Mises Wire

Why We Learn Nothing about Trade

International trade hasn’t had a very good time lately. Encircled by Trump’s plans, by EU and China’s threats at retaliation, and by the utter failure of the WTO, international commercial relations are stymied under an increasing amount of regulations, tariffs, and restrictions. The outlook is bleak indeed, but it’s not the first time, nor will it be the last. There are three main reasons why we seem to learn nothing from the history of trade.

First, the theoretical underpinnings of modern political and academic discourse on international trade are wrong. Currently, no matter whether one claims to support protectionism or ‘free trade’, the underlying assumption is that countries are or must be permanently in some sort of political and economic conflict with each other. Thus, whichever side of the barricade commentators claim to be on, they all believe that increasing one’s own welfare can only be accomplished by decreasing the welfare of others—or, that the benefits of trade only arise through reciprocal governmental agreements on mutual tariff concessions. The WTO’s entire agenda is built on reciprocal trade concessions, which have inevitable led to the current deadlock of negotiations. Trump’s view of trade is similar; to quote his now famous tweet, “trade wars are good, and easy to win… when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!”

It’s really not easy, nor true. The fallacy underlying this approach is based on the tenets of mercantilism, which originated in the 17th century France. Mercantilists claimed that trade is a zero-sum game; to win it, a country had to accumulate gold and silver at the expense of other countries, by imposing tariffs to restrict imports and encourage exports. Their ideas were demolished by the classical liberals of the 19th century who explained that international trade consists of a voluntary and mutually beneficial exchange—thus, a positive sum game. International trade is in fact only an extension of the domestic division of labor to an international scale. If trade between Georgia and Alabama is mutually beneficial, and no one is concerned about ‘winning’, the same holds true for trade between the U.S., China, E.U., and so forth.

The misguided concern with trade deficits can also be traced back to the same mercantilist fallacy that exports are good and imports are bad by nature. The balance-of-payments issue is a pseudo-problem, created simply by the fact that we collect data about which goods pass through customs. The real issue should be monetary inflation: back in the day of the gold-exchange standard, a trade deficit usually meant that gold was seeping out of a country because of domestic monetary inflation. But in the current monetary system, as domestic inflation is masked through dirty floating exchange rates, trade deficits no longer fully reflect reckless domestic monetary policies. Thus, trying to fix them won’t fix the unsound monetary system.

Despite these shortcomings, mercantilist ideas are pheonixlike—in academic circles, and particularly in policy. If the principle of comparative advantage was fully understood in its implications, we wouldn’t have any trade debates or multilateral negotiations anymore. Yet mercantilism creeps back under various names, such as strategic trade protection or ‘managed trade’, and as long as it does, tariffs are here to stay.

Second, to explain the interminable repetition of past errors, it must be said that trade policies, like all government policies, are addictive, to politicians as well as entrepreneurs. The rationale for trade protection is, in the end, not economic, but political.

The U.S. steel industry has benefited from some type of trade protection for the past 227 years: it was considered an infant industry in 1791 when tariffs were first proposed. But over the next two centuries, protection continued under the guise of it being a ‘mature industry’ that needed breathing room from international competition to maintain domestic jobs. And it’s not just steel: the U.S. protects and has protected everyone from peanut farmers to candlemakers, from the Colonial Era through the Civil War and the Great Depression.

In this light, a debate about the merits of one trade theory or another is somewhat futile outside academia. Ideas are important, but eventually it’s not trade theory that trade policies are based on. Politics implies the power of granting privileges to special interest groups, the power to gain at the expense of competitors and consumers. This power is indeed addictive, and compared to it, even correct trade theory is powerless. Entrepreneurs get an easy way out of the market through rent-seeking, and politicians gain powerful businessmen behind them supporting them in the election. This vicious circle will remain unbreakable until the very idea of a state trade department disappears.

Third, and finally, the present outrage of commentators at the U.S. government’s trade conduct is usually coupled with a quiet acquiescence about its new, record-high military budget. But we cannot expect free trade when military spending increases and there is a decline in domestic freedoms. These actually reinforce each other, as professor Salerno points out: military conflict “provides the ruling class with an extraordinary opportunity to intensify its economic exploitation of the domestic producers through emergency taxes, monetary inflation, conscription of labor”, and of course, trade restrictions.

Trade policy thus goes hand in hand with military policies and control of domestic activity, and an interventionist government that wages wars on small businesses and foreign countries will wage trade wars as well. Only when we will have peace, and peace at home, will free trade follow.

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Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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