The Mises Institute monthly, free with membership
May 1996, Volume 14, Number 5
The Anti-Free Traders
Mark Brandly
To the outside world, it appears that all economists agree: free trade can never be
compromised.
Inside, the picture is far more complicated. Good economists, preeminently the Austrian School,
favor liberty across the board. Yet among the mainstream, economists who favor big
government at home likely reject free trade abroad.
That's no credit to the profession, but it's not anything new. Arguments against free trade go
way
back. Adam Smith believed that protection should be used against countries who refused to
reduce their own trade barriers. He was wrong: that policy only makes domestic consumers
suffer
for the mistakes of foreign governments.
John Stuart Mill wanted to protect infant industries from foreign competition. He too was
wrong.
The government cannot know if the industry should stay small or grow bigger. An industry that
expands thanks to protection does so without the benefit of real competition and is dependent on
government instead of consumers.
In this century, John Maynard Keynes considered tariffs a way to increase demand for
domestic
goods, thereby alleviating unemployment, an argument we still hear today. Tariffs increase
demand for the protected industry, but decrease foreign demand for other domestic goods. Jobs
are gained in one industry but are lost in another.
Paul Krugman of MIT currently leads the pack among the new "strategic trade" economists
attacking free trade. His models show that in certain theoretical instances, protection improves
social welfare. When would this happen? When a company's profits, just by luck, are higher than
the normal rate.
In his view, the government should keep profits up by restricting foreign competition. In fact,
high profits are due to the ability of entrepreneurs to fulfill consumer demands. There is no
reason to believe that protection can shift entrepreneurial ability from foreign to domestic firms.
The strategic traders also forget that resources are scarce. Encouraging one industry with
protection tends to shrink other industries. Under a free-trade regime, countries tend to export
goods in industries where they are relatively more efficient. Protection shifts resources to
industries where the country is relatively less efficient.
Strategic traders want the government to choose the correct industries to protect in order to
reap
these gains. However, the world is more complicated. A government would need to know the
current world supply and demand for all traded goods and know all future conditions. That's
beyond the ability of any person, much less government.
Once the government starts favoring one group or industry over others, industries naturally
will
spend their resources attempting to reap political benefits instead of satisfying consumers. That
creates an entirely new and wasteful market for government favors.
The most popular argument against free trade comes from the fair traders. In the political
world,
Messrs. Clinton and Dole prescribe protection in the name of fair trade. To them, all trade
requires a level playing field. Any foreign policies or institutions that confer an advantage on
one's rivals are unfair.
This completely negates the benefits from trade due to the advantages that come from the
differences between countries. This argument once applied mainly to direct trade barriers such
as
tariff rates. It now extends to any policy or behavior that is different from our own.
So, Japan's savings rate, its distribution system, and its keiretsus all are
supposedly advantageous
to its economy. On the other hand, U.S. companies are at a disadvantage due to environmental
policies such as pollution abatement and our prohibitively costly tort system. Therefore, we must
respond with barriers and pressure tactics. The Japanese must become like us or face government
wrath.
This view has lead to ridiculous policies. More than 3,000 foreign companies have been
penalized since 1980 for selling their products to American consumers at prices lower than the
U.S. government approves of. Foreign companies are so afraid of antidumping charges that they
tend to keep their prices artificially high--as inefficient producers at home cheer.
Companies charged with dumping must divulge reams of information to the U.S.
government,
and this confidential information has routinely ended up in the hands of rival domestic
competitors. The Commerce department heavily burdens those charged with red tape, to induce
them to abandon the case.
On one recent Friday afternoon, the Commerce Department commanded Matsushita to
translate
3,000 pages of Japanese financial documents into English by the following Monday. Unable to
comply, Matsushita withdrew from the case, giving up $50 million in exports of telephone
products.
Countervailing duties are also imposed to remedy unfair advantages that foreign
governments
give to foreign companies. This has become an offensive weapon for U.S. firms to use against
foreign competitors. The Commerce Department has alleged that the Thai government subsidized
their rice at 0.8 percent and imposed a countervailing duty. Meanwhile, the U.S. government was
lavishing millions of dollars in subsidies on American rice growers.
Not all retaliations are so low. Witness the recent threat to impose a 100% duty on some
Japanese automobile imports. Meanwhile, the U.S. supports agriculture prices and floods world
markets with cheap agricultural products at the expense of the taxpayer. This is exactly what we
accuse other countries of doing in order to justify trade barriers.
The "fair trade" argument is ultimately based on the idea that if one nation imposes high
taxes
and regulations, it is unfair for other countries not to do the same. Our government burdens our
producers, so if other countries do not follow suit, we burden our consumers with trade barriers.
This makes no sense. Is it fair to make U.S. consumers pay high prices when they already
pay
high taxes and get bad policy in exchange? Is it fair to prohibit U.S. citizens from making
voluntary exchanges with whomever they choose? Is it fair to prevent foreign firms from
charging our consumers low prices? Is it fair to harm workers in one industry in order to protect
politically favored workers in another industry?
U.S. trade policy protects American consumers from the bane of low prices. If our prices are
lower than theirs, we are being competitive. If their prices are lower than ours, they are
"dumping" their products on us. Studies routinely show that "protection" costs the American
consumers $100,000 to $250,000 per year for every job supposedly "saved."
Instead of protecting our consumers from low prices, we should implement free trade on our
own
accord. Coupled with free markets internally, this would generate an economic boom of historic
proportions. Other countries would be free to follow our good example, instead of our
government's bad one, of planning the economy and managing trade.
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Mark Brandly teaches economics at Ball
State University and is an adjunct scholar of the Mises Institute
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