The debate
between free-trade and protectionism can sometimes get complicated. As with any
complicated issue, keeping some basic principles relevant to the issue in mind
can help make the issue simpler. I propose the following six principles:
1. More opportunities
for a wider international division of labor are better than fewer opportunities:
The division
of labor, the phenomena, enabled by free exchange, that allows for the
existence of economic specialization to better exploit land, natural resources,
and the particular talents, skills, and aptitudes of workers, contributes
mightily to our economic prosperity. When taking place within national
boundaries, this fact is rarely questioned. When it comes to an international
division of labor though, protectionists do not recognize many benefits,
whereas free traders do.
If there
were no economic benefits to the world’s consumers from a more international
division of labor, a free-market would tend not to produce it. In this case,
there would be no need for coercive protectionist tariffs. They would be
superfluous, trying to prevent something that the free-market wasn’t going to
make happen anyway. The fact is that the world’s consumers do benefit from an
international division of labor, which is why coercive tariffs are needed in
order to stop it.
How does an
international division of labor benefit the world’s consumers? The most obvious
way is through exchange of natural resources between countries. Different
countries have different natural resource make-ups. If residents of a country
with a lot of oil deposits are allowed to trade with residents of a country
with a lot of copper deposits, the residents of both countries are better off
because the resources are moved from the country where they are less valued to
the country where they are more valued. The oil producing country can get
access to copper, while the copper producing country can get access to oil.
This is by
no means the only way that an international division of labor is beneficial
though. In an advanced economic system, production often takes place in hubs.
Silicon Valley in California is a good example of a production hub, a place
where producers of a particular kind of good congregate in order to share
knowledge, attract workers, and increase their efficiency. If countries are
allowed to trade with one another, the whole world can benefit from each
production hub. Under national autarchy, each country would have to try to
replicate each relevant hub within their own borders, something which would be
wasteful and would result in less efficient hubs overall. In addition, for
whatever reason, different countries seem to produce goods in different ways.
For example, Japanese cars, American cars, and German cars are all different,
and there is a particular ‘national flavour’ for each kind of car. Under free
trade, these various ‘national flavours’ are made available to consumers
throughout the whole world, who have more choice in product as a result.
Finally,
free trade and an international division of labor mean that a much wider market
exists for each product than would exist under national autarchy. More competition means more choice for the
consumers, more pressure on each competitor to produce high quality goods
efficiently, and a significantly smaller chance of the monopolization of a
given product market by a single firm. It is much harder to achieve a monopoly,
or even a dominant position, in a world market than it is in an autarchic
national market.
2. More prosperity
results if capital and labor are allowed to meet each other freely:
Capital
goods (production tools), human labor, and land/natural resources, are the
three main classes of factors of production. These factors must be combined in
a specific way and in a certain proportion in order for production to take
place. The more suitable the combination proportion is to production, the more
efficient production becomes, and the more prosperity results.
For example,
imagine that a business firm owns a plot of farm land in the US and a plot of farm
land in India, each run by a contract farmer. The managers of the firm are
trying to decide where to use the new tractor that they just purchased. The
American farmer has a tractor, but says that he could use a second one in case
of problems with the first one and so that his son can help out in busy
periods. The Indian farmer is currently working his land with hand tools, and
says that he would be much more productive if he had a tractor to use. We will
assume that the two plots of land are of equal size, have equal fertility, and
are used to produce the same crop. In this case, it is likely that the firm
will decide to send the tractor to their Indian farmer. It will benefit his
production more than the second tractor would benefit the American farmer’s
production. Fundamentally, this is because the Indian farm has enough labor but
would really benefit from more capital, while giving more capital to the
American farm would be beneficial to a lesser degree, because a fairly
appropriate combination of labor and capital had already been achieved there.
As a general
rule, the more capital is invested in a region, the more productive labor done
in that region becomes. The more productive labor becomes, the higher real wage
rates employers will have to pay in order to secure the scarce labor that they
need. Employers need labor to combine their capital with in order to produce
value and make money. If the real wage rate offered is too low, the labor will
be combined with a more generous employer’s capital to produce value. The more capital
exists to compete for scarce labor to be combined with, the higher real wage
rates for workers the free market will settle on.
Under
conditions of free trade and free international investment, capital is allowed
to freely flow to locations where investors expect it can be combined with
labor and land/natural resources most productively. A specific production tool
(capital good) can only be in one country at a time. Either the tractor is
invested in India, thereby contributing to raising Indian real wage rates, or
the tractor is invested in America, thereby contributing to raising American
real wage rates. Thus, the short-term interests of workers in different parts
of the world are tied to these capital flows.
Leftists
draw curious conclusions from these facts. On one hand, they profess to be
deeply concerned with the well-being and ‘economic development’ of people
living in poor countries. On the other hand, whenever an American company
decides to invest some of their capital in a poorer country, leftists denounce
them for not caring about ‘American industry’ or the ‘American worker’. As I
said though, the capital cannot be in two places at once. Either it is raising
the real wages of workers located in India or it is raising the real wages of workers
located in the US. If leftists really cared about raising the standards of
living of poor countries and about economic egalitarianism, they would applaud,
not condemn, investment by American companies in poor countries.
Say the
protectionist does not really care about the well-being of poor countries or
about economic egalitarianism though? What if he is concerned with the negative
effects on the real wage rates of American workers that capital flows to poorer
countries might have? Here, I must admit that the capital flows will probably
result in a short-term drop in American real wages. I say short-term because if
free-market, international allocation of capital prevails, capital will tend to
be invested in the places with the best labor and land conditions, which will
result in production being carried on more efficiently. More efficient production
translates to gains for the world’s consumers, who can now buy these products
for a lower money price due to their greater supply. The American worker who
experiences short-term pain will thus benefit in his capacity as a consumer,
and after a while of more efficient international investment and production, he
may well benefit as a consumer more than he lost in his capacity as a producer
(worker). If protectionism had prevailed instead, the workers in the poorer
country, now denied access to the capital that would have came their way under
free trade, remain just as poor, without any worldwide consumer benefit being
reaped from free international investment.
3. Correlation does not
equal Causation, alleged Counterfactuals do not equal Evidence:
A favoured protectionist mode of argumentation goes something like this:
‘Japan, Taiwan, and South Korea are countries who went from poverty to
affluence in the 20th century. They were only able to do so because
their governments engaged in intelligent industrial policy (subsidizing certain
industries at the expense of others), and knew when to ‘protect’ their
countries against foreign competition so that their industries could develop.’
Here, we have a correlation between rapid economic development and certain
protectionist policies being adopted. At the same time though, the governments
of these countries did not suppress free market forces during their periods of
rapid growth as much as other countries who did not develop as fast did. Here,
we have another correlation, this time between rapid economic development and
free market forces being given sufficient leeway to operate.
With these
facts, the statist protectionist could argue that the development happened
despite these free market tendencies, not because of them. On the other hand,
the libertarian free trader could argue that the development happened despite
the protectionist policies, not because of them. Which interpretation is
correct? I see no possibility of answering this question at all decisively
through historical fact grubbing alone. Rather, we need to consider the
policies under consideration from the perspective of economic theory, and then
see which interpretation makes more sense, in the light of what economic theory
has to say on the matter. The preceding two principles in this article
represent an attempt to do just this, although a lot more could be said on the
subject. The point is that without an explanation from the perspective of
economic theory, we need not accept the protectionists’ interpretation of
economic history.
4. Other institutional
conditions equal, national borders are just lines on a map:
One thing to
always keep in mind is that nation states are not relevant units of analysis in
economic theory. The reason is fairly obvious: they can vary immensely in size,
from a city state such as Singapore to a giant, populous country such as China
or the United States. Thus, when evaluating protectionist arguments, we should
always keep in mind that there is nothing magical about a ‘country’. And if
not, then how far does the protectionist seek to push autarchy? While a
protectionist may seek near economic autarchy for the United States, they might
think twice if they were making recommendations for Singapore. No protectionist
has ever clearly answered the question of what minimum size a country needs to
be in order to effectively seek the ‘national economic self-sufficiency’ which protectionists
are so fond of.
This
consideration also applies when thinking about history. Protectionists claim
that in order for a country to develop economically, it must be protected
against the competition of countries with established industries until the
developing country produces established industries of its own. But now, let us
now consider the economic history of the western United States. The eastern
United States already had developed manufacturing industries when white people
settled the western states, and railroads were soon built to make the transport
of these products cheaper. Under the US constitution, interstate tariffs were
not allowed, thus trade between the western and the eastern United States was mostly
free. If the western United States were a different country than the eastern
United States, then according to protectionist theory, the western States
shouldn’t have developed economically due to the competition of the already
established eastern industries. The fact is that the western states did develop
economically though, and they even developed manufacturing industries of their
own.
This example
is not brought up often in the free trade versus protectionist debate because
the western United States and the eastern United States were in fact the same
country. But would it have been inconceivable for them to have been two
different countries who just signed a long-lasting free-trade agreement with
one another? There are many smaller countries in the world than the western
United States, countries for which protectionists recommend autarchic policies.
If protectionist policies are not necessary for this kind of inter-country
regional economic development, then why would they be necessary for countries
that are smaller geographically than these regions?
5. The drive for autarchy leads to war:
Under a
regime of free international trade and free international investment, national
borders do not matter as much as they do in a protectionist world. This is because
under free trade, production is carried on with the world’s consumers in mind,
rather than just the one country’s consumers. Under free trade, it probably wouldn’t
matter to a consumer in Maine whether he got his timber from a New Brunswick
forest or from a Minnesotan forest, even though the former would come from
Canada and the latter from the United States. The benefits from the
exploitation of land and natural resources are available to the consumers of
the world, rather than just to the consumers of the country in which they are
located, as is the case under protectionist autarchy.
In a world
of autarchic or near-autarchic nation states, capturing land and natural
resources and incorporating them into the nation states through violent
conquest becomes beneficial to the consumers in that nation state. After the
conquest, they are able to access the benefits from a larger supply of land and
natural resources. If some natural resources cannot be found in the vicinity of
the nation state, there is pressure for imperial colonies to be established in
regions of the world where these resources are located.
This is not
just a theoretical description; it is what actually happened in the late
nineteenth century as the European nation states/empires started adopting more
and more protectionist and expansionist policies, arousing hostilities which
contributed to causing the First World War. Protectionist policies were pursued
especially vigorously in the 1930s, the period leading up to the Second World
War. In turn, one of the Nazis’ avowed goals was to capture more Lebensraum (living space) and natural resources
for the benefit of the German people. Would such a goal have been as popular in
a world characterized by free trade and free investment? Very unlikely. Thus,
free trade is a force that contributes to international peace, while
protectionism is a force that contributes to international hostilities.
6. One cannot approach
an ideal condition in the real world if one does not try:
Many who
sympathize with protectionism reason as follows: ‘free trade sounds great in
theory, but in practice, no country will agree to abide by the rules of free
trade. The strong countries will pursue protectionist policies if they believe
it is in their interest to, while hypocritically forcing weaker countries to
open their borders to all imports from the strong country.’ Now, it is true
that such a situation is not ideal, although it is not true that two bad
policies (stronger countries and weaker countries adopting protectionist
policies) make a good policy. But in response to such a situation, we should
try to think of a way of bringing the real world closer to the ideal, rather
than just giving up by proclaiming free trade to be only good ‘in theory’, but
impractical in the real world.
As an
example, allow me to present an idea for your consideration: An international organization known as the
World Trade Authority (WTA) is to be established. Under the charter of the WTA,
it would specify that there are to be automatic reciprocity arrangements
between countries with regards to tariff policies, and that tariffs can only be
levied as a uniform percentage of sales cost for all products, no differential
rates depending on the product. Thus, if the Hong Kong government decides not
to impose tariffs on US products, the US government cannot impose any tariffs
on Hong Kong products. If the US government imposes a 10% tariff on Canadian
products, the Canadian government cannot impose a tariff higher than 10% on US
products (though they may opt for a lower rate if they so choose).
Any tariffs
that countries choose to impose are not to be collected by individual countries,
but by WTA personnel. Any funds collected will be administered by the WTA, and
used to fund basic scientific research, published in the worldwide public
domain, or to fund international space exploration missions. All of this will
be contained in the charter of the WTA and cannot be changed by WTA officials.
It is the
hope that under this arrangement, countries will be much more hesitant to
impose tariffs than they are now. Any tariff money collected will not flow into
the coffers of the government who imposed it, but into the coffers of an
international organization. Any tariff imposed to ‘help’ the country’s domestic
producers will end up costing the country’s exporting producers, who must now
face higher tariffs abroad as a direct, automatic result of the tariff policy
adopted. I believe that a combination of these two factors will make
protectionist policies much less popular, and would thus allow the world to
approach the free trade ideal in a way that is fair to all countries. I think
that this approach would be superior to just internationally mandating free
trade for all countries, primarily because it is less heavy handed and violates
the sovereignty of individual states less.
Thus, next
time you find yourself considering the merits of protectionist arguments and
policies versus free trader arguments and policies, I hope that you will keep
these six principles in mind. They may not refute the case for protectionism in
each and every instance, but I think that they should definitely weaken its
appeal overall.
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