The New Protectionism; P. Stevens

PAUL STEVENS The~'NEW" Protectionism .f" / THE TERM PROTECTION I ~ is most often used to mean int/~rnational trade restrictions. However, its root is implanted in government power to "protect" men from com petition and the free market. Thus, protectionism begins at home. Wage and price controls are a form of protectionism in that government tries to "protect" men from the effects of inflation. Ra tioning, too, is a form of protec tionism in that government tries to "protect" men from shortages. Both the domestic and interna tional aspects of protectionism arise from the same assumption: that government must enter the economy and make decisions for its citizens, which they allegedly Mr. Stevens is a freelance writer who special izes in the field of economics and monetary policy. 680 are incapable of making for them selves. When governments (politicians) attain the power to impose their ideas and values on other men do mestically, it is not surprising to see the same kind of protectionist policies extended into the interna tional economic and monetary spheres. And for the same reasons tha t men are not protected by protectionism internationally, they are not thereby protected domes tically.

Though our main concern may be with the international reper cussions of a recently renewed in terest in protectionism, the root of the matter lies embedded in domes tic political economic theory. It is at this root that we must begin pulling if we wish to reach a major source of today's economic and monetary problems.

1974 THE "NEW" PROTECTIONISM 681 The Essence of Protectionism The essence of protectionism is compulsion. For example, some men expect and demand that gov ernment· provide public programs, services, and favors to certainciti zens. This will allegedly protect men from an "uncertain world" and provide guarantees against the "harmful" consequences of "change." Such services as unem ployment benefits, welfare hand outs, health care, business subsi dies, and the like can be provided only at the expense of other citi zens; and government, by taxa tion, compels men to finance these services. Since men do not like taxes, the government resorts to inflation as a method of financing expensive programs. Thus, gov ernment must also compel men to accept paper money which govern ment controls and depreciates. But men dislike inflation, too, and usu ally demand that price rises be reduced or eliminated. Since to day's generally rising prices are simply an effect of inflation, there can be no cure to rising prices un less the artificial creation of money substitutes and credit by govern ment is halted.

In the guise of protecting men from inflationary effects, govern ment compels men to buy and sell goods at government-decreed prices and work for government decreed wages. Such political compulsion does not protect anyone it violates man's right to defend himself and his property. Clearly, buying and selling or working at voluntarily established and mutu ally agreeable prices does not en tail coercion. But the prohibition of such peaceful and voluntary ac tion is coercive. Controls on wages and prices, then, result in certain economic effects, Le., shortages. Men dislike shortages, and again, when social pressure mounts for government to protect men against these gov ernment-caused effects, govern ment enters the economy and im poses rationing. Men are then compelled to produce and trade at government-decreed rates, and they are told what they can and cannot do with their property.

Again, the call for· government ac tion against economic eff eets leads to compulsion (a loss of freedom) but not to a cure for the immedi ate cause of shortages - not to a cure for inflation combined with wage and price controls. Another .example of domestic protectionism is consumer protec tion. The result of freedom, free enterprise and free markets is economic diversity and an abund ance and variety of goods and ser vices for consumers to choose from. Not all goods and services are of the quality that consumers anticipate; some goods are of 682 THE FREEMAN November poor quality, others are better than expected. In a free society, the consumer must learn to shop in the market place. He can have no prior ex perience with or knowledge of many new products, and since the economic world is forever a chang ing and uncertain place to live in, a consumer must constantly de cide which actions best serve his self-interest. To help him make these decisions there are maga zines, books, and private organi zations supplying information on how to shop and what to buy.

If the consumer buys a product and is disappointed with it, he will not buy it again. If the product ,harms him in any objectively mea surable waY,he can sue for dam ages. But when the government attempts to "protect" men from purchasing shoddy or "poten tially" harmful products, economic diversity is reduced and profit (the incentive to produce) dwindles. Government thus gains a monop oly on "shopping sense", i.e., what politicians consider shoddy or "po tentially" dangerous merchandise. This kind of regimentation sub ordinates the majority of men's freely chosen values to the values of a few "omniscient" politicians. This leads to injustice because the government is necessarily arbi trary. This leads to a reduced standard of living as the market place is constricted and confined to government-determined "stand ards" of what should be produced and its quality. Again, the act of prod ucing and selling products or services does not entail coercion, but preventing peaceful and vol untary production, sales, and pur chases is coercive.

In all forms of domestic pro tectionism where the government enters the economy to protect men from the effects or "potential" effects of an economically uncer tain future, there exists govern ment-initiated force, Le., govern ment's attempt to subordinate the consumer's judgment and action~ to the judgments and decrees of politicians. This is the antithesiE of government's proper role - the protection of individual rights, The protection of individual rights means protection from compulsion, be it initiated by private citizens or government agencies. Domestic Protectionism At Work All economic controls and regu lations are established in the name of protecting some men, yet all economic controls and regulations result in the loss of freedom and economic well-being for all men. As decisions, judgments, and choices are taken out of the hands of individuals and regimented by government, the economy shifts from a market economy to a gov1974 THE "NEW" PROTECTIONISM 683 ernment controlled economy; and to control an economy means to control men.

One of the great economic bene fits of a market economy is the efficient production and dish'ibu tion of goods and services. Do mestic protectionism (Le., con trols and regulations over produc tion, prices, wages, and consumer choices) strangles the economy to the point of economic stagnation - depression. Domestic protectionism has al ways existed to some extent in the United States, but its recent alarming growth comes with the assumption that government has an obligation to care for and pro tect its citizens economically. The movement toward economic pro tectionism is not new - it has been developing most rapidly in this country since the turn of the century.· The signs of economic deterioration are becoming more and more visible domestically, yet the results of applying protection ist policies internationally are only now surfacing. Governments have so completely adopted the political philosophy of controls and regulations to "solve" domestic economic prob lems, that the same kinds of con trols have been extended without question into the international economic and monetary spheres.

But, just as domestic protectionist policies have the power to cause a depression na tionally,in terna tional protectionist policies can cause a worldwide depression. To understand the 'nature and poten tial danger of international pro tectionism, a brief history of its development and the role. it played in contributing to the Great De pression is in order. International Protectionism At Work The world has never achieved a period of free, unregulated inter national trade. It has, moreover, vacillated between periods of greater freedom in, and greater restrictions on, trade. It is not merely coincidental that freer in terna tional trade was more prev alent during times of greater domestic freedom, and that re strictions on international trade \vere more prevalent during times of greater domestic statist con trols and inflation. Prior to the 18th century move ment toward greater individual freedom, the trade policies of the world developed as an extension of statism. The years from 1500-1700 were in general an era of mercan tilism, which dominated trade pol icies of governments. Both domes tic and international economic ac ti vity during this era can only be described as stagnant.

But during the 18th century 684 THE FREEMAN November there developed a genuine intellec tual movement against statist domination and for greater per sonal and economic liberty. From the works of a series of writers, there began a movement toward laissez-faire which resulted in po litical revolution (culminating in the Industrial Revolution). The free-trade movement emerged from men's interest in greater individual liberty. Mercan tilist theories which had domi nated the policies of state were thoroughly and expertly demol ished. By the 1800's, the world's major powers embraced both a philosophy of freer domestic trade and greater political liberty. This led to an unprecedented expan sion of world trade and produc tivity and to over a century of peace between nations. Statism, fiat money, and protectionism had given way to capitalism, an inter national gold standard, and an era of international free trade.

But this transition was not complete. Statist principles were not entirely rejected; the gold standard was not free of govern ment meddling; and free trade was only more free - not fully free. These remnants of statism were not eliminated, so they con tinued to grow. Toward the end of the nineteenth century, statist trends began to again dominate the world - a condition which later led to abolition of the gold standard and free trade. The U.S., a bastion of freedom and a growing world power, proved no exception to the statist trend. Greater government intervention into the economy led to greater restrictions over domestic ex change. A growing populist move ment .urged government to engage extensively in economic matters. Inflationists began propagating massive government programs that would not likely gain popular support if financed through direct taxation. By the 1920's, government had gained total control over the issu ance of money substitutes and was using this power to finance new and ever-growing government pro grams. Although the gold stand ard was not officially abandoned, for all intents and purposes it be came non-operational. Meanwhile, international trade was faltering; the accumulated debts of major nations and the undercutting of gold flows (which, under normal circumstances, would lead to price equilibrium among nations), were creating serious international eco nomic and monetary distortions.

The Depression hit the world after only a relatively few years of implementing statist-inflation ist policies. And the political re sponse was a resort to greater do mestic and international protec1974 THE "NEW" PROTECTIONISM 685 tionism to "solve" the world's problems. In 1930, protective tariffs were raised to the highest level in United States history - an aver age of over 52 per cent on dutiable imports. Of course, foreign na tions retaliated with their own im port restrictions. As a result, be tween 1929 and the third quarter of 1932, the volume of world trade contracted by one-third while the gold value of world trade fell by nearly two-thirds. One of the main justifications offered for raising tariffs was to increase exports. Did the in creased tariffs increase exports? Not at all. In 1932, the volume of United States exports had in fact dedined by 53 per cent from the 1929 level. The trade "war" of the early 1930's is just one more elo quent illustration of how protec tionist measures contract world trade and reduce men's standard of living.

How could the world move to ward such an insane trade policy? How, after centuries of evidence on the vices of trade restrictions and the virtues of free trade, could such protectionist policies be re enacted into law? The answer is that when governments chose stat ism and inflation as a way to deal with social, economic, and mone tary problems domestically, they chose force as their primary method of dealing with men. And do mestic problems and policies soon enough became international pol icies and problems. In a time of emergency, good sense, reason, and truth became "impractical" nothing less than brute force would do. Protectionism, a world trade "war," and economic chaos were (and will always be) the product of this kind of thinking. Past folly and Current Nonsense Unfortunately, the lessons of history and common sense seem seldom sufficient to prevent a re currence of past folly.

Ask any economist if wage and price controls work or have ever worked. With rare exceptions, the answer will be, "No; wage and price controls are only a tempo rary panacea that attempts to deal with the symptoms of inflation rather than the cause and, at best, leads to economic dislocations and shortages." Ask if rationing is the best way to deal with shortages and, again with exceptions, the answer will be, "No; rationing re quires an army of bureaucrats and this is no substitute for the free market. It's expensive to ration, it's inequitable to ration, and it is economically dangerous to ration." Such policies as wage and price controls and rationing are not sci entific or reasoned approaches to problems, nor are they historically 686 THE FREEMAN November proven solutions. Why, then, are they forever plaguing men, like a recurring disease? The answer be comes apparent if one goes to the root of today's political action.

There he will find statism at work and a statist mentality to generate it. "The nation is in a crisis, in flation is raging, something must be done. This is an emergency!" Whenever one hears these words, he can be sure that new statist measures are about to be advo cated. The statist sees there is a pressing problem, but has no idea of the solution. He offers, with great confidence and moral indig nation, "something must be done," in place of exactly what should be done to end the emergency. He cannot be bothered to check into causes, scientific investigations, rational or historical evidence. His only concern is to forcibly prevent men from doing whatever it is they're doing to cause a crisis. While rationing and other re lated proposals are being advo cated to meet problems such as the energy crisis, the one potential proposal that has the power to do perhaps the greatest economic harm lingers in the background. It is rarely mentioned by politicians, yet is· a very real threat to the world. The threat is that politi cians may repeat the past follies of the 30's, and by dramatically increasing trade restrictions, throw the world into a new trade "war."

Toward a "New" Era of Protectionism Despite much talk about (and even some action on) reducing trade and money barriers, there is a growing protectionist mood in the world. The European Econom ic Community (EEC) has been hailed for its increased free trade policies, but these policies are of dubious merit. While trade be tween EEC nations has been lib eralized, trade policy between the E E C and other nations has changed little since World War II. Further, the kind of Hfree" trade that exists within the EEC is highly suspect: it is enveloped in controls over men, money, and markets in an attempt to legally fix exchange rates and support con trolled prices. The EEC has for years shown artificial export surpluses, by re tricting imports, discouraging for eign investment, and undervaluing their currencies. EEC intervention to keep the value of its currencies at unrealistic rates indicates the true sentiment in Europe. Europe demands from .the rest of the world both the right to inflate and to export, but governments refuse to allow their citizens the use of export revenues to freely import foreign goods.

Japan likewise· has erected in1974 THE "NEW" PROTECTIONISM 687 surmountable trade barriers for many goods, and has imposed a protectionist web of exchange con trols. Meanwhile, the United States imposed a temporary 20 per cent surcharge on all foreign goods at the first sign of "trouble" in 1971. The fact that this surcharge has ended would be encouraging ex cept for another fact: Congress granted the President power to determine trade policy, which means the power to decrease or increase tariffs and quotas as he sees fit. In the past, trade "wars" have been sparked by currency depreci ation and the attempt to legally fix exchange rates. This caused great distortions and disequilib ria, which resulted in devaluations, then in a series of "competitive" devaluations, and finally in a trade "war" as all nations attempted to "protect" the home industries from competition. While it is cer tainly possible that a trade "war"

could result once again from the mone:tary turmoil of "competitive" devaluations and the attempt to artificially increase exports and restrict imports, a new factor on the horizon warrants examination: the energy crisis. The Mid East's oil embargo rep resented a major step toward pro tectionism. Oil is now often re ferred to as a "weapon." The export ban on oil led to a renewed awareness of the importance of energy and natural resources. The energy crisis began to cause short ages of goods .throughout the world, and the massive amounts of existing fiat money (plus the new ly created fiat money printed to "stimulate" national economies) resulted in hoarding of goods and to skyrocketing prices. Call for Intervention It is always in this kind of panic atmosphere that protectionists step forth: "The government must do something! We must preserve our natural resources and combat the threat from the Mid East."

Governments have not yet serious ly increased protectionist restric tions, but the mood in the world is ominous. Here are a few of the questions that nations must face: How will nations obtain more oil? Will they encourage the domestic exploration and production of oil by decreasing restrictions on pro duction domestically, or will they increase international protection ist policies and restrict exports of scarce goods? How will nations pay for the higher-priced oil they must obtain? Will they increase their national money supplies (in flate) to pay for oil, will they re strict imports of other foreign products in order to run artificial trade surpluses, or will they re688 THE FREEMAN November duce trade barriers in order to achieve maximum exports? What will become of the billions of dol lars that flow to the oil-abundant Arab nations? Will Arabs be al lowed to freely invest and spend this money in other nations, or will they be discouraged from doing so by "new" protectionist policies? How will the balance of payments problems (the huge deficits of oil importing nations) be handled? Will the currencies of defici t nations be free to seek their market level, or will they be legally prevented from doing so?

The answers to these questions and others like them will help de termine whether the world em braces a new era of free trade or a new era of protectionism. The potential· sparks that can kindle a new world trade "war" are numerous. Governmental re fusal to allow the free export of natural resources is one potential spark. When nations jealously pro tect natural resources it is only a matter of time before other na tions retaliate with similar pro tectionist measures. The attempt to artificially increase imports and decrease exports - or vice versa never increases natural resources; it only serves to reduce world trade and contract the amount of imports on which nations depend. Attempts to pay for higher priced oil by means of inflation is another potential spark. The· Arab nations are very conscious of mon etary depreciation and ·thus will not tolerate massive artificial in creases of money. This can only add an inflationary strain to an international monetary system that is already being strained to the breaking point. Similarly, any attempt to artificially devalue na tional currencies in .order to stim ulate exports or artificially revalue national currencies in order to pay for oil and "solve" balance of pay ments problems, can only result in "competitive" devaluations or re valuations by other nations. And this could lead to the kind of mon etary turmoil that sparked the trade "war" of· the 30's.

What can be done to head off or combat the threat of a world trade "war" ? Men must speak out against iTrational fears with ra tional arguments. It must be urged that nations begin to decrease re strictions on men, money, and markets. This is the only moral and economically practical course of action open to nations. Men must realize that the at tempt to solve economic problems by imposing progressively greater protectionist policies will fail as it has always failed, and that it has the potential of culminating in a world trade "war." Such a trade "war" will not end adverse eco nomic effects such as shortages, or 1974 THE "NEW" PROTECTIONISM 689 balance of payments problems, nor will it stimulate exports or imports. It will only multiply present prob lems, just as past problems were increased during the trade "war" of the 30's. One point must be stressed: while it appears the world is cer tainly moving toward a "new" era of protectionism, a trade "war" is not inevitable. It can only occur through submitting to ignorance and fear and can be averted by combatting statist-inflationist pol icies in general and protectionist policies in particular.

Toward a New Era of Intellectualism The free trade movement did not come to the world accidentally - it came as the result of applying reason to the political and eco nomic sciences, i.e., as a result of moving toward capitalism. Like wise, protectionism did not come to the world accidentally, but re sulted from increased coercive government power and men's fail ure to properly challenge that power, i.e., as a result of moving toward statism. The proper way to suppress government power in a free soci ety is with ideas. One good idea by one thinking individual is worth more than any number of guns and laws aimed at forcing men to blindly take actions. It is far easier for men to identify with common sense and facts than with blind force. Men are recep tive to reason, and as such are likely to learn, to correct errors of thinking, and to act rationally and productively. When men are com manded to obey laws, they are more likely to 1ge confused, frus trated, apathetic or rebellious.

This nation was born as the re sult of an intellectual revolution. Ideas on liberty led to economic heights previously inconceivable. Then came the anti-intellectual "revolution" of the twentieth cen tury, and with it regression to ward ignorance, concern for ef fects rather than causes, and the politicaleconomic expression of such regression: increased statist controls. The result of the anti intellectual "revolution" has been greater economic and political problems and the beginning of a steady decline in the material well being of United States citizens. But not all men are satisfied with their political leaders and the stale, meaningless "answers" sup plied by today's "intellectuals." In creasingly, men question the cred ibility and worth of their leaders' statements. There may be only a handful of true intellectuals today, but from these men of reason, and out of the dissatisfaction and questioning of millions of Ameri cans, there can evolve a new in tellectual revolution.

690 THE FREEMAN November A new era of protectionism may well be awaiting the world; but this time, to combat it, hopefully to avert it, and perhaps to end it once and for all, a new era of in tellectualism may also be awaiting. It has always been character istic of Americans that when they are given the choice between force and reason as a way of life, they will in the last analysis choose reason. The main task today is to rationally speak out against the government initiated coercion that fuels economic controls and regu lations, so that Americans will be provided with that choice. t) IDEAS ON LIBERTY "Why clon't you propose something constructive?" FROM TIME TO TIME, readers of analysis urge upon me the espousal of some program they are pleased to call "constructive." ... Everyone of the proposed refOrlTIS has something to commend it, while the sincerity of the proponents makes one wish that they might succeed. The fact remains, however, that the reform invari ably rests its case on the good-will, intelligence and selflessness of men who, invested with the power to do so, will put the reform into operation. And the lesson of history is that power is never so used.

Never. I am convinced, on the other hand, that all of the evils of which these honest people complain can be traced to the misuse of power, and am therefore inclined to distrust political power of any kind .... The only "constructive" idea that I can in all conscience advance, then, is that the individual put his trust in himself, not in power; that he seek to better his understanding and lift his values to a higher and still higher level; that he assume responsibility for his behavior and not shift his responsibility to committees, organizations and, above all, a superpersonal State. Such reforms as are necessary will come of themselves when, or if, men act as intelligent and responsible human beings.' There cannot be a "good" society until there are "good" men. ANALYSIS, July 1949 FRANK CHODOROV. Editor All Different GEORGE ELLIS ,CRITICS of the United States are quick to point out that ours is not a truly democra tic system be cause people are not aU on a level and alike. But when did democracy offer to guarantee the similarity of people or grade mankind down to a dead flat? Democracy declares that men, unequal in their endow ments, shall be equal in their right to develop those endowments.