The Free Market Reader

 

3 FREE TRADE AND PROTECTIONISM

The Case for Free Trade

Congressman Ron Paul

In 1981, the Federal Register published a declaration from President Reagan: “I determine that it is in the national interest for the Export-Import Bank of the United States to extend a credit in the amount of $120.7 million to the Socialist Republic of Romania (for) the purchase of two nuclear steam turbine generators.”

This loan carried an interest rate of 7¾% for ten years, but the first payment wasn’t due until July, 1989.

Not too long before this announcement, the administration had made public its “voluntary” restraints on the number of cars Japan can export to the United States.

These two items—subsidization of trade and its restriction—are all too typical of our present trade policy.

Although we think of ourselves as a free-trading nation, it takes more than 700 pages just to list all the tariffs on imported goods, and another 400 to inventory all the non-tariff restraints, such as quotas and “orderly marketing agreements.”

A tariff is a tax levied on a foreign good, to help a special interest at the expense of American consumers.

A trade restraint or marketing agreement—on the number of inexpensive Taiwanese sneakers than Americans can buy, for example—achieves the same goal, at the same cost, in a less forthright manner.

And all the trends are towards more subsidies for U.S. exporters, and more prohibitions and taxes on imports.

Trade is to be subsidized or restrained, not left to the voluntary actions of consumers and producers.

In 1930, Congress passed the Smoot-Hawley tariff bill, imposing heavy tariffs on imports, with the avowed motive of “protecting” U.S. companies and jobs. Within one year, our 25 major trading partners had retaliated with their own tariffs on American goods. World trade declined sharply, and the depression was made world-wide and longer-lasting.

Today the policy of protectionism is again gaining favor in Congress, and in other countries. But it must be fought with all our strength.

Not only does protectionism make everyone poorer—except certain special interests—but it also increases international tensions, and can lead to war.

“If a foreign country can supply us with a commodity cheaper than we ourselves can make it,” wrote Adam Smith in 1776, “better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country will not therefore be diminished . . . but only left to find out the way in which it can be employed to the greater advantage.”

An important economic principle is called the division of labor. It states that economic efficiency, and therefore growth, is enhanced by everyone doing what he does best.

If I had to grow my own food, make my own clothes, build my own house, and teach my own children, our family’s living standard would plummet to a subsistence, or below-subsistence, level.

But if I practice medicine, and allow others with more talent as farmers, builders or tailors to do what they do best, we are all better off. Precious capital and labor are directed to the areas of most productivity, and through voluntary trading, we all benefit.

This principle works just as effectively on a national and world-wide scale, as Adam Smith pointed out.

It may be that Japan can make cars more efficiently than Detroit, at least certain kinds of cars, and that the capital and labor in parts of the U.S. auto industry could be better employed in other areas. With quotas, however, we will never find out. We will only increase the price of those Japanese cars that do get through, and of U.S. cars as well, since competitive pressures will be taken off General Motors and Ford.

Free trade at all levels makes for more prosperity, as the Founding Fathers knew. That’s why they gave Congress power to remove barriers to interstate commerce.

During the period of the Confederation—after our independence but before the adoption of the Constitution—some of the states erected tariff barriers against imports from their neighbors. The resulting economic stagnation and antagonism threatened the unity of our country, and led to the adoption of the interstate commerce clause by the Constitutional convention. The removal of all trade barriers—and not meddling in the economy—was the purpose of the clause.

As a result, we, as Americans, are free to trade with all other Americans, so that resources are put to their most efficient use in our giant domestic market. This happy consequence is no small contributor to our wealth.

Without this constitutional prohibition, state legislatures would listen to lobbyists for special interests, and enact protection against “unfair” out-of-state competition.

Knowing how similar situations come about, we could bet that someone in Minnesota, with idle greenhouses, would lobby the state legislature, pointing out that farmers in Florida, California, and Texas have too easy a time growing oranges. To protect Minnesota farmers, and create jobs, they would call for a heavy tax on out-of-state citrus, so greenhouse growing of oranges would become economic in Minneapolis.

As a result, oranges would drastically increase in price, and the quality would be lower. Minnesotans who like orange juice would be able to afford less, and what they could get would not be as good. But some would reap windfall profits, at the expense of the consumer. And pressure in orange-growing states would grow it retaliate against Minnesota products, to the detriment of everyone in the country. And we could bet that interstate antagonisms would increase as well. International trade barriers work no differently.

But because our Constitution forbids such domestic barriers, a company in Laredo, Texas, can trade freely, easily, and profitably with a firm in Oregon, thousands of miles away. (It’s important to remember that both parties to a non-coerced, non-fraudulent trade benefit from the exchange, or hope to benefit, or the exchange would not take place.)

But let that Laredo firm seek to trade with a Mexican company only a mile away, and tremendous impediments spring up, thanks to government regulations on both sides. “The motive of all these regulations,” wrote Adam Smith, “is to extend our own manufactures, not by their own improvements, but by putting an end, as much as possible, to the troublesome competition of such disagreeable rivals.

No one worries about the balance of trade between Oregon and Texas. That between Mexico and Texas should be of no consequence either. It is a problem only to government planners.

Dr. Murray Rothbard, who lives in New York City, has said that he’s delighted the federal government doesn’t keep interborough trade statistics. “We’d have the Bronx and Brooklyn worried about balance of trade!”

“Nations,” notes Dr. Rothbard, “may be important politically and culturally, but economically they appear only as a consequence of government intervention.”

But doesn’t protection save U.S. jobs? Yes, it can save the jobs of some, but it costs jobs overall, and harms consumers.

Limiting Japanese car imports, for example, does protect the jobs of high-seniority members of the United Auto Workers, who earn twice the average U.S. industrial wage. But it takes away any incentive to correct government-caused productivity problems.

Diverting resources into uneconomic uses takes them away from other, more productive areas and costs jobs. Some jobs are lost; others are never created. The uneconomic effects of protectionism benefit a few—usually well-to-do—at the expense of the great majority, including the poor.

Protectionism cannot be justified on economic or moral grounds. As Frederic Bastiat wrote, tariffs are “legalized plunder.” The law is used to steal.

By what right does the U.S. government tell an American citizen he cannot buy a foreign product? Such action is reprehensible on every ground imaginable, and is totally incompatible with individual freedom. Also inexcusable on any ground is the vast network of U.S. trade subsidies.

The taxpayers subsidize companies through the Export-Import Bank, the Department of Commerce, and the Overseas Private Investment Corporation, to name only three.

Such programs contribute to inflation, high taxes, “crowding out” in the capital markets, higher prices, and misallocation of resources.

Exports are only useful economically when they are profitable. Otherwise they represent a net loss.

But don’t we need our own subsidies because other countries have theirs? If the government of France wishes to help impoverish their own citizens to send us cheap products, why should we impoverish ours as well? We can, and should, oppose those policies for France as well as the United States, but we have no right to take away buying opportunities from our own consumers.

Notes the Council for a Competitive Economy: we should consider what would happen if a foreign country decided to give us free cars, TVs, steel, and other products. Would this hurt the American people? To ask the question is to answer it.

Every economic intervention in trade, domestic or foreign, should be abolished, for practical and moral reasons.

Even if other countries maintain tariffs or subsidies, we would be helped, not hurt, by unilaterally ending ours.

We would improve our productivity, shift resources to those areas where we have an advantage, grow more prosperous, and make a greater variety of less-expensive goods available to our people.

And we would serve the cause of peace and set a good example for the world to emulate.

“When people and goods cross borders,” Ludwig von Mises used to quote, “armies do not.” Free and extensive trade, unsubsidized, between the peoples of the Earth lowers tensions and makes us all better off. It is, morally and economically, the only proper policy.

Turgot and Iacocca

Llewellyn H. Rockwell, Jr.

After we won our War of Independence—fought partly over English trade restrictions—the 13 former colonies adopted the Articles of Confederation. Despite later criticism, this pact had much to recommend it, but it did have one incapacitating flaw: the lack of any provision for internal free trade.

As a result, politically powerful merchants succeeded in getting state legislatures to place tariff taxes on competing goods from other states. These were attempts to make buying out-of-state goods seem unpatriotic, and the inevitable results were increasing hostility between the states, and decreasing prosperity.

The nation faced commercial paralysis, and this was one of the major factors leading to the adoption of the Constitution.

The famous interstate commerce clause was designed to outlaw interstate trade restrictions, and although that clause has been perverted by the courts to justify many federal interventions in the economy, we still have open state borders.

There are no customs police patrolling the line between Massachusetts and Connecticut—as under the Articles of Confederation—and no one thinks a Virginian disloyal for buying something made in New Hampshire.

We are all much better off, in amity and economics, because of this internal free trade. In fact, it was essential to the growth of American prosperity.

The relative free trade that exists internationally benefits us all as well. Anti-free trade legislation, such as the high tariffs of the 1930s, devastated world trade and thereby helped deepen and lengthen the Great Depression. They also increased international tensions.

The many retreats on free trade over the past few years have been disheartening, but the recent non-renewal of the “voluntary” import ceiling on Japanese cars was an important improvement.

The great French economist A. R. J. Turgot (1727-1781) was the first to point out that attempts to restrict international trade are based not just on intellectual error, but on the search by some businesses for special privilege.1 And that such privileges harm domestic consumers more than foreign competitors.

Free international trade, he noted, follows necessarily from the principle of free exchange. That is, parties benefit from any non-fraudulent economic transaction. An American buying a Chrysler is no different in this sense from an American buying a Toyota. He also noted that it is economically ridiculous to try to sell to foreigners while not buying anything in return.

Each branch of industry in France, he noted, seemed to want free markets for everyone else and controlled markets for itself, resulting in “a war of reciprocal oppression which government lends its authority to all against all,” with everyone losing.

Recently Lee Iacocca, head of Chrysler Corporation, made one of his frequent attacks on free trade before a closed meeting of Democratic Congressmen. His remarks made the news, however, because some of the audience thought his tone was racist. Mr. Iacocca, who might have stepped out of one of Turgot’s examples, denounced the non-renewal of the car quotas, and said the U.S. had more to fear from Japanese attacks than Soviet ones.

The restriction on imports has had—like all government interventions in the economy—costs and benefits. The majority, who have borne the undeserved costs, are American car buyers (and would-be car buyers). The unearned benefits have accrued to highly paid auto workers and executives.

With an import ceiling artificially decreasing the supply, but demand increasing, Japanese car makers sent more of their most expensive, option-loaded vehicles. And U.S. car makers faced fewer competitive pressures, enabling them to raise their prices.

As a result, U.S. consumers have had fewer inexpensive cars to buy, and the cars that are available—domestic and foreign—cost an estimated $800-1400 more per vehicle.

Mr. Iacocca, who succeeded in getting heavy credit subsidies from the federal government for Chrysler, made it possible for average Americans to support $35-an-hour unionized auto workers (and $1,000-an-hour auto company chairmen). And now he’s campaigning for American consumers to keep paying through more restrictions on imports.

A. R. J. Turgot came from a free-market family, and his grandfather was a close friend of Thomas La Gendre, one of the most successful merchants of the 17th century. A free-market champion at a time when most businessmen sought special favors from the king, his ships were constantly harassed by the royal trade bureaucrats because of his principled stand.

When asked by Jean-Baptiste Colbert, the king’s finance minister, what the government should do for business, La Gendre answered laissez-faire—allow people to do as they choose.

Three hundred years later, that is still the proper answer.

The Crusade Against South Africa

Murray N. Rothbard

For many years, America’s campuses have been sunk in political apathy. The values of the 1950s are supposed to be back, including concentration on one’s career and lack of interest in social or political causes.

But now, suddenly, it begins to seem like a replay of the late 1960s: demonstrations, placards, even sit-ins on campus. The issue is apartheid in South Africa, and the campaign hopes to bring down apartheid by pressuring colleges and universities to disinvest in South Africa. Coercion against South Africa is also being pursued on the legislative front, including drives to embargo that country as well as prohibit the importation of Krugerrands.

I yield to no one in my abhorrence of the apartheid system, but it must never be forgotten what the road to Hell is paved with. Good intentions are scarcely enough, and we must always be careful that in trying to do good, we don’t do harm instead.

The object of the new crusade is presumably to help the oppressed blacks of South Africa. But what would be the impact of U.S. disinvestment?

The demand for black workers in South Africa would fall, and the result would be loss of jobs and lower wage rates for the oppressed people of that country. Not only that: presumably the U.S. firms are among the highest-paying employers in South Africa, so that the impact on black wages and working conditions would be particularly severe. In short: the group we are most trying to help by our well-meaning intervention will be precisely the ones to lose the most. As on so many other occasions, doing good for becomes doing harm to.

The same result would follow from the other legislative actions against South Africa. Prohibition of Krugerrands, for example, would injure, first and foremost, the black workers in the gold mining industry. And so on down the line.

I suppose that demonstrating and crusading against apartheid gives American liberals a fine glow of moral righteousness. But have they really pondered the consequences? Some American black leaders are beginning to do so. A spokesman for the National Urban League concedes that “We do not favor disinvestment. . . . We believe that the workers would be the ones that would be hurt.” And Ted Adams, executive director of the National Association of Blacks Within Government, warns that disinvestment would “come down hard on black people,” and could wind up “throwing the baby out with the bath water.”

But other black leaders take a sterner view. A spokesman for Chicago Mayor Harold Washington admits “some concern that the most immediate effect of disinvestment may be felt by the laborers themselves,” but then adds, on a curious note, “that’s never an excuse not to take action.” Michelle Kourouma, executive director of the National Conference of Black Mayors, explains the hard-line position: “How could it get any worse? We have nothing to lose and everything to gain: freedom.”

The profound flaw is an equivocation on the word “we,” a collective term covering a multitude of sins. Unfortunately, it is not Ms. Kourouma or Mr. Washington or any American liberal who stands to lose by disinvestment; it is only the blacks in South Africa.

It is all too easy for American liberals, secure in their well-paid jobs and their freedom in the United States, to say, in effect, to the blacks of South Africa: “We’re going to make you sacrifice for your own benefit.” It is doubtful whether the blacks in South Africa will respond with the same enthusiasm. Unfortunately, they have nothing to say in the matter; once again, their lives will be the pawns in other people’s political games.

How can we in the United States help South African blacks? There is no way that we can end the apartheid system. But one thing we can do is the exact opposite of the counsel of our misled crusaders.

During the days of the national grape boycott, the economist Angus Black wrote that the only way for consumers to help the California grape workers was to buy as many grapes as they possibly could, thereby increasing the demand for grapes and raising the wage rate and employment of grape workers. Similarly, all we can do is to encourage as much as possible American investment in South Africa and the importation of Krugerrands. In that way, wages and employment, in relatively well-paid jobs, will improve for the black laborers.

Free-market capitalism is a marvelous antidote for racism. In a free market, employers who refuse to hire productive black workers are hurting their own profits and the competitive position of their own company.

It is only when the state steps in that the government can socialize the costs of racism and establish an apartheid system.

The growth of capitalism in South Africa will do far more to end apartheid than the futile and counterproductive grandstanding of American liberals.

We the People vs. the Loot Seekers

Mark D. Hughes

We, the loot-seekers of the United States, in order to form more perfectly protected monopolies, impose injustices, insure domestic servitude, provide for our common defense against competition, promote our own welfare by securing the coercive powers of the state for ourselves and our posterity, do ordain and establish this Constitution for the United Special Interest Groups of America.”

Those were not the words penned by the Founding Fathers, but who could tell from today’s America? Over the last two centuries, we have seen our civil and economic liberties thwarted, despite the clear intent of the Founders. They sought to prevent the concentration of power in the hands of a privileged few. But regulatory legislation has enabled loot-seeking special interests to use the coercive powers of the state against the rest of us.

Ludwig von Mises called this a “caste system”:

Our age is full of serious conflicts of economic group interests. But these conflicts are not inherent in the operation of an unhampered capitalist economy. They are the necessary outcome of government policies interfering with the operation of the market. They are not conflicts of Marxian classes. They are brought about by the fact that mankind has gone back to group privileges and thereby to a new caste system. . . .

In a free-market society. . . there are neither privileged nor underprivileged. There are no castes and therefore no caste conflicts. There prevails the full harmony of the rightly understood interests of all individuals and of all groups. . . .

One example of caste privilege began in 1937 when a few large New York dairies successfully lobbied the legislature for protective licensing. Under the law, still in effect, new licenses could be issued only if they do not cause “destructive competition.”

There is, of course, no such thing as destructive competition for the consumer. Competition means lower prices, higher quality, and better service. To be sure, competition may be a nuisance for inefficient, established dairies. But it is not an annoyance to the milk-consuming public.

While the 1937 licensing law does not openly forbid the entry of new dairies into New York, that was its intent and effect. Until this January, the market was controlled by five large dairies. As a result, New York City consumers have traditionally paid a considerably higher price for milk than any other metropolitan area with a similar supply. In November 1986 the average price of a gallon of milk in New York City (except Staten Island) was $2.42. Philadelphia consumers paid $1.93.

Then in December 1985, after trying for seven years to gain access to the New York market, Farmland Dairies of Wallington, New Jersey, was reluctantly granted a license to serve Staten Island. The average price immediately dropped 40 cents per gallon and consistently remained about 30 cents cheaper than milk sold in the rest of New York City.

The New Jersey dairy spent the next year unsuccessfully trying to gain access to the rest of the city. On December 11, 1986, Agricultural Commissioner Gerace rejected Farmland’s request because “it would tend to destructive competition . . . and would not be in the public interest.”

The Commissioner’s decision immediately became the topic of angry editorials throughout the state. Even statist politicians like New York’s Mayor Ed Koch, recognizing the mood of the city’s consumers, jumped on the band wagon.

New York Governor Cuomo claimed that he would like to see increased competition among milk dealers, but said he would not intervene in the Commissioners “quasi-judicial” decision.

The Governor had received $58,700 in campaign contributions from the dairy cartel. But the dairies’ licensed overcharges have earned them more than $50 million a year, so it is not hard to understand the incentive for such donations, nor Governor Cuomo’s decision not to intervene.

Although it is a relatively small example of state intervention, the New York dairy licensing law reflects the isolationist mentality indicative of all loot-seeking interests. It is no different from those seeking tariffs on foreign automobiles, restrictions on foreign investment, or business licensing for entrepreneurs.

The economic isolationists claim that restricting entry into a market will “save jobs.” They argue that added competition from an external source will force local producers out of business and thereby cause irreparable damage to the economy of the region (whether a city, state, or nation). But clearly they know nothing of a market economy. As Henry Hazlitt wrote in his great Economics in One Lesson:

This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.

The secondary consequence of economic isolationism is simple—it reduces the actual and potential wealth of the community involved. By preventing competition in the New York dairy industry, the milk licensing law allows the dairy cartel to charge a higher price for milk than would exist in a free market. This is money the consuming public would spend on other goods and services in the community. It is true that added competition might force some of the inefficient dairies out of the market and some dairy workers would then be unemployed. However, contrary to what the economic isolationists claim, the story does not stop there, since more than $50 million a year of added consumer spending translates into new jobs in other businesses.

Even if the new jobs created just replace the old ones lost (probably not the case), the wealth of the community is still increased. After the price of milk is reduced, the consumer can do one of two things: 1) purchase the same amount of milk as usual for less money and spend what’s left on other goods and services, or 2) spend the same amount of money on milk and take more milk home. Regardless of the choice, the amount of goods and services consumed by the public will increase even though the amount spent by each consumer did not change.

Someone understood at least part of this, however. On January 8, 1987, Federal Judge Leonard D. Wexler held that the decision to prohibit Farmland Dairies from distributing milk in all of New York City was unconstitutional. “It is clear,” he said, “from Gerace’s report that this decision to deny Farmland’s license application was based on economic protectionism.”

Farmland started delivering milk to seven supermarkets in the city on January 9. Each immediately lowered the price it charged the consumer by 20 cents a gallon. By January 17, prices had dropped between 30 and 71 cents per gallon.

Unfortunately, Judge Wexler did not declare the law itself unconstitutional, although he did say that this “would not be without foundation.” The judge suggested this be left “to the discretion of the State Legislature.”

So, despite the court’s ruling, the New York City dairy market is still not free. New York has seen the price of milk drop, but we will never know how much more it will drop until the milk licensing law is repealed and all who want to compete are allowed to try.

The economic and civil liberty we still have in America exists not because legislators are concerned for the welfare of “We the people.” Our liberty, and the chance we have to expand it, exists only because a heroic few refuse to stand aside while special interests impose a new two-caste system—the state privileged vs. the rest of us.

The Myth of the Trade Deficit

Sam Wells

Almost daily we read and hear demands from leaders of industry and demagogic politicians to increase restrictions on foreign imports because of the “unfavorable balance of trade” that America is supposed to have with other countries. Although the Reagan administration has paid lip service to free trade, it has drastically increased political obstructions to foreign imports. In 1981, approximately 25% of all goods imported into the United States were subject to some kind of U.S. government restrictions. Today, that figure has risen to 40%.

And now the president has sent to Congress legislation to stiffen restrictions on imports and pile another layer of controls on top of the bunch we already have. Since 1982 the administration has, through government-to-government negotiations and arm-twisting, secured 18 agreements that limit steel exports to the United States. Last year, the administration pressured Japan and Taiwan into agreeing to limit their exports of machine tools to the U.S. for the next five years. After failing to secure “voluntary” trade restraints from Switzerland and Germany, the administration set new quotas which rolled back exports from those countries. Also last year, it used threats to obtain agreements with South Korea, Hong Kong, and Japan that limited the growth in the quantity of textiles they could export to the U.S. to only 1% or less per year. And these are only a few examples of increasingly prevalent protectionism.

In ominous tones, we are told that the United States has incurred a “trade deficit” and that this means disaster. In late January, the government—from whom all such numbers flow—revealed that the trade deficit for 1986 had amounted to $169.8 billion, a record level. Gosh! But what does it mean? Was the president right when he referred to us as “trade patsies”? Are Americans being taken advantage of by the opportunity to buy low-priced, foreign-made products? Are the trade policies of the Japanese “cheating” us? The answer is a clear No.

The great Ludwig von Mises, writing in 1946, showed how free trade works to the benefit of all parties:

Under free trade the Swiss watchmakers would expand their sales on the American market and the sales of their American competitors would shrink. But this is only a part of the consequences of free trade. Selling and producing more, the Swiss would earn and buy more. It does not matter whether they themselves buy more of the products of other American industries or whether they increase their domestic purchases and those in other countries, for instance, in France. Whatever happens, the equivalent of the additional dollars they earned must finally go to the United States and increase the sales of some American industries. If the Swiss do not give away their products as a gift, they must spend these dollars in buying.

So, in the long run, trade can never take jobs away, but only add them to the American economy as a whole.

Moreover, artificially trying to prop up inefficient industries through protectionist trade policies hurts us all by driving up prices and holding down quality. These policies also hurt other, efficient U.S. industries by tying up resources and capital in the protected sectors, which would otherwise flow to more efficient uses and satisfy consumer needs less expensively. How many Americans have any notion of the high costs imposed by auto import restraints? Despite its laudable free-market rhetoric, the current administration pushed for “voluntary” restraints on the number of Japanese automobiles sold to Americans. This had the effect of narrowing the alternatives from which American consumers could choose—and hiked the price by nearly $2,000 per car. That’s a total cost to American consumers of more than $250,000 for each U.S. auto-industry job supposedly saved. If you multiply that example by the number of other “protected” U.S. industries and jobs, the total burden to U.S. consumers amounts to $30-40 billion. And neo-mercantilist policies invite similar measures in retaliation from foreign governments whose leaders are also deluded by mercantilist myths.

Stepped-up protectionism in the U.S. Congress just in the last two years has already resulted in some very harmful foreign reprisals. While all American (and foreign) consumers are hurt by this war between governments, the American farmer has been especially hard hit. An editorial in USA Today noted:

A typical wheat, soybean, or cotton farmer gets fifty percent of his income from foreign sales. And recent U.S. efforts to protect specialty steel, textiles, and other industries have led to heavy retaliation by other countries against our grain exports. We’ve lost farm sales worth many times what we saved in the protected industries.

When Americans choose to buy lower-cost imports, they have more money to spend or invest in other ways. This means they have more of their wants and needs satisfied for a given income.

The freedom of Americans to buy goods made in other countries gives them a wider choice, and that’s all to the good. Not only has buying Japanese products not hurt Americans, but the money earned by the Japanese from their sales to us of VCRs, cars, stereos, cameras, and computer chips has come back to us in the form of Japanese investments.

If it were not for the inflow of this foreign capital (from Europe as well as Japan and elsewhere), the “crowding out” of domestic borrowers in our credit markets by big government’s gargantuan budget deficits would have slammed us into a deep repression long before now. So, it has given us a little more precious time to put our own house in order. Instead of expressing gratitude for this salutary consequence, our demagogic politicians are trying to make the Japanese and other foreigners the scapegoats for ills which the politicos themselves created.

What about “dumping” (selling goods to Americans at prices allegedly “below the cost of production”) or the Japanese keeping out U.S. goods? Japan is actually less protectionist than is the United States. And nobody can sell his products at below-cost for long without going out of business—much less making any profit. Besides, costs can only be subjectively determined, and they cannot be aggregated between or among industries, let alone countries. If “dumping” does occur, it is a great boon to Americans who take advantage of such bargains. (Why, by the way, isn’t Safeway attacked by Giant for dumping when it sells ketchup at a nominal loss to attract customers?)

But what if the Japanese government subsidizes some of its exporting companies so they can increase their American market share by selling at below-cost prices? Since consumption is the end of production, and since consumers clearly benefit by such a good deal, why should we care? If foreigners are foolish enough to allow their governments to tax them to subsidize their exporting companies, we should take full advantage of their generosity. It won’t last forever! (The only thing that apparently lasts forever is the U.S. government’s massive subsidization of our exporting companies through the Export-Import Bank and other examples of corporate welfare.)

One of the most important notions underlying the calls for stifling foreign imports is the “balance of trade” concept and the idea that a “trade deficit” (your country imports more goods than it exports) is bad and that a “trade surplus” (your country exports more than it imports) is good. This is pure superstition and goes back to the mercantilist days of the 17th century.

The terms “deficit” and “surplus” are accounting terms that apply to budgets. But they have been misappropriated from the context in which they have meaning and used to describe international trade. A “trade surplus” means a “favorable balance of trade” (exports greater than imports), while a “trade deficit” is supposed to denote an “unfavorable balance of trade” (imports greater than exports). This is what we are told by the modern mercantilists and Keynesians. But this notion is as false as it is widespread in current discussions on international economics. Although this fallacy was refuted by the great French economist Richard Cantillon 275 years ago, many have not learned the lesson.

There is no reason why trade should “balance out” between countries at any specific moment—any more than it should balance out between individuals or companies doing business with each other. If you walk into a supermarket and buy a loaf of bread by exchanging money for it, you don’t expect that particular supermarket to turn around and buy an equal amount of goods from you. It may take the money you gave for the bread and buy goods from somebody else, like a supplier or a truck farmer; but there’s no reason that goods should balance out in trade between two parties. The buyer gives up money for goods, and the seller gives up goods for money. Both sides benefit. The same applies to people or firms living in different countries.

When Americans buy imports, they are simply accepting payment for the goods they export (sell) to foreigners. Imports pay for exports and exports pay for imports. There is no reason they should always balance. Taking a statistical snapshot of the flow of goods between countries at any single time and calling that the “balance of trade” is artificial, misleading, and irrelevant. We don’t have to be concerned about it since it has no real bearing on the status or health of the economy. Yet, judging from all the media hype, we are supposed to fear a national “trade deficit” (which isn’t even a real deficit at all) more than the very real and definitely harmful federal budget deficit!

Americans who wish to preserve and expand their liberty, and maximize their choices in the market, should work to repeal existing restrictions and taxes on imported goods, and vigorously oppose efforts in Congress to impose still more protectionist legislation. Despite what we hear from the politicians, there is no conflict between the principles of freedom and patriotism: free trade is in the best interests of Americans and America. Instead of clamoring for more political intrusions on our freedom to buy and sell, those genuinely concerned about the struggling sectors of U.S. industry should demand abolition of the taxes and controls which the U.S. government has clamped on our domestic industries. Let American consumers have the freedom to choose to buy Sony and Honda. And liberate American producers from government.

Another Federal Crime Against Consumers

Llewellyn H. Rockwell, Jr.

The Reagan administration has verbally championed free trade while imposing more protectionism than any other administration since World War II. In 1981, about 25% of our imports were restricted in some way by the feds. Today, the figure is over 40%. And now we have an attack on American consumers in the name of retaliation against Japanese computer chips.

Because Japanese companies make these chips—the silicon hearts of computers—more economically than domestic producers, the administration has sought to protect inefficient U.S. firms at the expense of American consumers (and efficient U.S. firms).

The Japanese crime is “dumping”: selling products below cost. But there is no way to tell if dumping is taking place. Austrian economics shows us that the notion of cost is necessarily a subjective and changing one. No government bureaucrat can tell what a company’s cost is.

Even if dumping takes place, why should the police powers of the state be used to impede it? It can’t be bad for consumers, and as Ludwig von Mises taught, it is from the standpoint of consumers that all economics and economic policy must be judged.

Even if true and taking place, why outlaw this consumer-enhancing process only internationally? Why not prevent Safeway from selling ketchup at a loss to lure customers into its stores? Isn’t “ketchup dumping” unfair to the A&P?

Because Japanese companies benefit American consumers by selling us computer chips at prices we want to pay, the president is levying 100% tariffs on some Japanese electronic goods. This punishes U.S. consumers with higher prices to benefit inefficient but politically influential U.S. corporations.

Trade restrictions are wrong on at least three counts:

1) Moral. By what right does the U.S. government seek to benefit special interests by telling Americans what consumer products we can or can’t buy?

2) Economic. Protectionism, like all government interventions into the economy, rewards political pull at the expense of economic efficiency, and thus makes us all poorer.

3) Political. It is no coincidence that trade wars usually precede shooting wars. Why increase international tensions to pay off unsuccessful (but well-compensated) executives?

The collectivism that accompanies protectionism is off-putting as well: “Japan is harming ‘us’ by_____________________(fill in the blank).” What “us”? I have a lot more in common with a free-market Japanese businessman than I do with a protectionist and statist like Lee Iacocca, whether we share the same citizenship or not.

There’s a big trade fight in Washington these days. But no one seems to care about the consumer. The battle instead is over whether the White House or the Congress will get political credit for protectionist rip-offs. Mises called capitalism the system of consumer sovereignty. Anything that inhibits that sovereignty makes us all poorer—and less free.

Economic Warfare Hurts Us More Than Them

Robert Higgs and Charlotte Twight

During the past decade the United States has repeatedly waged war, not with guns, missiles, and bombs, but with economic sanctions restricting the international transactions and travel of Americans.

Economic warfare—prohibitions of travel and commercial and financial dealings imposed selectively in order to alter the behavior of other governments—has been waged at one time or another since 1979 against Iran, Libya, Nicaragua, South Africa, and Syria as well as various communist countries.

Sanctions usually fail to attain their ostensible objective: they do not alter the conduct of other governments. But they do have significant domestic consequences. Americans suffer economic losses, both short-term and long-term. In effect, sanctions impose the costs of U.S. foreign policy on Americans interested in certain international commercial and financial deals or travel to certain countries.

Sanctions imposed after the Iranians took American hostages in Tehran in 1979 illustrate the erratic and arbitrary character of this instrument of foreign policy. President Carter first blocked all Iranian property in the United States and forbade most commercial and financial dealings with Iran. Then, as part of the deal to gain freedom for the hostages, Carter rescinded the sanctions, nullified attachments of Iranian property issued by federal courts, and suspended the legal claims of Americans against Iran. An Iran-United States Claims Tribunal was established in the Netherlands, and Americans were forbidden to press their claims in U.S. courts.

This extraordinary setting-aside of the judicial system by the president was challenged in an important 1981 Supreme Court case, Dames & Moore V. Regan. The Court’s decision gave broad scope to the president’s powers under the International Emergency Economic Powers Act, sustaining his nullification of courts’ attachments of Iranian property. Moreover, the Court held that, even without explicit statutory authority, the president has constitutional power to suspend American claims in federal courts because of “a history of congressional acquiescence” in similar instances. Whatever Executive action Congress has never overtly disapproved, it has implicitly approved—a doctrine that would have astonished the Founding Fathers.

In making regulations to implement sanctions, the bureaucrats of the Treasury’s Office of Foreign Assets Control (OFAC) have extraordinary discretion—the power to act arbitrarily and capriciously. Licenses may be denied, granted, or revoked at will. OFAC is not bound by the Administrative Procedure Act with regard to notice of proposed rule making, opportunity for public participation, or delay in effective date. OFAC officials may, and sometimes do, abruptly alter the rules solely at their pleasure. They often create loopholes for privileged parties, such as wholly-owned foreign subsidiaries of American oil companies that continue business as usual with Libya, notwithstanding the president’s order that Americans cease operations in that country. Administrative officials may, as in the Iranian case, set aside the protections normally afforded private property rights by the U.S. judicial system.

Economic warfare rarely promotes the national interest effectively. Rather, it is a costly form of political theater. Only governmental officials, especially the president, normally benefit from it; and even that benefit is fleeting.

A president wages economic warfare because it enhances his popularity, if only momentarily. It diverts attention from intractable domestic problems and creates an image that he is strong, that he is “doing something” to defend or promote American interests beyond our borders.

The image has little substance. The governments of Iran, Libya, Nicaragua, South Africa, and Syria have not been visibly moved by U.S. sanctions against them. But American citizens have been hurt. Although some firms have found ways to circumvent the sanctions, important business has been lost—computer sales to South Africa, aircraft sales to Syria, all exports to Nicaragua. American reputations for reliable service have suffered in the world market, where alternative foreign suppliers are usually happy to take on the business denied Americans by their own government.

More importantly, economic warfare has shifted rights from private hands into the hands of governmental officials who are free to exercise their newly acquired powers with virtually unchecked discretion. Nothing of genuine public importance has been gained; bad political and legal precedents have become established; a little more liberty has been lost. As Ludwig von Mises pointed out in The Free and Prosperous Commonwealth: “Nationalist policies, which always begin by aiming at the ruination of one’s neighbor, must, in the final analysis, lead to the ruination of all.”

Protectionism and the Destruction of Prosperity

Murray N. Rothbard

Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths, mixed with discrete anti-Oriental racism, can prove a heady brew, as protectionists warn about this new “Japanese imperialism,” even “worse than Pearl Harbor.” This “imperialism” turns out to consist of selling Americans wonderful Sony TV sets, autos, microchips, etc. at prices more than competitive with backward and lumbering American firms.

Is this “flood” of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers?

In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.

Keep Your Eye on the Consumer

As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: 1) protectionism means force in restraint of trade; and 2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few—and an inefficient few at that: people who cannot make it in a free and unhampered market.

Take, for example, the alleged Japanese menace. All trade is mutually beneficial to both parties—in this case Japanese producers and American consumers—otherwise they would not engage in the exchange. In trying to stop this trade, protectionists are trying to stop American consumers from enjoying high living standards by buying cheap and high-quality Japanese products. Instead, we are to be forced by government to return to the inefficient, higher-priced products we have already rejected. In short, inefficient producers are trying to deprive all of us of products we desire so that we will have to turn to inefficient firms. American consumers are to be plundered.

How To Look at Tariffs and Quotas

The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each state of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by inefficient, high-priced New York or Rhode Island textile manufacturers who would then be complaining about the “unfair,” “cheap labor” competition from various low-type “foreigners” from Tennessee or North Carolina, or vice versa.

Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.

If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by inefficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.

Fortunately, interstate tariff’s are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose interstate tariffs in another guise. Part of the drive for continuing increases in the federal minimum wage law is to impose a protectionist device against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.

During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R-NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms (and the workers struck by unemployment) hardest hit by an increased minimum wage will be located in the south.

Another way in which interstate trade restrictions have been imposed has been in the fashionable name of “safety.” Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk “unsafe.”

If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America’s first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose—fortunately not fulfilled—to prohibit all “imports” from outside of Detroit, and citizens were exhorted to “buy only Detroit.” If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.

So why not restrict and even prohibit trade, i.e. “imports,” into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn’t the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.

And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.

The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade—such as protectionism—cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of inefficient producers, at the expense of competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.

The Negative Railroad

Protectionism is also peculiarly destructive because it acts as a coerced and artificial increase in the cost of transportation between regions. One of the great features of the Industrial Revolution, one of the ways in which it brought prosperity to the starving masses, was by reducing drastically the cost of transportation. The development of railroads in the early 19th century, for example, meant that for the first time in the history of the human race, goods could be transported cheaply over land. Before that, water—rivers and oceans—was the only economically viable means of transport. By making land transport accessible and cheap, railroads allowed interregional land transportation to break up expensive inefficient local monopolies. The result was an enormous improvement in living standards for all consumers. And what the protectionists want to do is lay an axe to this wonderous principle of progress.

It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19th century, called a tariff a “negative railroad.” Protectionists are just as economically destructive as if they were physically chopping up railroads, or planes, or ships, and forcing us to revert to the costly transport of the past—mountain trails, rafts, or sailing ships.

“Fair” Trade

Let us now turn to some of the leading protectionist arguments. Take, for example, the standard complaint that while the protectionist “welcomes competition,” this competition must be “fair.” Whenever someone starts talking about “fair competition” or indeed, about “fairness” in general, it is time to keep a sharp eye on your wallet, for it is about to be picked. For the genuinely “fair” is simply the voluntary terms of exchange, mutually agreed upon by buyer and seller. As most of the medieval scholastics were able to figure out, there is no “just” (or “fair”) price outside of the market price.

So what could be “unfair” about the free-market price? One common protectionist charge is that it is “unfair” for an American firm to compete with, say, a Taiwanese firm which needs to pay only one-half the wages of the American competitor. The U.S. government is called upon to step in and “equalize” the wage rates by imposing an equivalent tariff upon the Taiwanese. But does this mean that consumers can never patronize low-cost firms because it is “unfair” for them to have lower costs than inefficient competitors? This is the same argument that would be used by a New York firm trying to cripple its North Carolina competitor.

What the protectionists don’t bother to explain is why U.S. wage rates are so much higher than Taiwan. They are not imposed by Providence. Wage rates are high in the U.S. because American employers have bid these rates up. Like all other prices on the market, wage rates are determined by supply and demand, and the increased demand by U.S. employers has bid wages up. What determines this demand? The “marginal productivity” of labor.

The demand for any factor of production, including labor, is constituted by the productivity of that factor, the amount of revenue that the worker, or the pound of cement or acre of land, is expected to bring to the brim. The more productive the factory, the greater the demand by employers, and the higher its price or wage rate. American labor is more costly than Taiwanese because it is far more productive. What makes it productive? To some extent, the comparative qualities of labor, skill, and education. But most of the difference is not due to the personal qualities of the laborers themselves, but to the fact that the American laborer, on the whole, is equipped with more and better capital equipment than his Taiwanese counterparts. The more and better the capital investment per worker, the greater the worker’s productivity, and therefore the higher the wage rate.

In short, if the American wage rate is twice that of the Taiwanese, it is because the American laborer is more heavily capitalized, is equipped with more and better tools, and is therefore, on the average, twice as productive. In a sense, I suppose, it is not “fair” for the American worker to make more than the Taiwanese, not because of his personal qualities, but because savers and investors have supplied him with more tools. But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.

Putting it another way, the fact that American wage rates are on the average twice that of the Taiwanese, does not make the cost of labor in the U.S. twice that of Taiwan. Since U.S. labor is twice as productive, this means that the double wage rate in the U.S. is offset by the double productivity, so that the cost of labor per unit product in the U.S. and Taiwan tends, on the average, to be the same. One of the major protectionist fallacies is to confuse the price of labor (wage rates) with its cost, which also depends on its relative productivity.

Thus, the problem faced by American employers is not really with the “cheap labor” in Taiwan, because “expensive labor” in the U.S. is precisely the result of the bidding for scarce labor by U.S. employers. The problem faced by inefficient U.S. textile or auto firms is not so much cheap labor in Taiwan or Japan, but the fact that other U.S. industries are efficient enough to afford it, because they bid wages that high in the first place.

So, by imposing protective tariffs and quotas to save, bail out, and keep in place inefficient U.S. textile or auto or microchip firms, the protectionists are injuring the American consumer. They are also harming efficient U.S. firms and industries, which are prevented from employing resources now locked into incompetent firms, and who would otherwise be able to expand and sell their efficient products at home and abroad.

“Dumping”

Another contradictory line of protectionist assault on the free market asserts that the problem is not so much the low costs enjoyed by foreign firms, as the “unfairness” of selling their products “below costs” to American consumers, and thereby engaging in the pernicious and sinful practice of “dumping.” By such dumping they are able to exert unfair advantage over American firms who presumably never engage in such practices and make sure that their prices are always high enough to cover costs. But if selling below costs is such a powerful weapon, why isn’t it ever pursued by business firms within a country?

Our first response to this charge is, once again, to keep our eye on consumers in general and on American consumers in particular. Why should it be a matter of complaint when consumers so clearly benefit? Suppose, for example, that Sony is willing to injure American competitors by selling TV sets to Americans for a penny apiece. Shouldn’t we rejoice at such an absurd policy of suffering severe losses by subsidizing us, the American consumers? And shouldn’t our response be: “Come on, Sony, subsidize us some more!” As far as consumers are concerned, the more “dumping” that takes place, the better.

But what of the poor American TV firms, whose sales will suffer so long as Sony is virtually willing to give their sets away? Well, surely, the sensible policy for RCA, Zenith, etc. would be to hold back production and sales until Sony drives itself into bankruptcy. But suppose that the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by the Sony price war? Well, in that case, we the consumers will still be better off, since the plants of the bankrupt firms, which would still be in existence, would be picked up for a song at auction, and the American buyers at auction would be able to enter the TV business and outcompete Sony because they now enjoy far lower capital costs.

For decades, indeed, opponents of the free market have claimed that many businesses gained their powerful status on the market by what is called “predatory price-cutting,” that is, by driving their smaller competitors into bankruptcy by selling their goods below cost, and then reaping the reward of their unfair methods by raising their prices and thereby charging “monopoly prices” to the consumers. The claim is that while consumers may gain in the short-run by price wars, “dumping,” and selling below costs, they lose in the long-run from the alleged monopoly. But, as we have seen, economic theory shows that this would be a mug’s game, losing money for the “dumping” firms, and never really achieving a monopoly price. And sure enough, historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.

Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses. But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sony’s, so much the better! Their policy would be just as self-defeating as if the losses were private.

There is yet another problem with the charge of “dumping,” even when it is made by economists or other alleged “experts” sitting on impartial tariff commissions and government bureaus, there is no way whatever that outside observers, be they economists, businessmen, or other experts, can decide what some other firm’s “costs” may be. “Costs” are not objective entities that can be gauged or measured. Costs are subjective to the businessman himself, and they vary continually, depending on the businessman’s time horizon or the stage of production or selling process he happens to be dealing with at any given time.

Suppose, for example, a fruit dealer has purchased a case of pears for $20, amounting to $1 a pound. He hopes and expects to sell those pears for $1.50 a pound. But something has happened to the pear market, and he finds it impossible to sell most of the pears at anything near that price. In fact, he finds that he must sell the pears at whatever price he can get before they become overripe. Suppose he finds that he can only sell his stock of pears at 70 cents a pound. The outside observer might say that the fruit dealer has, perhaps “unfairly,” sold his pears “below costs,” figuring that the dealer’s costs were $1 a pound.

“Infant” Industries

Economists agree on very little. But economists agree virtually unanimously on one thing: their oppostion to protectionism. Classically, they made one unfortunate exception, an exception which the specially privileged were able to use and magnify to become an enormous hole in the free-trade case. This argument held that the government should provide a temporary protective tariff to aid, or to bring into being, an “infant industry.” Then, when the industry was well established, the government would and should remove the tariff and toss the now “mature” industry into the competitive swim.

The theory was fallacious, and the policy proved disastrous in practice. For there is no more need for government to protect a new, young, industry from foreign competition than there is to protect it from domestic competition.

In the last few decades, the “infant” plastics, television, and computer industries made out very well without such protection. Any government subsidizing of a new industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition. As a result, “infant-industry” tariffs have tended to become permanent, regardless of the “maturity” of the industry. The proponents were carried away by a misleading biological analogy to “infants” who need adult care. But a business firm is not a person, young or old.

Older Industries

Indeed, in recent years, older industries that are notoriously inefficient have been using what might be called a “senile-industry” argument for protectionism. Steel, auto, and other outcompeted industries have been complaining that they “need a breathing space” to retool and become competitive with foreign rivals, and that this breather could be provided by several years of tariffs or import quotas. This argument is just as full of holes as the hoary infant-industry approach, except that it will be even more difficult to figure out when the “senile” industry will have become magically rejuvenated. In fact, the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference. The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors.

The Non-Problem of the Balance of Payments

A final set of arguments, or rather alarms, centers on the mysteries of the balance of payments. Protectionists focus on the horrors of imports being greater than exports, implying that if market forces continued unchecked, Americans might wind up buying everything from abroad, while selling foreigners nothing, so that American consumers will have engorged themselves to the permanent ruin of American business firms. But if the exports really fell to somewhere near zero, where in the world would Americans still find the money to purchase foreign products? The balance of payments, as we said earlier, is a pseudo-problem created by the existence of customs statistics.

During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If U.S. banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the U.S., and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance of payment deficits, thus bringing gold back into the country.

But now, in the fiat-money era, balance of payments deficits are truly meaningless. For gold is no longer a “balancing item.” In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither did dollars “leak” out. The alleged “deficit” was paid for by foreigners investing the equivalent amount of money in American dollars: in real estate, capital goods, U.S. securities, and bank accounts.

In effect, in the last couple of years, foreigners have been investing enough of their own funds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead of worrying and complaining about this development, we should rejoice that foreign investors are willing to finance our cheap imports. The only problem is that this bonanza is already coming to an end, with the dollar becoming cheaper and exports more expensive.

We conclude that the sheaf of protectionist arguments, many plausible at first glance, are really a tissue of egregious fallacies. They betray a complete ignorance of the most basic economic analysis. Indeed, some of the arguments are almost embarrassing replies of the most ridiculous claims of 17th century mercantilism: for example, that it is somehow a calamitous problem that the U.S. has a balance of trade deficit, not overall, but merely with one specific country, e.g. Japan.

Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century: namely, that balance with individual countries will cancel each other out, and therefore that we should only concern ourselves with the overall balance? (Let alone realize that the overall balance is no problem either.) But we need not reread the economic literature from Adam Smith to the present-day to realize that the impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers.

In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.

___________________

2I am indebted to Dr. Murray N. Rothbard for this material.

• 1*The Institute thanks Margit von Mises for her gracious permission to print excerpts from this 1957 talk. ed.
• 2We are inaugurating tonight the ninth meeting of the Mont Pelerin Society. It is fitting to remember on this occasion that meetings of this kind in which opinions opposed to those of the majority of our contemporaries and to those of their governments are advanced, are possible only in the climate of liberty and freedom that is the most precious mark of Western civilization. Let us hope that this right to dissent will never disappear.*