Freeman

ARTICLE

Free Trade and Prosperity: A Global Approach

FEBRUARY 01, 1986 by STEVEN E. DASKAL

Mr. Daskal of Annandale, Virginia, is a defense systems analyst and writer.

International development and domestic prosperity are ensured by free trade.

Americans are especially prone to feel obligated to help others on a global scale. Whether it is the unfortunate plight of our fellows in the under-developed nations, often known as the “Third World,” or the difficulties and unemployment facing some Americans at home, we care. Within that context, free trade is a vital issue, because it is one of the primary means by which the market economy helps create global prosperity.

When surveying the world economic situation, some Americans feel guilt over our comparative wealth and comfort in contrast to the millions living at the subsistence level. Our size, power, and wealth appear to some as being of little value unless we use that wealth to help the less fortunate. We send food, money, training advisors, educators, and missionaries around the world in a sincere effort to help others. These efforts have been undertaken by individuals, religious and social organizations, charitable associations, and the government. As believers in voluntarism and limited government, it is inappropriate for us to criticize how individuals freely spend their money. However, when the government coerces us through taxation to send aid overseas, we often have cause to object to the way our involuntary contribution is being spent on activities that appear unnecessary, wasteful, or even counterproductive.

Sometimes efforts to feed the starving prove well-intentioned, but sadly ineffectual. Even if the entire U.S. budget were directly distributed to the poorer half of the world’s population, it would amount to less than $1,000 per person, certainly not enough to cure global poverty. Of course, with both our own bureaucracy and that of the recipient nation serving as intermediaries, a lot of that $1,000 would never reach the poor, but would instead support a small army of administrators, investigators, analysts, and auditors in both countries. If the recipient country’s government were less than scrupulously honest, as is all too often the case, the poor would wind up with a couple of cups of milk and grain, while the U.S. government would be bankrupt. After decades of receiving such aid, the recipient country would still be poor, and in fact there would be more poor people to feed in the future. One would hope that a better way to help these people would have been discovered by now.

Maximizing Employment

While we continue to be concerned about the poor overseas, we also feel an obligation to ensure maximum employment of our own citizens. Unemployment is generally recognized as a significant problem, for both personal and social reasons. Given current law, the financial drain the unemployed place upon society through the wide range of “compensation” and support programs is also of growing concern. While in most cases, the value of the welfare benefits an individual can receive is less than working wages, welfare pays well enough to support many people for extended periods of time. As government regulations and compensation plans directly and indirectly increase the cost of labor, and commensurately decrease the average worker’s net pay, more and more businesses find it less profitable and more difficult to hire workers. Thus, unemployment, like global poverty, seems unlikely to disappear, despite the growing expenditures attempting to combat it. The more the government spends and regulates, the fewer people can be hired by private enterprise.

A popular scapegoat for unemployment in the United States (and in many other “industrialized” nations) is the “trade deficit.” Many people, especially manufacturers and unionized workers, see imported vehicles, electronics, machine tools, and textiles flooding our markets and “taking away” sales from American manufacturers. These lost sales translate, they contend, into reduced production requirements, and ultimately lost American jobs. The fact that imported goods create sales, financing, service, and other related employment is generally ignored, because domestic industrial workers and manufacturers are far better organized, have more political clout, and are much more vocal. The result is a periodic frenzy of proposals to “protect American jobs and industry” through tariffs and quotas intended to limit or eliminate imports. As natural and unavoidable consequences of such moves:


•       the cost of a given item to the American consumer rises due to the higher cost of producing the American product and the loss of competitive pressure on prices;

•       consumers have less choice and fewer products available for purchase, reducing the incentive to increase earnings;

•       the overall strength of the American economy falters as consumer spending drops in response to rising prices;

•       Americans involved in buying and selling imported goods would be faced with significant losses and possibly unemployment;

•       foreign manufacturers lose business, resulting in higher unemployment, lower tax revenues, and higher government spending in foreign countries;

•       foreign individuals, corporations, and governments have fewer dollars to buy U.S. goods and services, or to pay off their heavy debt burdens; and

•       growing economic problems in foreign nations often lead to political instability and increased anti-Americanism, increasing requirements for non-productive defense spending both overseas and in the United States.

Protectionism, like any other form of government intervention in economic life, has a cost. Government tariffs and quotas transfer money to certain people who have invested in, manage, or work for, industries that aren’t competitive on their own merits. This forced transfer guarantees these firms that they will have a greater market share than they would have had without protection from competition. Without facing the pressures of the free market, they can continue to produce more expensive, less desirable goods, knowing their market cannot be taken by foreign competitors. Thus, the consumers (which often include the people benefiting from the protection) pay for protection—they get less, and pay more.

Protectionism Costs Consumers Billions

How much do we pay, as consumers, for protection of a few industries? Michael Munger, in “The Costs of Protectionism,” estimates the total burden (in 1980 dollars) to be over $58 billion, and it is probably even greater today. Nearly a third of that cost was in the textile and apparel market, a burden that fell most heavily on the poor, who tend to buy the least expensive clothing that doesn’t look cheap. They tended to favor foreign- made goods because they looked good, and didn’t cost as much as American-made items. This value differential existed despite the tariffs and quotas involved, but it was greatly reduced. While the more affluent could afford the higher prices or even switch to American products, the poor were faced with buying less.

Six billion dollars worth of tariffs and other barriers were applied to agricultural products, another area where the poor pay the cost for protectionism. On the other hand, protecting the jobs of highly-paid auto, steel and machinery production workers (and their employers) accounted for $26 billion in added protection costs. These costs affect all of us in a myriad of ways, because higher-priced transportation and manufacturing equipment raises the cost of all commodities to the consumer. Since these indirect costs are not included in the $26 billion, the true cost of protectionism in this segment of the economy could in fact be far higher.

Despite the “chance to modernize and catch up” that protection was supposed to offer these industries, most of them have chronically cried for protection against imports for decades. Only the threat of protection being phased out forced automakers and some steel manufacturers to begin modernizing. Some still haven’t, and are slowly crumbling despite protection. The loss of employment in various aspects of importing and exporting goods is another unknown cost.

Another common cause of pleas for protection is the accusation that foreign states are selling goods in the U.S. at a price lower than it costs the foreign manufacturer to produce it. This practice, known as “dumping,” is more often a reflection of some economist’s incorrect analysis of the cost of production of a given item, rather than an example of some competing nation’s attempts to undermine our economy. True “dumping” results in the “dumper” losing money on every piece sold, while the recipient, an American consumer, has saved money that can be invested elsewhere. True “dumping” will ultimately bankrupt the “dumper.”

Even when Communist bloc nations with their controlled economies “dump” goods in the West to obtain hard currency, they are doing even more damage to their already inefficient, stifled economies. If they manage to temporarily “corner” a market, they will still have to provide equivalent goods at the same low prices, or face the re-entry of Western firms into competition with them. Despite the rock-bottom pricing structure subsidized by the various Eastern European governments, Russian “Ladas,” “Polski Fiats,” and Czech “Skodas” have not cornered the relatively open automobile market in Canada or Switzerland. Due to their greater economic efficiency, the Japanese and South Koreans provide far better cars for only a little more money. All “dumping” provided the Communists was a chance to subsidize the poorest segment of the Canadian auto market.

The French economist and legislator Frederic Bastiat recognized the fallacy of protectionism in the 1840s. He often resorted to satire to illustrate the absurdity of being preoccupied with maintaining a “favorable balance of trade.” One of these was so believable that many thought it was a good example of the benefits of protection!

A French merchant shipped $50,000 worth of goods to New Orleans and sold them for a profit of $17,000. He invested the entire $67,000 in American cotton and shipped it back to France. Thus, the customhouse record showed that the French nation had imported more than it had exported—an unfavorable balance of trade. Very bad.

At a later date, the merchant decided to repeat the personally profitable transaction. But just outside the harbor his ship was sunk in a storm. Thus, the customhouse record showed that the French nation had exported more products than it had imported—a favorable balance of trade. Very good. Additionally, more jobs were thereby created for shipbuilders.

Since storms at sea are undependable, perhaps the safest government policy would be to record the exports at the customhouse and then throw the goods into the ocean. In that way, the nation could guarantee to itself the profit that results from a favorable balance of trade.

That economic disaster results from trade restriction and protectionism is not just theoretical speculation, however. The events of the period between 1922 and World War II illustrate them very graphically. The mid- 1920s was a period of generally increasing prosperity. However, then as now, the rapid changes in economic organization, management and technology had severe impact on a few outdated industries that relied heavily On manual labor, and hurt those farmers who were still using nineteenth-century techniques.

Jude Wanniski, a former member of the Wall Street Journal’s editorial staff, wrote a book entitled The Way the World Works. He describes the manner in which the beleaguered “1ow-tech” manufacturers and farm lobbyists pushed through the infamous Smoot-Hawley tariff act. The idea of keeping out foreign competition sounded good to the news media, but it terrified the bankers and investors of Wall Street. When it appeared certain the bill would be passed, the stock market panicked. The result was the stock market crash of the autumn of 1929, followed by the Depression that was fueled by the general collapse of world trade. Consumers in America and the rest of the world were forced to buy inefficiently produced domestic goods, or pay extortionate prices for foreign ones. Foreign governments of course retaliated in kind, many having already begun economic warfare against the rest of the world. Markets for American goods dried up, investment collapsed, businesses failed, jobs disappeared.

Despite the popular belief that laws passed since 1929 could prevent another Great Depression, it could happen again. America is far more dependent upon imports and exports today than it was in the 1920s. A global trade war would have disastrous consequences at home, and could create enormous security problems for us abroad. As reliant as we are upon free trade, the rest of the world is even more dependent upon it, even though they may not recognize it. A collapse of world trade would hurt virtually all of our allies, and threaten the survival of many developing nations barely able to avoid default on their debts.

If one looks at things from a sufficiently broad perspective, one begins to see a major contradiction in our foreign policy. On the one hand, we want to help the poor overseas, and try to do so at great expense, but with limited success. We spend great sums of money to help defend foreign nations from present and potential enemies. Yet, on the other hand, we are willing to threaten the economic and political stability of these same nations (and our own) by creating insurmountable walls against their ability to freely sell goods in the world’s richest market—the United States. This is a significant and costly inconsistency.

We have sent aid money to strengthen the economies of countries such as Japan, Thailand, Israel, Italy, Turkey, South Korea, and West Germany (to name a few). If these nations are to develop strong economies, they will naturally try to export goods to the United States and other nations. Yet, our response is to consider tariffs to shut out their products—threatening the same economies we ostensibly wanted to develop. The consumer ultimately pays the bill for all of this. They pay taxes to support efforts aimed at creating productive enterprises overseas, and pay higher prices (and have less free choice) because of attempts to protect American businesses against competition from overseas. And, as the ultimate blow to the budget and good sense, we pay to defend the same nations that supposedly “threaten” American jobs and profits.

The Benefits of Free Trade

Americans sincerely want to help people overseas. The question has become how to help them to the greatest extent while spending the least of our own hard-earned money. We also care about the health of our economy. Once again, the question is how to help preserve U.S. economic prosperity without disrupting international trade and causing ever-higher prices. The best method for accomplishing both goals is through free trade!

Why free trade? A basic economic reality—buying the best goods at the lowest prices—makes free trade more economical than closing our markets to foreign competitors. American consumers (all of us, including businesses and unionized labor) benefit by obtaining more goods for less money, while the foreign manufacturers and workers benefit by having jobs, making profits, and paying taxes to governments which then have a better chance to pay off their enormous debts. This, in turn, will make American banks more secure.

Free trade allows consumers around the world to buy more for less, which in turn creates more revenue for businesses. Governments have less call to provide tax-supported benefits to individuals or businesses, thus relieving the need to continue increasing taxes, inflation, or deficits. Ultimately, free trade will allow all but the poorest, least educated, and least diligent nations to get ahead. Examples of this are easy to find.

The most successful of the developing countries, states such as Singapore, the Republic of Korea, Republic of China (Taiwan), and Hong Kong, have built themselves up from illiteracy and poverty largely due to their respect for the power of free trade and relative economic freedom. Potentially wealthy developing nations, such as China, Brazil, Argentina, Nigeria, and Mexico, have stifled their own economic development through confused myriads of protective tariffs, import quotas, and centralized government manipulation of the economy.

Free trade also helps Americans and our trading partners overseas increase national security against both invasion and subversion. Open trade tends to improve the economic health of all trading nations. These nations tend to be more stable internally, since strong economies generally result in reduced unemployment, greater availability and affordability of food, clothing, and other commodities, and relief from the sense of desperation felt by people barely able to survive—a desperation that often leads to disorder and revolution. These increasingly self- sufficient nations also are better able to defend themselves against invasion. Their industries are strong, their people are more confident, and they are able to obtain necessary imported supplies easily. Thus, nations dedicated to free trade tend to be more valuable as friends and allies, and less of a liability needing continuous costly support and military assistance.

If this sounds too easy, too good to be true, just reflect on the benefits we gained in our own country by the elimination of trade restrictions between the colonies/states after the adoption of the Constitution. Free trade allowed for better direction of local economic activity. New Englanders didn’t have to struggle to be self- sufficient in agriculture on their rocky Soil, while Southerners could freely purchase better, less costly tools and machinery built in large New England and mid-Atlantic factories. Entire new industries developed to support this commerce, as evidenced by the growth of banks and by the flurry of railroad, steamship, and canal companies that were formed in the 19th century. While inflexible individuals and businesses may have suffered, the overall prosperity of all of the states increased dramatically, and employment grew rapidly despite the destruction of the Civil War and the influx of impoverished immigrants from around the world.

Free trade works, both in the context of international development and in ensuring greater domestic prosperity. It helps the poor and at the same time helps the working class, the middle class, and the wealthy. It works because it represents efficiency—from each according to his ability, to each according to his work (work in the scientific sense of energy expended that has a tangible result). Money is not wasted administering complex trade agreements, monitoring the “fairness” of international trade practices, or buying overpriced goods. Money is not involuntarily taken from taxpayers to Subsidize inefficient American businesses or the poor overseas.

Open international trading relations, especially between private individuals and businesses, facilitates peaceful relations between nations. Warfare is often a costly, destructive, and unsuccessful means to acquire another nation’s goods and services—trade is a far more efficient and mutually beneficial way to obtain the desired goal. Free trade is a sound basis for relations between free nations. It is the best type of foreign aid. And it is good for American consumers and investors.

ASSOCIATED ISSUE

February 1986

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