FREE TRADE VERSUS PROTECTIONISM By RICHARD M. EBELING A specter is haunting the economies of the world. It is the specter of protectionism. In one country after the other, cries are heard that international trade, rather than bringing mutual prosperity, imposes economic hardship on some nations so that others may gain. Trading practices among nations are declared to be "unfair." Jobs are supposedly lost through "cheap" imports flooding domestic markets. Balance of trade deficits threaten the financial stability of not only third- world countries, but the United States as well. And the solutions proposed are the same everywhere: demands are made for the imposition or stiffening of trade restrictions--the raising of barriers in the path of trade among nations. It is claimed that limitations on amounts of foreign supplies entering the domestic market, through either tariffs that make foreign goods more costly or quotas that prohibit the quantities which may be imported, will increase the market share of domestic companies as well as enhance employment opportunities at home. The reasoning seems straightforward and sensible. However, it suffers from one handicap: It is dead wrong! When implemented, protectionist policies bring economic harm, as well as lower standards of living, for the people of every nation choosing to follow this path. If the protectionist argument is correct, that buying Japanese goods, for example, is harmful to American industry and jobs as a whole, then the same logic would have to imply that importing New Mexico goods is harmful to Texas industry and jobs; and that buying Fort Worth goods is harmful to Dallas industry and jobs. Why does the Japanese-U.S. argument seem plausible, while the Fort Worth-Dallas argument appears suspect? Because people still suffer from the tribal notion that suggests that the accident of a political boundary across the face of a map must imply antagonism between the human beings who live on different sides of that boundary. International trade is nothing more than an extension of the social division of labor across national borders. And the same advantages that arise from a division of labor between members of the same nation apply among members of different nations. It enables a specialization of skills and abilities, with each member of the world economic community tending to specialize in that line of production in which he has a comparative advantage (a relative superiority) in relation to his trading neighbors. Through such a division of tasks and activities, the wealth and prosperity of every nation is increased, as compared to a situation in which individuals or nations are required to obtain what they desire through their own efforts, in economic isolation from their fellow men. But what of the particular charges presently leveled against our foreign trading partners? What about the detrimental effects which supposedly result from the trading policies of other nations? Let us examine some of these charges: 1. Unfair Trading Practices. A number of nations have been accused of unfairly subsidizing the export of goods to America, i.e., at prices which are below their "actual" cost of production. The world is going through a dramatic technological and economic revolution, with many underdeveloped nations finally entering the industrialized era. Their lower prices often merely reflect their lower costs of production, as they shift into positions in the international division of labor which reflect those areas where their relative economic efficiencies are greatest. As these nations sell more in the United States, they earn the purchasing power to buy more from America. American exports, therefore, increase because the only way for foreigners to buy more from Americans is for Americans to sell more to foreigners. To the extent that foreign governments do subsidize some products sold in the U.S., this means that Americans are able to buy them below what would have otherwise been the market price. In other words, we are given a bargain, a bargain that saves us resources that would have been devoted to the making of more products to pay for what otherwise would have been higher-priced imports. And these resources are now available to make other things that we would not have been able to produce without this bargain. It is the citizens of those other nations who should be outraged since they, not us, have to foot the tax bill to pay for the subsidies. 2. Foreign Products Cause Loss of Jobs. The charge is made that the sale of foreign goods in America "steals" markets away from American companies, with a resulting loss of jobs in America. This argument ignores the fact that these foreign goods must be paid for. It is true that jobs in those sectors of the economy which directly compete against certain foreign products may be lost. But other jobs are created in those industries which manufacture goods which foreigners are interested in purchasing from Americans. The sale of foreign goods in America may change the locale and types of employments in the U.S., but it need not result, over time, in any net loss of jobs. Furthermore, with free trade, Americans end up spending less of their income on certain products because they are bought more cheaply from foreign suppliers. This leaves them with extra dollars by which they are able to increase their demand for other goods on the market. The net effect, therefore, is to stimulate even more employment opportunities than previously existed. 3. The Balance of Trade Deficit and Foreign Investment. The leading issue during the last several years has been the charge that America buys more abroad than it sells, resulting in a trade deficit that threatens the economic stability of the United States. It is true that in terms of tangible or visible goods, the U.S. has been buying more than it has sold. But this overlooks the overall trade "balance sheet." Instead of buying American commodities with the dollars they have earned, foreign earners of dollars have returned some of them to America in the form of savings in the credit markets, or as direct investment in U.S. industry. The overall balance of payments between the United States and the rest of the world has balanced. When this is pointed out, the concern expressed is that foreigners are "buying up America." "They" will control "us." Actually, however, when the foreign investment is "indirect," i.e., loaned to Americans through the banking system, this merely increases the pool of savings in the United States; and this pool of savings is available to domestic businessmen who desire to expand or improve their plant and equipment. If wisely used, the money borrowed will be paid back, with interest. And, in a few years, the productive capital in America will be greater and more efficient. Industry will still be in "our" hands. But what if the investment is direct? Won't foreigners "control" America by buying out existing companies or starting up new businesses which successfully compete against American- owned firms? Again, this reflects the collectivist notions of past ages, notions which think of those who belong to other nations--"tribes"--as inherently dangerous enemies. But those of other nations who invest in America are actually "our" captives--if one wishes to use this form of reasoning. They have invested their savings in America because it has offered the most attractive economic and political environment. Their own fortunes and futures are linked to continuing American prosperity; and they must manage their investments in judicious, market-oriented directions if they are to generate the profits for which they hope. But what if "they" pulled out? Would that not hurt "us" by disrupting "our" economy? In such a case, the physical plant and equipment remain in America. To "pull out," they would have to find willing buyers. And to do that, they would have to offer attractive prices to prospective buyers. And they would only want to sell out if either the political or economic climate in the U.S. became less attractive as compared to other countries. But are these not the same incentives and motives which guide Americans who invest and save in New York rather than California, or in the U.S. rather than some other country? While there will always be necessary adjustments to new and changing circumstances, free trade between nations ultimately benefits all who participate. Protectionism can only lead us down a road of impoverishment and international commercial tensions. To paraphrase the great 18th century, free-market thinker, David Hume, when he criticized the protectionists of his time: Not only as a man, but as an American, I pray for the flourishing commerce of Germany, France, England and even Japan. Why? Because America's prosperity and economic future are dependent upon the economic prosperity of all of those with whom it trades in the international division of labor. Professor Ebeling is the Ludwig von Mises Professor of Economics at Hillsdale College, Hillsdale, Michigan, and also serves as vice-president of academic affairs for The Future of Freedom Foundation, P.O. Box 9752, Denver, CO 80209. ------------------------------------------------------------ From the January 1991 issue of FREEDOM DAILY, Copyright (c) 1991, The Future of Freedom Foundation, PO Box 9752, Denver, Colorado 80209, 303-777-3588. Permission granted to reprint; please give appropriate credit and send one copy of reprinted material to the Foundation. A CAPITALIST LOOKS AT FREE TRADE By WILLIAM L. LAW Protectionists seeking relief from the rigors of foreign competition bring to mind Milton Friedman's dictum, "The great enemies of free enterprise are businessmen and intellectuals-- businessmen because they want socialism for themselves and free enterprise for everyone else; intellectuals, because they want free enterprise for themselves and socialism for everyone else." I speak from personal experience. Baseball-glove leather was the principal product of our firm until 1957 when ball gloves of Japanese manufacture appeared and ultimately gained seventy percent of the United States' market. Today, we tan no baseball-glove leather. Sentiment in the ball-glove industry at that time was very strong for protective action. I investigated the matter in some depth and found that I could not in good faith urge protectionist action on my political representatives; such action would have been wrong economically, politically and morally. My sentiments stem from the fact that I look upon myself not as a tanner whose product is leather, but as a capitalist whose product is profit. That climate most beneficial to capitalists--and to workers--is one in which there exists a minimum of governmental interference. The protectionist argument is almost as widespread today as it was two hundred years ago when Adam Smith in his treatise An Inquiry into the Nature and Causes of The Wealth of Nations so brilliantly demonstrated its fallacies. Fortunately, we have the work of Smith and his many successors, plus the empirical lessons on the benefits of free trade--our fifty states united in one common market are a notable example--to demonstrate the advantages of free exchange. No improvement can be made on Smith's understanding: It is the highest impertinence of kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will. . . . To give the monopoly of the home market to the produce of domestic industry . . . must, in almost all cases be either a useless or a hurtful regulation. If the produce of domestic industry can be bought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of a shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it in their interests to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for. What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. . . . That it was the spirit of monopoly which originally both invented and propagated this [protectionist] doctrine cannot be doubted; and they who first taught it were by no means such fools as they who believed it. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind. The "sophistry" of which Smith speaks is in essence that being advanced today by protectionists: "The U.S. is a high-wage country; its industry is unable to compete with that in low- wage countries; imports are increasing, and unless remedial measures are adopted, our industries will be destroyed and large-scale unemployment will ensue." But fortunately, we have the the rationale and arguments for free trade. We trade to obtain goods that are either unobtainable domestically, such as chrome ore, diamonds, and teak wood, or that can be obtained more cheaply abroad, such as baseball gloves or textiles. And free trade raises wages! Trade between individuals, between states, between nations is beneficial, and far from reducing the living standards of the participants, greatly improves them. And the country with the freest trade policy enjoys the maximum advantage. I repeat: trade raises wages! Those who think otherwise fail to understand that wages in the U.S. are the world's highest for a reason: American industry has the world's highest average-capital investment per worker ($125,000) and, therefore, has the highest average productivity per worker. And while we have high wages, because of the multiplier-- tools, we also have low labor costs! Certainly, labor-intensive industries, i.e., textiles, find it difficult to compete inside a capital-intensive country. After all, a Chinese worker with minimal capital--a needle-- and working for $20 a week, will produce handmade lace at a lower cost than an American worker using the same needle and receiving $200 a week. While their productivity will be the same, the Chinese labor cost will be one-tenth of the U.S. cost. But give the American worker a giant mechanical shovel and, at the world's highest wage, he will produce the world's cheapest coal. With advanced technology, workers will produce the lowest-cost coal, wheat, jet aircraft and countless other goods. And so, we import lace and ball gloves and petroleum, and we export jet planes and wheat and chemicals. To attempt to "retaliate" against lower costs in certain foreign industries is an exercise in folly. Moreover, contrary to popular belief, imports don't cause unemployment, nor do immigration or automation. Unemployment exists only when money wages are arbitrarily raised or held above the market price. The Great Depression is the classic case of "iatrogenic" unemployment, i.e., induced by the economic doctor. For example, when the stock market crashed in 1929, it precipitated a deflation and concomitant lowering of all prices. Presidents Hoover and Roosevelt, believing in the so- called "purchasing power theory," cooperated with major industrialists and union leaders to do everything in their power to prevent wages from falling--even though prices in general had dropped by one-third from 1929 to 1932! The result was that twenty-five to thirty percent of the work force was unemployed. The situation was not ameliorated until 1941 when the government printed massive amounts of money to support the war effort; and instead of trying to support wages, the government took the opposite position and introduced controls to hold wages down. Unemployment soon disappeared and industry expanded. Unfortunately, a false lesson was learned--that war is the health of the economy. (Our current secretary of state, justifying the military intervention in the Middle East, reflected this when he stated, "If you want to sum it up in one word, it's jobs.") The truth, of course, is that war is actually the enemy of prosperity (and freedom) and that full employment is actually the normal condition of a truly free economy. Protectionism is the age-old road to reduced exports, increased unemployment, lower standards of living, war, and so many other problems associated with government intervention in economic activity. Free trade, on the other hand, is the way to increased exports, full employment, higher standards of living, peace, and so many other benefits associated with economic freedom. Mr. Law is chairman of the board of Cudahy Tanning Company in Cudahy, Wisconsin. ------------------------------------------------------------ From the June 1991 issue of FREEDOM DAILY, Copyright (c) 1991, The Future of Freedom Foundation, PO Box 9752, Denver, Colorado 80209, 303-777-3588. Permission granted to reprint; please give appropriate credit and send one copy of reprinted material to the Foundation.