Restructions on International Trade; L. von Mises

copyright by The Institute for Humane Studies. 554 Why, in the face of reasoned ar guments by leading intellectuals, do, restrictions to trade have such an appeal to lawmakers? In other words, who is it and what is it that moves the lawmakers to take such action? The cry for protection comes in many voices. A glove manufac turer resents finding imported gloves in the market. It is natural for any firm to take any legal steps available to sustain profits and remain in business. If a way can be found to eliminate this for eign competition, perhaps convince the government to raise some sort of barrier to the foreign gloves a tariff, or a quota, or an embargo 1971 RESTRICTIONS ON INTERNATIONAL TRADE 555 - then the glovemaker might be able to continue in business, com peting with domestic firms as al ways, but avoiding the foreign competitor. The glove industry may main tain a lobby in Washington to try to convince the lawmakers that unless protection is provided, thousands of jobs will be lost, un employment will rise, and com panies will go bankrupt. And it may all be true! At least it often is convincing enough to the law makers.

What happened to the logical argument of the economists who said protection hurts the consum er ? Well, the argument stands, but the consumer's voice is faint. What if it does cost a few pennies more to buy a pair of gloves? Com pared with the loss of a job or a failing company, this is nothing! Or so it seems to those seeking protection. We Accept Domestic Competition Now, suppose a domestic firm is in financial trouble, in no way caused by imports. Does it send a lobby to Washington and ask for help? Not ordinarily. In domestic trade, we accept the idea that a firm must compete without special favors. True enough, companies do fail; men do lose their jobs; but the consumer is not penalized by interventions that reduce production and make things cost more. If the failure of the Edsel auto mobile had been because of for eign competition, it might have been argued that a tariff on im ports would have saved the car and preserved thousands of jobs.

Had the maker been a one-product firm, it might have been saved from bankruptcy. But, no; it was a domestic firm that misjudged consumer acceptance of a product; and that was that! The Edsel is reported to have cost the Ford Motor Company $250 million. A more recent example is that of Corfa.m which the du Pont Com pany developed to compete with natural leather for footwear. After seven years and a reported $100 million, du Pont discontinued pro duction of Cor/am. Only the size of these write-offs makes these two items news worthy. Thousands of new prod ucts are tried each year, and there are many failures. Unless a com pany has other profitable items which will carry such losses, the company may fail, as many do. The testing of consumer prefer ences goes on constantly. Ordi narily, we wouldn't think of ask ing the government to prevent the failure of a given product. We ac cept such failure as one of the regulatory aspects of competition and the market. But let the compe tition be from a foreign country, 556 THE FREEMAN September even though it benefit consumers the same as domestic competition, and there arises a clamor to erect some sort of barrier to save jobs, or to save firms, or to build a fence around our high standard of living, or whatever.

Politics of International Trade The justifications for tariffs and other forms of protection in clude the arguments that they keep our wages high, prevent un employment, protect infant indus tries, help with national defense, prohibit trade with the enemy, dis courage dumping, and so on. Trade barriers or threats of trade barriers are often used in the formulation of foreign policy. "We will reduce our restrictions if you will do likewise." Or: "Let us reduce our restrictions against underdeveloped countries so that they can benefit from sales to us." Or: "Let us stop buying chrome from an African nation whose in ternal policies we do not approve." Among the reasons for trade re strictions must be included for eign policy. Or, as one author re cently stated, "trade policy in the United States is a political mat ter." But of all the pressures upon the members of Congress and the Executive to enact trade restric tions, few are greater than those exerted by business firms or associations representing business firms. Individual consumers who have the most to gain through the reduction or elimination of trade barriers, and who have voting power enough to elect or defeat any candidate for office, are prac tically power less in comparison with business lobbies.

An as illustration, note the re sults of recent attempts to cut back certain phases of defense spending. Now, the production of something to be destroyed in com bat obviously is worthless so far as contributing to the level of liv ing of a people is concerned. If those workers and resources were used to produce housing, build highways, provide medical care, teaching, plumbing,. auto repairs, and the like, then consumers would be that much better off. But let it be suggested that we shut down our war machine and the protests are deafening. Work ers will lose their jobs; companies will fail; the entire economy will suffer. Granted, there are difficult ad justments to be made. But the fact that a worker is not ,needed in an airplane factory shouldn't preclude his finding a productive job else where. One sympathizes with a worker in an industry that is be ing "wound down," especially in a one-industry community. In the re cent discussion of continuing re1971 RESTRICTIONS ON INTERNATIONAL TRADE 557 search and development of the SST, many in Congress, and many members of the press based their argument chiefly on the fact that thousands of workers would be disemployed and business firms would fail. The same arguments have been used in trying to main tain our outer space program.

Such arguments have a strong emotional appeal and carry con siderable persuasive force. Many of the same arguments are used to establish trade restric tions, and with equally disastrous economic consequences. Five Basic Principles In discussing foreign trade, it is well to keep in mind certain basic principles: (1) Trade between t,wo ind,ivid uals, entered into freely, always results in benefits to both parties. Otherwise, why should they trade? Wha t anyone else may think of their judgment is beside the point. (2) There always is a comparative advantage in producing some products and importing others. Produc tion costs in one nation may be lower than in another nation for every item produced in either na tion. But the people of these re spective nations may still find it profitable to trade with one an other. It is often thought that only nations like Great Britain or other maritime nations benefit by trade, simply because there are so many things they do not produce do mestically. True, the United States could close its borders to all im ports .and exports and still there might be a relatively high level of living for its citizens; but not as high as would be possible through trade with foreigners.

(3) Consumption is the sole pur pose of production. Adam Smith explained this nearly 200 years ago. Production is to supply con sumers' wants. It is not to make jobs, or to keep a business solvent, or to make one nation dependent on another. Naturally, some of these things happen as a by-prod uct of production and trade, but that should not be the objective. (4) Trade ordinarily will be most satisfactory to all concerned when individuals or their agents who have something to trade deal with other individuals or their agents who want the other si,de of that trade. Governments should be in volved as little as possible; first, beca use they are not concerned, and secondly, because there is al ways the temptation to use the trade for purposes other than satisfying consumers. If an individual in this country wanted to trade some of his own property for something offered by a Russian citizen, we would think little about it, knowing that each 558 THE FREEMAN September party to the trade considered he was better off than before. But if government enters one or both sides of such a trade, there is often the suspicion, sometimes justified, that one party is seeking a military or political advantage.

(5) Imports require exports. For eign trade appears complicated be cause it often takes an indirect or roundabout route through sev eral nations. In addition, monies of several nations with complex exchange rates are usually in volved. But it finally boils down to the fact that a nation which im ports must export something in exchange. Many people appear to believe that we might eventually be inun dated with imports to the extent that practically all production in this country, all jobs, all business firms, might be wiped out. They fail to see that foreign· goods can not continue to come into this country unless something goes out to pay for them. The Reciprocity Argument A popular argument in support of tariffs is that we will reduce our obstacles to trade if other na tions will reduce theirs. In other words, we must do it together. The lack of understanding of international trade and the effect of restrictions is reflected in this press release in The New York Times for March 31, 1971. "The European Economic Community decided today to give generalized trade preferences to developing coun'tries beginning July 1." The implication is: "If you are poor, we will let you sell to us." The truth, of course, is that voluntary exchange, whether the partici pants be rich or poor, benefits the buyer as well as the seller. Had the "developing country" previ ously been subject to trade restric tions, then, of course, it would gain from the relaxation of those restrictions. But the increased trade also would be of benefit to the "affluent" buying nation.

When diplomats from different countries discuss the reduction of trade barriers, it almost always has the appearance of a high-level bargaining session. How little can we give up in reducing our restric tions on imports in order to gain some reduction in their restric tions against our exports? It never seems to occur to them that we stand to gain by opening our gates entirely, whatever the other nation does. Certainly our consumers would stand to benefit. But, always of diplomatic concern is the effect on firms and on jobs. A great deal of consideration is given to "most favored nation" re ductions. If we give one nation the "benefit" of our reduction, then all nations are entitled to this 1971 RESTRICTIONS ON INTERNATIONAL TRADE 559 great benefaction. Actually, uni lateral action in reducing our re strictions against imports would benefit our consumers, and might end most of the seemingly endless bargaining over reduction by other countries in return.

Who knows? It might soon be discovered that trade policy should not be a political issue but that free trade between citizens of all nations, rich and poor alike, bene fits all consumers. How Can Free Trade Be Achieved? Politicians, in the legislative as well as the executive branches of government, respond to pressures of various kinds from their con stitutents. So long as the pressure for trade restrictions exceeds that for free trade, we can expect re strictions to continue. Considerable attention just now is directed at textiles, especially the textile trade with Japan. Had such trade been strictly between in dividuals without the intrusion of governments, many of our present problems would have been avoided. Following World War II, our gov ernment made concessions to help rebuild the Japanese economy. It delivered cotton for less than our own textile manufacturers had to pay for it; it practically gave new textile mills to the Japanese. Little wonder that American textile manufacturers resented this unfair competition and sought to re strict imports from Japan. Now, a quarter of a century after the war, while the effects of. that kind of "foreign policy" may have worn off, the arguments against Japa nese textiles persist and carry weight with legislators.

Over the years, many economic injustices, including misuse of capital and labor, have resulted from trade restrictions. To remove them all at once and go back to free trade is bound to require dif ficult adjustments on the part of business firms. No wonder they try, in any legal way they can, to protect any remaining shelters or even increase their protection. Who Speaks for the Consumer? From the standpoint of a man ... ufacturer, the so-called benefits of protection and disadvantages of free trade are short-run and dis appear once adjustments to the changed situation are made. The firm still must compete with other domestic firms as well as with im ports, even if over a tariff wall. But it is these short-run adjust ments that the legislators hear about - the layoff of workers, the reduced profits, and even business failures. The longer-run genuine benefits of free trade to consumers arouse little excitement. This is especially true in a country like the United States where imports 560 THE FREEMAN September are a relatively small part of all trade. Who is there to speak for the consumers? The professional protectors seem so interested in auto seat belts, unit pricing, pack aging, advertising, truth-in-Iend ing, and ecology that they aren't likely to get to the matter of free trade for .some time.

Most families present a com bination of consumer and producer interests, interests which may seem to be in conflict with regard to trade restrictions. For example, suppose two members of the fam ily work in the local textile mill. The most important day-to-day problem to the family is making certain that these two mill work ers are employed and bring home their weekly pay checks. So, if they are convinced that imported textiles may eliminate their jobs, then they are apt to be protection ists. Attesting to this is a story in a recent Sunday supplement head lined "Twilight of a Textile Town." In this article, it was re ported that a mill which had been the town's leading industry for 70 years went bankrupt and put 844 textile workers out of work. Fur thermore, "50 textile plants in the South have shut down since 1969. The Department of Labor has esti mated that 27,200 Southern textile workers lost their jobs in 1970 alone."

This is a serious situation, apparently calling for a political solution. What is not so obvious is that even if all imports of textiles were stopped, after a short period of adj ustment, domestic firms would find strong competition with each other and marginal firms would continue to face failure. Adjusting to Change An illustration of how adjust ments can be made to a declining industry is related in the New England Letter for April, 1971, published by The First National Bank of Boston. The study shows how, in the early 1950's, many tex tile mills were liquidated and a basic weakness was shown in the leather and shoe industries. Some of the textile mills are now among those in trouble in the South. Had the problem been handled with political solutions, no doubt New England textiles could have been "protected" in a way that would have kept the mills going with employment and jobs as usual.

But, instead, New England in dustry changed, in part, to the manufacture of transportation equipment, electrical equipment, and instruments, to name only three. This new type of manufac turing is more export-oriented and enjoys a better international com petitive position. It has the greater "comparative advantage" that economists have been talking 1971 RESTRICTIONS ON INTERNATIONAL TRADE 561 about. It uses higher skills from its workers, and the "value added in manufacturing" is relatively high. Thus, in the long run, the return to labor stands to exceed what it was and what it might have been in the production of tex tiles, shoes, and leather goods. True, some of the newer types of industry have been closely tied to government defense contracts, and with a recent cutback, unemploy ment increased. However, a basis for export and for increased pro duction for consumers is there. Adj ustments to changes like these are often difficult and must not be passed off lightly. But such changes in an expanding and progressive economy are always going on. Attempts to stop them with artificial restraints are cer tain to be more painful than is the process of adjusting.

Man Must Choose Between Freedom and Protectionism As observed earlier, most econ omists agree that protectionism is unsound. The consumer is served best by allowing people to trade freely with each other, not only domestically but world wide. But restrictions continue to persist, placed there for political reasons. The incentive to erect barriers to trade is a political response to pressure from individuals, groups of workers, industrial groups, and others who think they will gain from protective measures such as tariffs, quotas, and the like. Because the consumer is the dis advantaged party, it may be argued that the solution lies in his education. But as previously shown, the consumer's stake as consumer of a protected product often is much less important to him than his job as a producer of a potentially protected product. Therefore, it seems doubtful that consumers, as a group, can be effective in bringing political pres sure on lawmakers to offset the pressure for protection exerted by other groups.

After two centuries and more of expounding the advantages of free trade, it must seem trite to say that education must be relied upon to bring about a correction of the wrongs caused by protec tionism. Nevertheless, there seems to be no short cut. While the con sumer, qua consumer, must be in cluded among those educated, it would· seem that emphasis should be placed on convincing lawmakers of the advantages of free trade so that they can better withstand the pressures put upon them by their constituents who think they need and deserve protection from com petitors. t) TO Rbdicate or Not... LEONARD E. READ f\f\f\f\ LIFE is a process of selection and rejection; knowing what to re nounce in life and what to em brace are distinguishing marks of a wise man. My theme is Mises and his exemplary achievements in this respect - as much to be noted and honored as the economic enlightenment on which his fame so solidly rests.