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Recently I forwarded to my circle of friends what I considered to be a
concise and accurate argument
in favor of unilateral free trade. The author was Professor Don Boudreaux
of George Mason University, writing in his daily blog Cafehayek.com. He responded to Mr. Daniel
Dimiccio, former CEO of Nucor Steel, who was defending tariffs on foreign
steel. Professor Boudreaux explained that arguments in favor of tariffs place
all of economics on its head; i.e., that consumers were required to support
producers rather than the other way around.
After sending Professor Boudreaux's article, I have been hearing two
common objections to his article from friends who consider themselves generally
to be in favor of free trade, even unilateral free trade. The first objection I
will call the Donald Trump objection; i.e., that imports have cost Americans
good paying jobs, from which the nation has never recovered and cannot recover
as long as we allow imports to replace American made products. The second I
will call the essential industries objection; i.e., that there are some
products that America must produce itself, no matter what the cost or
inefficiency, in sufficient quantities to ensure access to these products in
time of war.
Objection
number one: Free trade causes unemployment
The first objection is easiest to dismiss, for it attempts to refute
the "Law
of Comparative Advantage", postulated exactly two hundred years ago by
the great English economist David Ricardo. Peaceful cooperation among peoples
of the earth has no limit. Just as we Pennsylvanians find it advantageous to
import pineapples from Hawaii rather than attempt to grow them ourselves,
Americans find it advantageous to import many goods from people who just happen
to live in foreign countries. Absent government intervention to restricts one's
own citizens from entering into peaceful cooperation to produce any legal
product or service, all will find employment and all will be wealthier. A
simple example will suffice. Let's assume that Michael Jordan, the greatest
basketball player of his generation (and perhaps of any generation) desired a
new home. Let's also assume that Mr. Jordan was a skilled carpenter,
electrician, plumber, etc. Would Mr. Jordan become wealthier by quitting
basketball for a year or two at the height of his career in order to build his
own home? Of course not. Even if we assume that Mr. Jordan not only was a
skilled craftsman but just happened to be the best craftsman in the world, he still
would be wealthier paying less skilled workmen to build his new home while he earned
much higher wages playing basketball. The corollary is that even those who are
less skilled in ALL things can find useful employment in an unhampered
market. This is the "Law of
Absolute Advantage", a corollary to the "Law of Comparative
Advantage".
The Law of Comparative Advantage is also revealed once producers create
a surplus. Savings produces capital, which produces more wealth when
individuals are allowed to engage in the productivity enhancing division of
labor via trade. The resulting products and services cost less than previously,
yet employment is not destroyed. It is transferred to better uses, which enrich
all. Both sides expect that trade is beneficial and must be allowed to freely
trade their surplus product. The political location of individuals engaged in
such trade is completely irrelevant to the wealth enhancing benefits of trade.
The logical conclusion of restricting international trade for just one
or two so-called threatened industries is the demand that all products be
protected. Advocating an autarkic society is to argue in favor of the
fallacy of composition; i.e., that what might be good for one industry--for
example, allowing domestic steel producers to extort higher prices from customers--cannot
be extended to all industries.
This is akin to standing in a giant circle with everyone picking the
pocket of the person in front while having his pocket picked in return.
The source of our societal problems, even those correctly identified,
such as persistent unemployment, must be found elsewhere. As Ludwig von Mises
would advise, one must find the proper means to arrive at the ends desired. If
the US really does suffer from collapsing industries, restricting trade is not
the solution but will exacerbate the problem. In other words, trade
restrictions to cure unemployment are the wrong cure and will cause even more
harm to society.
Unfortunately in modern day America there are many suspects to which
one can assign economic decline. American industry is hampered by a panoply of regulatory
red tape and outright restrictions at federal, state, and local levels. One
needs only to consider the effects of the Environmental Protection Agency, the
Occupational Health and Safety Administration, the Federal Food and Drug
Administration, not to mention similar agencies at the state level, plus the
disaster that is public education (regulated mostly by the states) and ever
increasing regulations on economic life at the local level. (My tiny township
government in southeast Pennsylvania recently informed us homeowners that we needed
to obtain a township issued permit in order to resurface our driveways. So, now
I need government permission to maintain my home in good repair!)
Objection
number two: Essential industries must be protected
This is the national security objection; i.e., that the US must
maintain a minimum production level of essential war related products. This is not an argument in favor of economic
efficiency. Quite the opposite. Furthermore, little or no evidence is offered
that nations have lost wars due to running out of essential products, although
it undoubtedly is true that denying the enemy all kinds of goods and services
does reduce a nation's war-making capability. Nevertheless, one can make a good
case that this concern is unlikely to be a factor by taking a closer look below
the surface of this argument.
Stating the "essential
industries" case:
Let's assume that China wants to drive US steel manufacturers out of
business. It succeeds by offering US steel users--manufacturers of buildings,
bridges, autos, etc-- high quality products at low prices for an extended
period of time. After US steel production has been reduced to zero, China
suddenly refuses to sell steel to us and, as a consequence we cannot build essential
war material that requires steel components. We surrender to China, withdraw
our military protection to allies, and/or accede to China's demands, whatever
those may be.
The response:
Note that for a long period of time, perhaps years or even decades,
China must subsidize steel production, which drains its public coffers and
actually reduces its own war making capacity. (China can't build its own
battleships, for example, if it is subsidizing construction of ours.) In the meantime, the US enjoys an increase in
its standard of living. We build up our country in many ways, from new and
improved bridges to a revitalized domestic auto industry (remember, cheap, high
quality Chinese steel is subsidizing US car makers). Now China embargoes steel shipments
to the US and makes threats of some kind. Our modern battle fleet, the product
of cheap Chinese steel, is at our immediate disposal.
Meanwhile, our modern infrastructure, built with cheap Chinese steel,
allows us to rush stockpiled war material, also built with subsidized Chinese
steel, to our fleet and onward to our overseas bases and the battle area. We then
gear up for the possibility of a protracted war by placing orders for steel
with the other thirty-odd nations of the world who are eager to sell us high
quality steel but who have been shut out of the American market by subsidized
Chinese steel.
Now, I ask you...is this not the more likely scenario?
Importing subsidized products--perhaps especially products essential for war--increase a nation's war
making capacity rather than diminish it. We build up all aspects of our
nation's economy, including the defense sector, by using products with the best
combination of quality and price, whether imported or not. Doing so allows us
either to spend less for the same level of defense or increase our defense by
spending the same amount of money but getting more war material in return. Our
theoretical potential enemy has actually helped us defend ourselves and our
vital interests abroad.
Conclusion
In conclusion, these two common objections to unilateral free trade do
not stand up to closer scrutiny. For two hundred years David Ricardo's Law of
Comparative Advantage has informed us that in an unhampered market economy all
will be employed to the limit of their capabilities. Furthermore, rather than
reduce a nation's security, imports of what we might consider to be
"essential materials" actually enhance our security. We need to tax
our own citizens less for the same level of security while building up our
nation at the expense of potential enemies.
Let us end such nonsensical worries and trade freely with the world,
especially with those whom we might currently fear, such as China. It wasn't
that long ago our nation feared Germany, Japan, and even Great Britain. It's
good to remember that peaceful cooperation provides its own momentum for
everyone.
