“Globalism began as a vision of a world with free trade, shared prosperity, and open borders. These are good, even noble, things to aim for.” – Deepak Chopra

Free Trade or Trade Wars?

The Facts Are Clear

Tariffs are meant to protect local business and their employees from “unfair” foreign competition. By imposing a tax on inexpensive imported goods, they remove the price incentives for buying them and increase the consumption of US products.

So if, for example, it costs $10 to make a pair of sneakers in the US and only $5 in China, you can theoretically even the scale by imposing a 100% duty on sneakers made in China. Since both sneakers now cost the same, American sneaker manufacturers (and their employees) are “protected” from “unfair” Chinese competition and keep their jobs.

That’s the basic idea. And if you are concerned only with US sneaker companies, it’s a strategy that makes sense.

But, in fact, the US footwear industry has had tariff protection for 90 years, ever since the Smoot-Hawley Tariff Act of 1930 went into effect. And as Alexander Green pointed out in a recent issue of Liberty Through Wealth, the tariffs that were employed so aggressively during the 1930s made the economic problems of that era much worse.

What happened then is what is happening now. The US-imposed tariffs made formerly cheap consumer products more expensive. This reduced the spending power of US consumers. At the same time, foreign countries responded by putting tariffs on US goods. And that made US goods less attractive overseas. Prices increased on both sides, slowing trade and eating into the GDP. Ultimately, the world economy contracted by 25%.

Green calls this “the economic version of mutual assured destruction.”

The Case for Free Trade 

The original argument against tariffs and other trade barriers was made by Adam Smith in The Wealth of Nations almost 250 years ago. Smith’s theory was that free trade produces the maximum economic benefits by rewarding businesses, industries, and countries that can produce superior products at the least cost.

From the point of view of a single country, there may be practical advantages in trade restriction, particularly if the country is the main buyer or seller of a commodity. In practice, however, the protection of local industries may prove advantageous only to a small minority of the population, and could be disadvantageous to the rest.

Here’s an example that anyone my age can remember.

When, 50 years ago, Japan began selling automobiles to Americans at a fraction of the price of comparable US-made cars, the US auto industry charged Japan with unfair practices, predicting that unless tariffs were imposed, hundreds of thousands of Americans would soon be unemployed and the economy would tank.

That didn’t happen.

Initially, US auto manufacturers lost a huge share of the market. But then, forced to compete with the Japanese, they figured out how to improve the quality and cost of their own cars. And those that survived did very well. Meanwhile, millions of American car buyers enjoyed the equivalent of a big raise in income, and were able to apply the money they were saving on cars to other goods and services.

As a result, the US economy grew and millions of new jobs were created. The net result of not imposing tariffs was a huge economic gain.

This has been the history of tariffs and trade protection for many years. A 2017 study by trade specialist Scott Linciome showed that, with very few exceptions, trade barriers “imposed immense economic costs on American consumers, workers, and companies (more than $600,000 per year for every US job created) while also failing to open foreign markets or resuscitate protected American firms and workers over the longer term. In case after case, the jobs still disappeared, and the companies either went bankrupt or came back to the government for more help.”

What About China? 

Of all the trade relationships that Trump has been negotiating, those with China have been at the top of his list. China is now the second-largest economy in the world and the producer of a multitude of products imported by the US, including drugs and medical goods. Trump and his protectionist allies have argued that this is a danger to the US, and have initiated a trade war that they believe will make America great again.

Are they right?

From the Cato Institute, a conservative think tank:

Several recent studies have found that freer trade with China, for example, has generated, through increased competition and lower prices, hundreds of billions of dollars in US consumer benefits –  benefits that, according to economists Xavier Jaravel and Erick Sager, are the equivalent of giving every American “$260 of extra spending per year for the rest of their lives.”

Consumer gains from imports, in general tilted toward the poor and the middle class, are especially tilted toward them when it comes to goods that are made in China and sold at stores like Walmart. The magnitude of such benefits also debunks the well‐​worn myth that free trade is mainly about cheap T‐​shirts. Indeed, trade’s consumer surplus is a big reason that Americans today work far fewer hours to own far better essentials than at any prior time in US history.

Something that protectionists often forget is that many American exporters rely on cheap foreign imports to produce their own goods. According to the San Francisco Fed, almost half of US imports are parts and materials bought by American manufacturers to make globally competitive finished goods.

“These supply chains,” Scott Linciome says, “not only deliver modern marvels at amazing prices but also allow American companies and workers to focus on our high‐​value comparative advantages, such as professional services and advanced manufacturing, and leave the lower‐​value stuff to other countries and workers who lack such skills.”

They also create millions of American jobs in transportation, logistics, and wholesale and retail trade.

And finally, as economist Russ Roberts recently noted, “When we find ways to get more from less, that means more resources available to expand opportunities elsewhere in the economy. That expansion is unseen.… But it’s hugely important.”

The Bottom Line 

People that favor tariffs and other trade restrictions do so, Henry Hazlitt said in The Foundations of Morality, because they suffer from a sort of analytical myopia: They see clearly what’s right in front of them, but they can’t see the rest of the picture, which is much larger and ultimately more important.

Having free-trade has and always will result in driving some US businesses out of business and putting thousands of people out of work. But these losses will be more than compensated for by the creation of new businesses that will absorb most of the laid-off workers and many more. More importantly, by providing “the greatest good for the greatest number,” free trade has and will give all Americans better products, lower prices, and more cash left over to spend on more products and services, which will grow our economy overall.

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