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Free Trade Vs. Protectionism: Why History Matters

Bruce BartlettThe Fiscal TimesMarch 11, 2011

There are two big reasons why policymakers tend to repeat the mistakes of the past. First,memories are short and policymakers simply forget the lessons of history. Second,academics, whose job it is to pass on the lessons of history, tend to be alienated from policydebates and are easily bored by issues on which there is no significant academic debate; theywould rather study obscure issues of interest. This often leads them to concentrate onexceptions to general rules at the expense of impressing upon students and the public the

truth of those rules.

This concentration on exceptions is nowhere truer than withinternational trade.Since thetime of Adam Smith and David Ricardo, economists have known that free trade is the best

policy. But it is always possible to construct unusual circumstances in which one countrymight temporarily gain a little bit at some other countrys expense by restricting imports,subsidizing exports, or finding some loophole to accomplish one of these in a way thatdoesnt violate world trade law.

Support for protectionism is always

the popular approach with voters.

Furthermore, for a politician, supporting protectionism is always the popular approach withvoters. For as far back as we can gauge opinionon this subject,the general public has alwayssupported measures to restrict imports and protect jobs, and opposed free trade. And ifanything, support for protectionism is rising and support for trade is falling. According to the

NBC News/Wall Street Journal poll,the percentage of Americans who think that tradeagreements are generally bad for the country has risen from 30 percent in December 1999 to53 percent in September 2010. Over the same period, those with a favorable opinion of tradeagreements fell from 39 percent to 17 percent.

For these reasons, it is welcome to have a new history of the Smoot-Hawley tariff, the mostinfamous case of protectionism in history, Peddling Protectionismby Dartmouth economistDouglas Irwin. It is highly readable and will be enjoyed by anyone with an interest in thehistory of American politics. Irwins encyclopedic knowledge of the literature on Smoot-Hawley will make this the standard work on the subject for many years to come.

Principle Source of Revenue

Irwin begins by noting that tariffs were the federal governments principal source of revenuefrom the beginning of the republic to the adoption of a permanent federal income tax in 1913.For this reason, Congress mostly avoided using the tariff for protectionist purposes, because

the more successful a tariff is at keeping out imports, the less revenue it raises. Thus,historically, tariffs tended to be set at modest levels designed to maximize revenue.
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But once the income tax became the federal governments major source of revenue, Congresswas free to use the tariff more for protectionist purposes. When Republicanshistorically the

party of protectionismgot control of the House, Senate, and White House after World WarI, they quickly adopted the highly protectionist Fordney-McCumber tariff in 1922. But

pressure for additional protection from the business community was heavy and only kept in

check by opposition from labor, which feared a rise in the cost of living from protectionwhich would raise both the prices of imports and competing goods produced domestically and from the farm lobby, which feared retaliation against U.S. agricultural exports if tariffswere raised on foreign manufactured goods.

Unfortunately, a prolonged glut of agricultural production throughout the 1920s weakenedthe traditional opposition of farmers to trade protectionism. At the same time, workers beganseeing the benefits of trade restrictions in terms of protecting jobs, thus lowering theirresistance to higher tariffs.

- See more at: http://www.thefiscaltimes.com/Articles/2011/03/11/Free-Trade-Vs-

Protectionism-Why-History-Matters#sthash.7L2WVS6k.dpuf

In Congress, Senator Reed Smoot, Republican of Utah and chairman of the Senate FinanceCommittee, was a very ideologically committed protectionist and anxious to pass a big pieceof legislation with his name on it. His states principal crop in those days was sugar beets and

sugar has long been among the most protected industries in the U.S. Willis Hawley was aRepublican from Oregon and chairman of the House Ways and Means Committee. Less of anideologue than Smoot, his main interest was promoting the Republican agenda.

Unholy Alliances

The critical factor that madeSmoot-Hawleypossible was the opposition to agriculturesubsidies by President Calvin Coolidge. Desperate for relief from persistent deflation, this

pushed farmers into an unholy alliance with manufacturers in an effort to raise agriculturalprices. In 1928, Coolidge was replaced by Herbert Hoover, who gave the go-ahead foranother tariff bill as long as he was provided with some flexibility to adjust tariff rates.

Work on Smoot-Hawley began in early 1929 and was extremely protracted, especially in theSenate. Political scientists have long been fascinated by the horse-trading and logrolling thatwent on as senators would repeatedly change their votes on the same exact tariff ratedepending on what backroom deal had been made that day. An exhausted Congress finally

passed Smoot-Hawley in June 1930 and Hoover signed it into law.

Economists have long debated the effect Smoot-Hawley had in triggering, deepening, orprolonging the Great Depression. A few, such as the late Jude Wanniski, thought it was theprincipal cause of the depression. Yet most think that international trade was simply too smalla share of the economy to have had a major macroeconomic effect. Total dutiable importsamounted to only 1.4 percent of the gross domestic product; Smoot-Hawley raised their

prices by just 5 percent.

Irwin explains that two factors made Smoot-Hawley important economically. First is that themoney supply shrank by a third after 1929, as banks closed in the wake of the stock market

crash and depositors lost all their money in an era before deposit insurance. This led to awidespread deflation that caused consumer prices to fall by 25 percent. This had the effect of
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sharply raising the real tariff level in cases where it was a flat dollar rate. As prices fell, thetariff stayed the same, thus raising it as a percentage of the import price.

The second factor was retaliation by Americas trading partners, which sharply curtailed U.S.

exports. This beggar-thy-neighbor was especially pernicious because many countries were

suffering from debt problems left over from the war. As world trade shrank, they lost theability to service their debts, which further depressed growth and trade.

Remaking the World Economy

When Franklin D. Roosevelt was elected president in 1932, a key part of his campaign was toreform the tariff. True to his word, he appointed Cordell Hull, a committed free trader, assecretary of state. As a congressman from Tennessee, Hull had led the opposition to Smoot-Hawley in the House.

Smoot-Hawley was largely undone by the Reciprocal Trade Agreements Act of 1934. With

the beginning of World War II, Roosevelt, Hull and others in the administration recognizedthat there would be a great opportunity after the war to remake the world economy andcement free trade in place for all time as a bedrock principle of international economicrelations. Institutions such as the General Agreement on Tariffs and Trade (now the WorldTrade Organization), the Organization for Economic Cooperation and Development andothers were established with the express purpose of preventing another outbreak of

protectionism that would threaten world prosperity.

Although economists remain divided on the economic impact of Smoot-Hawley, I dont thinkthere are any who see it as a good idea that ought to be repeated. Politicians and the general

public, on the other hand, are a different matter; I think many would support Smoot-Hawleylevels of protection to protect jobs and incomes from Chinese imports and prevent Americancompanies from outsourcing their production in low-wage countries.

The memory of Smoot-Hawley and its link to the Great Depression is one of the few thingsthat keeps protectionism in check. For this reason, Peddling Prosperity deserves a wide

readership.

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FREE TRADE

ByAlan S. Blinder

For more than two centuries economists have steadfastly promoted free trade among nationsas the best trade policy. Despite this intellectual barrage, many practicalmen and womencontinue to view the case for free trade skeptically, as an abstract argument made by ivorytower economists with, at most, one foot on terra firma. These practical people know thatour vital industries must be protected from foreignCOMPETITION.

The divergence between economists beliefs and those of (even well-educated) men andwomen on the street seems to arise in making the leap from individuals to nations. In running

our personal affairs, virtually all of us exploit the advantages of free trade and comparativeadvantage without thinking twice. For example, many of us have our shirts laundered at

professional cleaners rather than wash and iron them ourselves. Anyone who advised us toprotect ourselves from the unfair competition of low-paid laundry workers by doing ourown wash would be thought looney. Common sense tells us to make use of companies thatspecialize in such work, paying them with money we earn doing something we do better. Weunderstand intuitively that cutting ourselves off from specialists can only lower our standardof living.

ADAM SMITHs insight was that precisely the same logic applies to nations. Here is how heput it in 1776:

It is the maxim of every prudent master of a family, never to attempt to make at home what itwill cost him more to make than to buy.. . . If a foreign country canSUPPLYus with acommodity cheaper than we ourselves can make it, 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.

Spain, South Korea, and a variety of other countries manufacture shoes more cheaply thanAmerica can. They offer them for sale to us. Shall we buy them, as we buy the services oflaundry workers, with money we earn doing things we do welllike writing computersoftware and growing wheat? Or shall we keep cheap foreign shoes out and purchase moreexpensive American shoes instead? It is pretty clear that the nation as a whole must be worseoff if foreign shoes are kept outeven though the American shoe industry will be better off.

Most people accept this argument. But they worry about what happens if another countrysay, Chinacan make everything, or almost everything, cheaper than we can. Will free tradewith China then lead toUNEMPLOYMENTfor American workers, who will find themselvesunable to compete with cheaper Chinese labor? The answer (seeCOMPARATIVE ADVANTAGE),which was provided byDAVID RICARDOin 1810, is no.To see why, let us once again appealto our personal affairs.

Some lawyers are better typists than their secretaries. Should such a lawyer fire his secretary

and do his own typing? Not likely. Though the lawyer may be better than the secretary atboth arguing cases and typing, he will fare better by concentrating his energies on the practice
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of law and leaving the typing to a secretary. Such specialization not only makes the economymore efficient but also gives both lawyer and secretary productive work to do.

The same idea applies to nations. Suppose the Chinese could manufacture everything morecheaply than we canwhich is certainly not true. Even in this worst-case scenario, there will

of necessity be some industries in which China has an overwhelming cost advantage (say,toys) and others in which its cost advantage is slight (say, computers). Under free trade theUnited States will produce most of the computers, China will produce most of the toys, andthe two nations will trade. The two countries, taken together, will get both products cheaperthan if each produced them at home to meet all of its domestic needs. And, what is alsoimportant, workers in both countries will have jobs.

Many people are skeptical about this argument for the following reason. Suppose the averageAmerican worker earns twenty dollars per hour while the average Chinese worker earns justtwo dollars per hour. Wont free trade make it impossible to defend the higher Americanwage? Wont there instead be a leveling down until, say, both American and Chinese workers

earn eleven dollars per hour? The answer, once again, is no.And specialization is part of thereason.

If there were only one industry and occupation in which people could work, then free tradewould indeed force American wages close to Chinese levels if Chinese workers were as goodas Americans. But modern economies are composed of many industries and occupations. IfAmerica concentrates its employment where it does best, there is no reason why Americanwages cannot remain far above Chinese wages for a long timeeven though the two nationstrade freely. A countrys wage level depends fundamentally on thePRODUCTIVITYof its laborforce, not on its trade policy. As long as American workers remain more skilled and bettereducated, work with more capital, and use superior technology, they will continue to earnhigher wages than their Chinese counterparts. If and when these advantages end, the wagegap will disappear. Trade is a mere detail that helps ensure that American labor is employedwhere, in Adam Smiths phrase, it has some advantage.

Those who are still not convinced should recall that Chinas trade surplus with the United

States has been widening precisely as the wage gap between the two countries, while stillhuge, has been narrowing. If cheap Chinese labor was stealing American jobs, why did thetheft intensify as the wage gap fell? The answer, of course, is that Chinese productivity wasgrowing at enormous rates. The remarkable upward march of Chinese productivity bothraised Chinese wages relative to American wages and turned China into a world competitor.

To think that we can forestall the inevitable by closing our borders is to participate in a cruelself-deception. Nor should there be any worry about failing to forestall the inevitable. Thefact that another country becomes wealthier does not mean that Americans must become

poorer.

Americans should appreciate the benefits of free trade more than most people, for we inhabitthe greatest free-trade zone in the world. Michigan manufactures cars; New York provides

banking; Texas pumps oil and gas. The fifty states trade freely with one another, and thathelps them all enjoy great prosperity. Indeed, one reason why the United States did so much

better economically than Europe for more than two centuries is that America had freemovement of goods and services while the European countries protected themselves from

their neighbors. To appreciate the magnitudes involved, try to imagine how much your
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personal standard of living would suffer if you were not allowed to buy any goods or servicesthat originated outside your home state.

A slogan occasionally seen on bumper stickers argues, Buy American, save your job. Thisis grossly misleading for two main reasons. First, the costs ofSAVINGjobs in this particular

way are enormous. Second, it is doubtful that any jobs are actually saved in the long run.

Many estimates have been made of the cost of saving jobs byPROTECTIONISM.While theestimates differ widely across industries, they are almost always much larger than the wagesof the protected workers. For example, one study in the early 1990s estimated that U.S.consumers paid $1,285,000 annually for each job in the luggage industry that was preserved

by barriers to imports, a sum that greatly exceeded the average earnings of a luggage worker.That same study estimated that restricting foreign imports cost $199,000 annually for eachtextile workers job that was saved, $1,044,000 for each softwood lumber job saved, and$1,376,000 for every job saved in the benzenoid chemical industry. Yes, $1,376,000 a year!

While Americans may be willing to pay a price to save jobs, spending such enormous sums isplainly irrational. If you doubt that, imagine making the following offer to any benzenoidchemical worker who lost his job to foreign competition: we will give you severance pay of$1,376,000not annually, but just oncein return for a promise never to seek work in theindustry again. Can you imagine any worker turning down the offer? Is that not sufficientevidence that our present method of saving jobs is mad?

But the situation is actually worse, for a little deeper thought leads us to question whether anyjobs are really saved overall. It is more likely that protectionist policies save some jobs byjeopardizing others. Why? First, protecting one American industry from foreign competitionimposes higher costs on others. For example, quotas on imports of semiconductors sent the

prices of memory chips skyrocketing in the 1980s, thereby damaging the computer industry.Steel quotas force U.S. automakers to pay more for materials, making them less competitive.

Second, efforts to protect favored industries from foreign competition may induce reciprocalactions in other countries, thereby limiting American access to foreign markets. In that case,export industries pay the price for protecting import-competing industries.

Third, there are the little-understood, but terribly important, effects of trade barriers on thevalue of the dollar. If we successfully restrict imports, Americans will spend less on foreigngoods. With fewer dollars offered for sale on the worlds currency markets, the value of the

dollar will rise relative to that of other currencies. At that point unprotected industries willstart to suffer because a higher dollar makes U.S. goods less competitive in world markets.Once again, Americas ability to export is harmed.

On balance the conclusion seems clear and compelling: while protectionism is sold as jobsaving, it probably really amounts to job swapping. It protects jobs in some industries only bydestroying jobs in others.

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PROTECTIONISM

By

Jagdish Bhagwati

The fact that trade protection hurts the economy of the country that imposes it is one of theoldest but still most startling insights economics has to offer. The idea dates back to theorigin of economic science itself.ADAM SMITHsThe Wealth of Nations,which gave birth toeconomics, already contained the argument forFREE TRADE:by specializing in productioninstead of producing everything, each nation would profit from free trade. In international

economics, it is the direct counterpart to the proposition that people within a nationaleconomy will all be better off if they specialize at what they do best instead of trying to beself-sufficient.

It is important to distinguish between the case for free trade for oneself and the case for freetrade for all. The former is an argument for free trade to improve one nations own welfare(the so-called national-EFFICIENCYargument). The latter is an argument for free trade toimprove every trading countrys welfare(the so-called cosmopolitan-efficiency argument).

Underlying both cases is the assumption that free markets determine prices and that there areno market failures. But market failures can occur. A market failure arises, for example, when

polluters do not have to pay for the pollution they produce (seeEXTERNALITIES). But suchmarket failures or distortions can arise from governmental actionas well. Thus,governments may distort market prices by, for example, subsidizing production, as Europeangovernments have done in aerospace, as many other governments have done in electronicsand steel, and as all wealthy countries governments do in agriculture. Or governments may

protectINTELLECTUAL PROPERTYinadequately, leading to underproduction of newknowledge; they may also overprotect it. In such cases, production and trade, guided bydistorted prices, will not be efficient.

The cosmopolitan-efficiency case for free trade is relevant to issues such as the design of

INTERNATIONAL TRADEregimes. For example, the General Agreement on Tariffs and Trade(GATT), incorporated into the World Trade Organization (WTO) in 1995, oversees worldtrade among member nations, just as the International Monetary Fund oversees internationalmacroeconomics and exchange rates. The national-efficiency case for free trade concernsnational trade policies; it is, in fact, Adam Smiths case for free trade. Economists typically

have the national-efficiency case in mind when they discuss the advantage of free trade andthe folly of protectionism.

This case, as refined greatly by economists in the postwar period, admits two main theoreticalpossibilities in which protection could improve a nations economic well-being. First, asAdam Smith himself noted, a country might be able to use the threat of protection to get other

countries to reduce their protection against its exports. Thus, threatened protection could be atool to pry open foreign markets, like oysters, with a strong clasp knife, as Lord Randolph
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Churchill put it in the late nineteenth century. If the protectionist threat worked, then thecountry using it would gain doubly: from its own free trade and from its trading partners free

trade. However, both Smith and later economists in Britain feared that such threats would notwork. They feared that the protection imposed as a threat would be permanent and that thethreat would not lower the other countries trade barriers.

U.S. trade policy today is premised on a different assessment: that U.S. markets can, andshould, be closed as a means of opening new markets abroad. This premise underlies sections301310 of the 1988 Omnibus Trade and Competitiveness Act, which permit, and sometimeseven require, the U.S. government to force other countries to accept new trade obligations bythreatening tariff retaliation if they do not. But those trade obligations do not always entail

freer trade. They can, for instance, take the form of voluntary quotas on exports of certaingoods to the United States. Thus, they may simply force weak nations to redirect their tradein ways that strong nations desire, cutting away at the principle that trade should be guided bymarket prices.

The second exception in which protection could improve a nations economic well-being iswhen a country hasMONOPOLYpower over a good. Since the time of Robert Torrens andJOHN STUART MILLthat is, since the mid-1800seconomists have argued that a countrythat produces a large percentage of the worlds output of a good can use an optimum tariff

to take advantage of its latent monopoly power, and thus gain more from trade. This is, ofcourse, the same as saying that a monopolist will maximize hisPROFITSby raising his priceand reducing his output.

Two objections to this second argument immediately come to mind. First, with rareexceptions such asOPEC,few countries seem to have significant monopoly power in enoughgoods to make this an important, practical exception to the rule of free trade. Second, othercountries might retaliate against the optimum tariff. Therefore, the likelihood of successful(i.e., welfare-increasing) exploitation of monopoly power becomes quite dubious. Severaleconomists, among them Avinash Dixit, Gene Grossman, and Paul Krugman, made theiracademic reputations by finding theoretical cases in which oligopolistic markets enablegovernments to use import tariffs to improve national welfare; but even these researchershave advised strongly against protectionist policies. Their advice is based principally on thefact that governments would rarely have theINFORMATIONrequired to know where to applythe tariffs.

One may well think that any market failure could be a reason for protection. Indeed,

economists fell into this trap for nearly two centuries, until the 1950s. Economists now argue,instead, that protection is an inappropriate and inefficient way to correct for domestic marketfailures. For example, if wages do not adjust quickly enough whenDEMANDfor an industrys

product falls, as was the case with U.S. auto workers losing out to foreignCOMPETITION,theappropriate policy is for the government to interveneor possibly to remove interventionin the labor market, directly aiming remedial policy at the source of the problem. This is the

principal insight from the postWorld War II theory of commercial policy: it significantlynarrows the rationale for protectionism and has revolutionized the conventionalunderstanding of the relative merits of free trade and protectionism.

Many economists also believe that even if protection were appropriate in theory, it would in

practice be captured by groups who would misuse it to pursue their own narrow interestsinstead of the national interest. One clear cost of protection is that the country imposing it
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forces its consumers to forgo cheap imports. But another important cost of protection maywell be the lobbying costs incurred by those seeking protection. These lobbying activities,now extensively studied by economists, are variously described asRENT SEEKINGor directlyunproductive profit-seeking activities. They are unproductive because they produce profit orincome for those who lobby, without creating valuable output for the rest of society.

Protectionism arises in ingenious ways. When free-trade advocates squelch it in one place, itpops up in another. Protectionists seem to always be one step ahead of free traders in creatingnew ways to protect against foreign competitors. One way is by replacing restrictions onimports with what are euphemistically called voluntary export restrictions (VERs) or

orderly market arrangements (OMAs).Instead of the importing country restricting importswith quotas or tariffs, the exporting country restricts exports. The protectionist effect is stillthe same. The real difference, which makes exporting nations prefer restrictions on exports torestrictions on imports, is that the VERs enable the exporters to charge higher prices and thuscollect for themselves the higher prices caused by protection. That has been the case withJAPANs voluntary quotas on exports of cars to the United States. The United States could

have kept Japanese car imports in check by placing a tariff on them. That would have raisedthe price, so consumers would have bought fewer. Instead, the Japanese government limitedthe number of cars shipped to the United States. SinceSUPPLYwas lower than it would have

been in the absence of the quotas, Japanese car makers were able to charge higher prices andstill sell all their exports to the United States. The accrual of the resulting extra profits fromthe voluntary export restraint may also, ironically, have helped the Japanese auto producersfind the funds to make investments that made them even more competitive.

The growth of VERs in the 1980s was a disturbing development for a second reason as well.They selectively target suppliers instead of letting the market decide who will lose when trademust be restricted. As an alternative, the United States could provide just as much protectionfor domestic auto makers by putting a quota or tariff on all foreign cars, letting consumersdecide whether they wanted to buy fewer Japanese cars or fewer European ones. With VERs,in other words, politics replaces economic efficiency as the criterion determining who tradeswhat.

Protectionism recently has come in another form more insidious than VERs. Economists callthe new form administered protection. Nearly all rich countries today have fair trade

laws. The stated purpose of these laws is twofold: to ensure that foreign nations do notsubsidize exports (which would distort market incentives and hence destroy efficientallocation of activity among the worlds nations) and to guarantee that foreign firms do not

dump their exports in a predatory fashion. National governments thus provide for proceduresunder which a countervailing duty (CVD) against foreign subsidy or an antidumping (AD)duty can be levied when subsidization or dumping is found to occur. These two fair trademechanisms are meant to complement free trade.

In practice, however, when protectionist pressures rise, fair trade is misused to work againstfree trade. Thus, CVD and AD actions often are started against successful foreign firmssimply to harass them and coerce them into accepting VERs. Practices that are thoroughlynormal at home are proscribed as predatory when foreign firms engage in them. As one tradeanalyst put it, If the same anti-dumping laws applied to U.S. companies, every after-Christmas sale in the country would be banned.
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Much economic analysis shows that, in the 1980s, fair trade mechanisms turned increasinglyinto protectionist instruments used unfairly against foreign competition. U.S. rice producersgot a countervailing duty imposed on rice from Thailand, for example, by establishing thatthe Thai government was subsidizing rice exports by less than 1 percentand ignoring thefact that Thailand also imposed a 5 percent tax on exports. We usually think that a foreign

firm is dumping when it sells at a lower price in our market than in its own. But the U.S.government took an antidumping action against Polands exports of golf carts even though nogolf carts were sold in Poland.

Economists have been thinking about how these fair trade mechanisms can be redesigned soas to insulate them from being captured and misused byspecial interests. Ideas include thecreation of binational, as opposed to purely national, adjudication procedures that wouldensure greater impartiality, as in the U.S.-Canada Free Trade Agreement, then incorporatedinto the enlarged North American Free Trade Agreement with Mexico. Also, greater use ofWTO dispute-settlement procedures, and readier acceptance of their outcomes, is a

possibility.

Increasingly, domestic producers have labeled as unfair trade a variety of foreign policies

and institutions. Thus, opponents of the U.S.-Mexico Free Trade Agreement claimed that freetrade between the two nations was impossible because of differences in Mexicos

environmental and labor standards. The litany of objections to gainful free trade from thesealleged sources of unfair trade (or its evocative synonym, the absence of level playingfields) is endless. Here lies a new and powerful source of attack on the principles of free

trade.

The current concerns about protectionism extend to two main issues. First, the exclusion ofrich-country agricultural protectionism, chiefly in the form of production and trade subsidiesexempted from GATT discipline by a waiver in 1965, is finally being challenged effectively.This is good for universal free trade. Second, economic analysts have been profoundlyconcerned by the proliferation of bilateral free trade agreements, now known as preferentialtrade agreements (PTAs), which currently number almost three hundred. Thanks to thesePTAs and the massive extension of special and differential treatment to the poor countries,under which they get varying exemptions from the most-favored-nation (MFN) tariff (seeINTERNATIONAL TRADE AGREEMENTS), there has now been a serious, systemic erosion of theMFN principle, which assured that every trading nation that was party to GATT would enjoythe most-favored-nationthat is, the lowesttariff that others enjoyed. This is bad foruniversal free trade.

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Globalisation and Protectionism todayAuthor: Andrew McCulloch

I found myself looking for statistics on globalisation last week after I bought an electric kettlemade in China for less than 10. The one thing I had learned about globalisation was that it iscommonly measured using the volume of world trade. It came as a slight surprise, however,to find that world trade is generally measured using the value of world exports and imports asa percentage of world output (or GDP). I cant see that the resulting figure has any intuitive

meaning although I'd be happy for someone to correct me on that. However, the figure belowuses data on trade and GDP from the World Bank and shows how the value of trade as a

percentage of GDP has varied over the last 50 years. As expected the figure shows that therehas been a steady rise over time in the level of trade.

Datafrom World Development Indicators (Series NE_TRD_GNFS_ZS)

The vigorous rise in world trade over the last 50 years might suggest that the idea that the

extent of trade between countries might decline in the near future is a little far-fetched. Thefigure above uses world GDP as a denominator, however, making it difficult to discern trends
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over time in the value of exports or imports. The figure below shows the percentage changein the value of exports over the previous 12 months for selected countriesusing datafrom2006 to 2012 from the World Trade Organisation. The figure shows that in each country thevalue of exports had been rising at around 20 percent each year but that in 2009 this trendreversed and the level of exports fell by as much as 40 percent in the space of a single year.

In 2010 and 2011, the growth in exports resumed but 2012 has seen the level of exportsstagnate or decline in all countries.

The collapse of world trade in 2009 was due in significant part to a sharp fall in consumerconfidence in most western economies. In previous economic downturns, most notably the1930s Depression, a fall in the level of trade was also influenced by the use of import tariffsand quotas by many countries. In a situation where the economy remains depressed for a

period of time, governments feel that they need to make sure that whatever consumer

spending there is goes on domestically produced goods. The most straightforward way forgovernments to do this is to increase the price of imports relative to domestic goods (usingtariffs) or to restrict the level of imports (using quotas). During the current economicdownturn governments were initially felt to have done a reasonably good job of avoiding

protectionism.

Several recentreportshave however pointed to arisein the use of measures such as importtariffs, exchange controls and import licenses by major trading blocs. Economic historysuggests that wholesale recourse to tariffs and quotas is likely to prolong the world economicdownturn, however, so while such measures might be politically popular at home, they areunlikely to make much of a positive contribution to economic growth.

Not everyone is convinced of the benefits of free-trade, however. The centre-left think-tank,Compass,arguedin a recent pamphlet that the fundamental cause of most of the economicills in the UK, such as the much discussed squeezed-middle, is globalisation. Although theargument that free-trade increases the overall value of economic output is convincing,economics has little to say about how the gains from trade are distributed (to governments,corporations, households etc). Many economists have argued that globalisation has reducedthe demand for labour and wages in in the UK and US, particularly for men with poor skills.It is argued that industry has moved to Asia or Eastern Europe where labour is comparativelycheap, resulting in a lack of wage growth and a decline in the availability of well-paid jobsfor unskilled workers in western economies.

In the UK, I imagine that all politicians would say they support free-trade and industrialdecline and a shift towards a service economy is seen as inevitable. In continental Europe,views are more diverse and one argument that has been advanced is that foreign firms should

be allowed to compete for European markets primarily through foreign direct investmentrather than through trade. This would allow competition when based on higher productivity

but not when based on lower wages. It would be useful to see such views discussed in Britishpolitics and it is potentially an issue which would distinguish the left and right. Indeed, theCompass pamphlet attracted the ire of the right-wing Adam Smith Institute who described itas'economic fascism'.
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The view that the free market is the bedrock of a free society (and hence that protectionismequates to fascism) was argued by Hayek in the Road to Serfdom written in the 1940s andsubsequently picked-up by conservative governments in the 1980s. It is not entirely wrong

but multinational corporations are not the buttress of a free society.http://www.significancemagazine.org/details/webexclusive/2528931/Globalisation-and-

Protectionism-today.html

Farmers in developing world hurt by 'eat

local' philosophy in U.S.

William G. Moseley

Published 4:00 am, Sunday, November 18, 2007

Increasing awareness of climate change has transformed the way Americans think aboutorganic food. While organic consumers used to focus on how food was produced, such aswhether pesticides were used, they now are also concerned about how far food has traveled toarrive at their plate. The issue is that greater distances often equate to more energy use andgreenhouse gas emissions.

The preference for eating local has been popularized, among others, by UC Berkeleyjournalism professorMichael Pollanin the "Omnivore's Dilemma" and byBarbaraKingsolverin "Animal, Vegetable, Miracle." This "eating local" philosophy has a hugefollowing among those consumers who buy organic food. But what about the consequencesof the local food craze for farmers in the developing world who have joined the organic and

fair trade movements?

We're getting a glimpse of the future of this debate in the United Kingdom, where the tensionbetween the local food and fair trade movements is acute. Just recently, theU.K. SoilAssociation,a nonprofit group that promotes sustainable and organic farming, called on theBritish government to restrict imports of organic produce brought in by air. In a concession tothe fair trade movement, this group would allow for imports from countries actively seekingto promote organic and fair trade markets within their own borders. Despite this concession,British fair trade activists are worried.

Whether the British government would ever adopt such a ban is questionable, but labelingschemes and use of concepts such as "food miles" (the distance a product has traveled toreach the store) are likely to increase consumer awareness and influence purchasing habits.

The suggestion that developing countries should promote local markets for organic producein order to wean themselves off of export markets is a false alternative. These markets oftenalready exist in everything but name.

Many farmers in the poorest of African nations - where I do my research - already supplylocal markets with their grains and produce. While not formally recognized as such, thesemarkets are virtually organic because most poor African farmers restrict pesticide use to

traditional export crops such as cotton, cacao and coffee, while local foodstuffs are grownwith few or no chemical inputs.
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Traditional export-oriented agriculture is problematic in many ways, but the organic and fairtrade movements are beginning to diversify opportunities for African farmers in this sector.Just as Mexico and South America supply large amounts of organic produce to California,European demand for organic and fair trade products from Africa is surging. These are not

just niche markets where developing world farmers can potentially gain a higher return, but

these channels also promote better working conditions and the reduced use of chemicals.

If the local food movements in Europe and North America reduce their demand for organicand fair trade products from afar, the most likely consequence is that African farmers whohave entered these niche markets will return to producing their export crops in theconventional, pesticide-intensive manner. While local food markets can provide some incomefor these farmers, they still are reliant on export opportunities for the bulk of theircash income.

Although our decisions as consumers have the power to influence how our food is produced,this approach is limited. What we really need are changes in the basic rules that govern the

global marketplace.

If international bodies, such as theWorld Trade Organization,set and enforced rules aboutbasic working conditions and environmental standards, then we would not be relegated totrying to promote organic farming and fair labor practices via labeling schemes and informedconsumption. If African countries were allowed to protect nascent industries, then they mightnot be so reliant on agricultural exports.

But until these changes are made, it is a cruel joke to condemn developing-world farmers tocommodity crop production and then remove the only hope they have for higher returns -organic and fair trade crops and products.

While the local food craze is all well and good, we should not be so quick to denounceorganic and fair trade foods that are imported from the developing world. By shunning these

products, we do not encourage local markets to flourish in these countries, but we condemnthese farmers to the ills of conventional production for the global market (the only other realalternative at this time). We should remain open to such products in the short term, but alsowork for broad scale changes in the rules of the global market place to ensure that evenconventional agricultural production is safe and fairly compensated.
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Protectionism and the Destruction of

Prosperity

By Murray N. Rothbard

Monograph first published by the Mises Institute, 1986Available for printing from PDF

Protectionism, often refuted and seemingly abandoned, has returned, and with avengeance. The Japanese, who bounced back from grievous losses in World War II toastound the world byproducing innovative, high-quality products at low prices, are servingas the convenient butt of protectionist propaganda.

Memories of wartime myths prove a heady brew, as protectionists warn about this new

"Japanese imperialism," even "worse than Pearl Harbor." This "imperialism" turns out toconsist of selling Americans wonderful TV sets, autos, microchips, etc., at prices more thancompetitive with 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 meanscoercion, so that calling upon the U.S. government to intervene means urging it to use forceand 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 twoessential points: (1) protectionism means force in restraint of trade; and (2) the key is whathappens 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 onAmericans. And since each and every one of us is a consumer, this means that protectionismis out to mulct all of us for the benefit of a specially privileged, subsidized fewand aninefficient 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 bothpartiesin this case Japanese producers and American consumersotherwise they wouldnot engage in the exchange. In trying to stop this trade, protectionists are trying to stopAmerican consumers from enjoying high living standards by buying cheap and high-qualityJapanese 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 todeprive 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
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The best way to look at tariffs or import quotas or other protectionist restraints is to forgetabout political boundaries. Political boundaries of nations may be important for other reasons,

but they have no economic meaning whatever. Suppose, for example, that each of the UnitedStates were a separate nation. Then we would hear a lot of protectionist bellyaching that weare now fortunately spared. Think of the howls by 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 viceversa.

Fortunately, the absurdity of worrying about the balance of payments is made evident byfocusing on inter-state trade. For nobody worries about the balance of payments between

New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, becausethere 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 NorthCarolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab

for coerced special privilege by less efficient business firms. If the 50 states were separatenations, the protectionists would then be able to use the trappings of patriotism, and distrustof foreigners, to camouflage and get away with their looting the consumers of their ownregion.

Fortunately, inter-state tariffs are unconstitutional. But even with this clear barrier, and evenwithout being able to wrap themselves in the cloak of nationalism, protectionists have beenable to impose inter-state tariffs in another guise. Part of the drive for continuing increases inthe federal minimum-wage law is to impose a protectionist devise against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their NewEngland and New York competitors.

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

Another way in which interstate trade restrictions have been imposed has been in thefashionable name of "safety." Government-organized state milk cartels in New York, forexample, 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 orregion? The principle is precisely the same. In America s first great depression, the Panic of1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist criesarosefortunately not fulfilledto prohibit all "imports" from outside of Detroit, andcitizens were exhorted to buy only Detroit. If this nonsense had been put into effect, generalstarvation 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, oreven 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


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goods or services produced outside the family house? Starvation would quickly wipe out thisludicrous drive for self-sufficiency.

And yet we must realize that this absurdity is inherent in the logic of protectionism. Standardprotectionism 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 ofall economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. Themarket economy is one vast latticework throughout the world, in which each individual, eachregion, each country, produces what he or it is best at, most relatively efficient in, andexchanges that product for the goods and services of others. Without the division of labor andthe trade based upon that division, the entire world would starve. Coerced restraints ontradesuch as protectionismcripple, hobble, and destroy trade, the source of life and

prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, behurt so as to confer permanent special privilege upon groups of less efficient producers, at the

expense of more competent firms and of consumers. But it is a peculiarly destructive kind ofbailout, 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 increasein the cost of transportation between regions. One of the great features of the IndustrialRevolution, one of the ways in which it brought prosperity to the starving masses, was byreducing drastically the cost of transportation. The development of railroads in the early 19thcentury, for example, meant that for the first time in the history of the human race, goodscould be transported cheaply over land. Before that, waterrivers and oceanswas the onlyeconomically viable means of transport. By making land transport accessible and cheap,railroads allowed interregional land transportation to break up expensive inefficient localmonopolies. 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 wondrous principle of progress.

It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19thcentury, called a tariff a "negative railroad." Protectionists are just as economicallydestructive as if they were physically chopping up railroads, or planes, or ships, and forcingus to revert to the costly transport of the pastmountain trails, rafts, or sailing ships.

"Fair" Trade

Let us now turn to some of the leading protectionist arguments. Take, for example, thestandard complaint that while the protectionist "welcomes competition," this competitionmust 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 needsto pay only one-half the wages of the American competitor. The U.S. government is called


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upon to step in and "equalize" the wage rates by imposing an equivalent tariff upon theTaiwanese. But does this mean that consumers can never patronize low-cost firms because itis "unfair" for them to have lower costs than inefficient competitors? This is the sameargument that would be used by a New York firm trying to cripple its North Carolinacompetitor.

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

The demand for any factor of production, including labor, is constituted by the productivityof 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 byemployers, 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, thecomparative qualities of labor, skill, and education. But most of the difference is not due tothe personal qualities of the laborers themselves, but to the fact that the American laborer, onthe whole, is equipped with more and better capital equipment than his Taiwanesecounterparts. 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 Americanlaborer 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 Americanworker to make more than the Taiwanese, not because of his personal qualities, but becausesavers 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 farscarcer 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 theTaiwanese, does not make the cost of labor in the U.S. twice that of Taiwan. Since U.S. laboris 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 theaverage, to be the same. One of the major protectionist fallacies is to confuse the price oflabor (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" inTaiwan, because "expensive labor" in the U.S. is precisely the result of the bidding for scarcelabor by U.S. employers. The problem faced by less efficient U.S. textile or auto firms is notso much cheap labor in Taiwan or Japan, but the fact that other U.S. industries are efficientenough 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 less efficientU.S. textile or auto or microchip firms, the protectionists are not only injuring the Americanconsumer. They are also harming efficient U.S. firms and industries, which are preventedfrom employing resources now locked into incompetent firms, and who could otherwise be

able to expand and sell their efficient products at home and abroad.


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"Dumping"

Another contradictory line of protectionist assault on the free market asserts that the problemis 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 overAmerican 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 powerfulweapon, 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 andon American consumers in particular. Why should it be a matter of complaint whenconsumers so clearly benefit? Suppose, for example, that Sony is willing to injure Americancompetitors by selling TV sets to Americans for a penny apiece. Shouldn t we rejoice at suchan absurd policy of suffering severe losses by subsidizing us, the American consumers? Andshouldn 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 willingto virtually 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 supposethat the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by theSony price war? Well, in that case, we the consumers will still be better off, since the plantsof the bankrupt firms, which would still be in existence, would be picked up for a song atauction, and the American buyers at auction would be able to enter the TV business andoutcompete Sony because they now enjoy far lower capital costs.

For decades, indeed, opponents of the free market have claimed that many businesses gainedtheir powerful status on the market by what is called "predatory price-cutting," that is, bydriving their smaller competitors into bankruptcy by selling their goods below cost, and thenreaping 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 shortrun by price wars, "dumping," and selling below costs, they lose in the long run from thealleged monopoly. But, as we have seen, economic theory shows that this would be a mug sgame, 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 dumpingbecause their governments are willing to subsidize their losses. But again, we should stillwelcome such an absurd policy. If the Japanese government is really willing to waste scarceresources 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 byeconomists 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 objectiveentities that can be gauged or measured. Costs are subjective to the businessman himself, and


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they vary continually, depending on the businessman s time horizon or the stage ofproduction 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 apound. 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 anythingnear that price. In fact, he finds that he must sell the pears at whatever price he can get beforethey 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 hispears "below costs," figuring that the dealer s costs were $1 a pound.

"Infant" Industries

Another protectionist fallacy held that the government should provide a temporary protectivetariff 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 is fallacious, and the policy has proved disastrous in practice. For there is no moreneed for government to protect a new, young, industry from foreign competition than there isto protect it from domestic competition.

In the last few decades, the "infant" plastics, television, and computer industries made outvery well without such protection. Any government subsidizing of a new industry will funneltoo many resources into that industry as compared to older firms, and will also inauguratedistortions that may persist and render the firm or industry permanently inefficient andvulnerable 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 bya 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 whatmight be called a "senile-industry" argument for protectionism. Steel, auto, and otheroutcompeted industries have been complaining that they "need a breathing space" to retooland 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 hoaryinfant-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 beeninefficient 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 thePennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 andalready 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, center on the mysteries of the balance of payments.

Protectionists focus on the horrors of imports being greater than exports, implying that ifmarket forces continued unchecked, Americans might wind up buying everything from


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abroad, while selling foreigners nothing, so that American consumers will have engorgedthemselves to the permanent ruin of American business firms. But if the exports really fell tosomewhere near zero, where in the world would Americans still find the money to purchaseforeign 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 aproblem, 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 discourageexports and encourage imports. The resulting deficit had to be paid for in some way, andduring 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-reservebanks 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 goldis no longer a "balancing item." In effect, there is no deficit in the balance of payments. It istrue 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 Americandollars: 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 ownfunds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead ofworrying and complaining about this development, we should rejoice that foreign investorsare willing to finance our cheap imports. The only problem is that this bonanza is alreadycoming 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, arereally a tissue of egregious fallacies. They betray a complete ignorance of the most basiceconomic analysis. Indeed, some of the arguments are almost embarrassing replicas of themost ridiculous claims of 17th-century mercantilism: for example, that it is somehow acalamitous problem that the U.S. has a balance of trade deficit, not overall, but merely withone specific country, e.g., Japan.

Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century:namely, that balances with individual countries will cancel each other out, and therefore thatwe 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 to realize thatthe impetus for protectionism comes not from preposterous theories, but from the quest forcoerced special privilege and restraint of trade at the expense of efficient competitors andconsumers. In the host of special interests using the political process to repress and loot therest 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 richlydeserve.

* * * * *


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Murray N. Rothbard(1926-1995) was professor of economics at the University of Nevada,Las Vegas and vice president for academic affairs of the Ludwig von Mises Institute.

http://mises.org/rothbard/protectionism.asp
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Four : The Reasons for Protectionism- Leland B. Yeager,

Free Trade: Americas Opportunity[1954]

Edition used:

Free Trade: Americas Opportunity(New York: Robert Schalkenbach Foundation, 1954).

Author:Leland B. Yeager

Copyright information:

This title has been put online with the permission of the author.

Fair use statement:

This material is put online to further the educational goals of Liberty Fund, Inc. Unlessotherwise stated in the Copyright Information section above, this material may be used freelyfor educational and academic purposes. It may not be used in any way for profit.

Hide TOC

One: Free Trade

a Timely Proposal Two: the Nature of Protectionism Three: the Positive Case For Free Trade Four: the Reasons For Protectionism Five: Progress Toward Free Trade About the Author

Four

The Reasons for Protectionism

PROTECTIONIST THEORIZING

Although the Free-Trade case looks strong, Protectionism has triumphed so far in the worldof practical affairs. Doesnt this fact suggest some grave flaw in the Free-Trade case after all?Free Traders should, if they can, show why their arguments have met such widespread scornin practice. That is what the following sections try to do.

It is unfortunate, as a matter of practical politics, that the Free-Trade case involves someabstract reasoning: to understand it, one needs some ability to think clearly.

The case for free trade is primarily rational and unspectacular. To appreciate it calls for a

broader and deeper understanding of economics than most people possess, or care to acquire.But to the mass of the people, it seems plausible that, if imports are kept out, there will be
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practical men. That is why it is necessary to study his theoriesand more carefully thanthe Protectionist would like. The following discussion is unavoidably theoretical because thewhole Protectionist case is theoreticaland sloppily so.

Space permits considering only the Protectionist arguments most commonly used today. Even

these are numerous, but their mere number should not fool you into thinking that theProtectionist case must be strong. The very fact that the Protectionists, lacking even one ortwo really strong arguments, must pile weak argument upon weak argument itself casts doubton their case. Furthermore, as we shall see, some of the Protectionist arguments contradictone another.

SAVING AN INDUSTRY

To judge from testimony at Congressional committee hearings, the most commonProtectionist argument is that such-and-such an industry is suffering from unfair foreigncompetition and must be saved by a higher tariff or a tighter import quota. The typical

witness points out how imports are underselling his product, how his sales are dropping off,and how his workers face unemployment. Very likely the witness will emote a little: hisworkers have rare skills acquired by a lifetime of specialized work in the widget industry;these widget workers are good, loyal American citizens, the backbone of the nation, who livealong elm-lined streets in peaceful little towns, own their own homes, support the schools andchurches, and have sons who fought in Korea. Congress must save their jobs. (Such storiesare effective: the unfortunate widget workers are definite, specific people, while the vastmajority who bear the diffused harm of Protectionism are nameless and forgotten.)

Congressmen are sometimes rightly skeptical about whether conditions really are as bad as

the witness claims. But if evidence is produced, the typical Congressman regards the case forstronger import barriers as airtight. Secretary of Commerce Weeks exemplified the similarconfusion of a great many people when he said, shortly before taking office, that you cannot

go on importing goods which hurt American business.Even President Eisenhower, in hisfirst state-of-the-union speech, said that customs reform must not ignore legitimatesafeguarding of domestic industries, agriculture and labor standards. Senator Malone of

Nevada, during a tirade against a Japanese microscope priced about 60 per cent below theequivalent American model, spoke as follows:

The point I make is this: We could buy the cheaper one and allow the Japanese and theGermans to manufacture all the precision instruments. It is a fine theory as long as you only

have that one industryit is not a large industry, not a large employerbut if you follow thatthrough, you kill all the industries, and then the United States and all of our businesses aredown to that same level.14

People who think like Secretary Weeks and Senator Malone are falling into the fallacy of

compositionthe fallacy of assuming that what is true of the part is necessarily true of thewhole. For example, one person in a crowd can see a parade better by standing on a soap box;

but it is wrong to conclude that everybody can see better if everybody stands on a box.Similarly, a particular industry may suffer from competitive imports, and the facts are plain tosee: lost orders, idle factories, displaced workers. But if anyone concludes from this that theAmerican economy as a whole is suffering and would benefit from Protection to the afflicted

industry, he is committing the fallacy of composition. To protect one industry hurtsconsumers in the form of higher prices than otherwise and so may reduce their buying power
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as customers of other industries. It also hurts all industries into whose costs the Protectedproducts directly or indirectly enter, whether as raw or semifinished materials, as tools, asmeans of transportation, or as items in the cost of living of their workers. Finally, by cuttingthe dollar earnings of foreigners and thus their ability to buy American goods, import barriersharm the businessmen and workers in American export industries. (In fearing that imports

could kill off all American industries, Senator Malone evidently supposes that foreigners willgive us all the goods we need free, taking no American goods in return. The idea is pleasant

but absurd.)

The hearing before the House Ways and Means Committee on May 18, 1953 neatly displaysa Protectionist venting his contempt for academic theory while he himself unwittinglyindulges in save-an-industry theorizing built on the fallacy of composition. CongressmanJames B. Utt was questioning Mr. Peter G. Franck, an economist who specializes ininternational trade and who had just made a powerful case against P

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