economic theory helps us clarify the free trade position to such an extent that even seemingly practical objections can be viewed with renewed skepticism. One of the key concepts in Austrian school economics is that man trades with man and that both expect to benefit. Notice that I did not say that America trades with China. The free trade position stands upon the right of the individual to trade with whomever he desires. This right does not end at our nation’s borders. We have just as strong a right to trade with foreigners as we have with next door neighbors. This is a right embodied in our Declaration of Independence, which calls our right to life, liberty, and property (the pursuit of happiness) as inalienable, meaning that it is God given and may not be given away much less taken from us by legal means. Our Constitution became the practical implementation of this principle. As our “Supreme Law of the Land”, our Constitution lays a sacred obligation at the foot of government to protect us in our inalienable rights. Our Constitution makes no provision for our government to grant these rights or even to interpret them. Seventy-five years after our Declaration of Independence a Frenchman explained this issue in as clear terms as have ever been penned. Frederick Bastiat, in The Law, stated that it is impossible for government ever to obtain powers that did not once belong to man himself. Because government is a creation of man, man cannot grant to government any powers that he himself did not already possess. Since man does not possess the right to deprive other men of their property, government cannot legally exercise this right, no matter the number of people who clamor for it to do so. This is the philosophical foundation of free trade. Since man has no individual right to prevent his neighbor from trading with anyone he chooses, government cannot obtain the power to do so. But there is more; there is economics.

“Society” Benefits when Man Benefits

A fundamental tenet of Austrian school economics is that man acts in a purposeful way to accomplish something that he considers will be an improvement upon his existing condition. Now, I know the previous statement sounds odd, but the implications of it are far reaching. First of all, it places man at the center of all action. It does not say that societies act; no, it says that man acts. Man is the building block, so to speak, of society; that is, society is nothing more than the aggregate of all men and their actions. No man, no society. Therefore, it follows logically that when man acts in a purposeful way to improve his condition, any subsequent improvement may be regarded as an improvement for society, too. There is no such thing as an improved condition of man that translates somehow into a deteriorated condition for society. This is impossible. Now, this is not to say that man may improve his condition by committing a crime or some other physical harm upon another man. No, he may not. This is the “No Harm” doctrine of Dr. Thomas Patrick Burke of the Wynnewood Institute. When two men agree to trade, both expect to gain, and, in pursuance of their goal, they may not cause physical harm to another man. Notice that I said “physical” harm. Refusing to trade with another does not constitute harm. If I decide to switch my grocery shopping patronage from store A to store B, I have not harmed store A. The fact that I change my car buying patronage from an American company to a foreign company likewise does no harm to the American company. I have gained (or expect to gain, if my research is correct that the foreign car will meet my expectations) and the foreign carmaker gains. If either of us did not expect to gain we would not have traded in the first place. But there is more yet.

All Subsidies Are Transfers of Capital

Some trade protectionists will agree with my analysis of the situation, yet they still will advocate protectionism under the theory mentioned earlier that the foreign carmaker was subsidized by his government. The problem with this theory is that it fails to understand that all subsidies are transfers of capital. If the American government subsidizes its farmers, for example, the farmers gain and the buyers of farm products gain to the extent that their lower price exceeds the cost of the subsidy they provided. Since American taxpayers pay the subsidy to farmers, as a class of farm product consumers they cannot gain. In fact, they lose, since the cost of running the farm subsidy program detracts from the amount of the subsidy the taxpayers send to the farmers and, as a result, the price of farm products are not as low as they would otherwise be. One can see that if China subsidizes its steel industry, it transfers capital to the American consumers. Continue this exercise long enough and widespread enough, and China will ruin its economy by running out of capital.

Furthermore, when Americans buy cheap, subsidized Chinese steel, it is as if our steel industry found a new and more efficient method of production. We now get the same amount of steel by expending fewer economic resources. This allows us to expand our economy into new areas, because we now have increased capital to do so. The Chinese provided that capital to us free of charge! The American production possibility frontier expands while the Chinese production possibility frontier shrinks. But there is more! Cheap Chinese steel makes our steel-using products cheaper on the world market. We gain market share for any good that contains steel, because we can lower our price while maintaining our profit margins. The only way China can recoup some of its loss is to import these cheaper American finished goods. If they refuse to do this, then the subsidy is an out and out gift. But there is even more! To the extent that we build military hardware with subsidized Chinese steel, the Chinese are helping us pay for our national security. If we find that our current level of military preparedness can be purchased at a lower cost, we might decide to expand our military preparedness for the same budget dollars as before!

Conclusion—Free Trade Enhances Our National Security

In conclusion, rather than harm our national security, free trade enhances it. Military goods are cheaper; our economy expands into new frontiers made possible by an increase in capital; our exports are cheaper, so our businesses expand; and employment expands right along with an expanding economy, of course. So, bring on those foreign subsidies!