The Case Against Protectionism; L. W. Reed

Lawrence W. Reed ONE THING we learn from history is that hardly anyone ever learns from history! Mistakes made in the past, some on a grand and glaring scale, have been repeated again and again. This is true particularly of the poli cies of central governments. International trade presently re flects the consequences of a mass lapse of memory. During the dark days of the Great Depression the world learned the painful lesson that rampant economic nationalism leads to a breakdown in world trade. The ((isolationist economics" of the 1930s did much to prolong and deepen the agony of depression. Much of the post World War II era was marked by a gradual return to relatively free trade. Barriers to Mr. Reed Is Assistant Professor of Economics at Northwood Institute In Midland, Michigan and Direc tor of the college's summer Freedom seminars. commerce came down. Goods and services crossed national borders once again. Between 1938 and 1970 the value of world exports increased thirteenfold, from $23.5 billion to $311.5 billon. 1 With this expansion of peaceful, voluntary, and construc tive activity came a wider division of labor and general prosperity.

The volume of world exports in the 1970s for the most part contin ued to grow. But a complicating fac tor emerged which has slowed the trend and threatens a return to the practices of the 1930s. The govern ments of the world are rapidly re jecting the logic and benefits of free trade. The specter of protectionism has reared its ugly head once again. Protectionism is the policy of using coercion to restrict the importation of foreign goods, allegedly for the good of the domestic economy. Gov579 580 THE FREEMAN October ernments around the globe increas ingly are employing it through higher tariffs, import quotas, ex change controls, and other artifi cial, political roadblocks. Market transactions in oil, soybeans, airline tickets, gold, bank loans and almost any other imaginable product or service routinely and hourly cross national boundaries on a vast scale, creating international markets and market prices. Both theory and his tory tell us that government policies which ignore this process or try to contraven-e it for national advan tage must have deleterious effects.

The list of new and proposed re strictions, however, is growing al most daily. For example: 1. American steel manufacturers have filed suits charging ~~unfair competition" from Japanese and Eu ropean steelmakers. 2. Florida tomato growers are de manding ~~protection" from Mexican tomatoes. 3. British manufacturers of greet ing cards are calling for limits on Christmas cards imported from the Soviet Union. 4. The French government re cently vetoed a French company's purchase of four Japanese container ships and offered instead a $40 mil lion subsidy to the company so it could buy ships built in France. 5. The governments of the Com mon Market countries caved in to demands that they restrict the im port of acrylic· fibers by American producers. 6. British shoe producers are ap pealing for import restrictions against shoes made in Brazil, Czechoslovakia, and Poland, claim ing that these countries are dump ing shoes in Britain.

7. The Italian car maker Fiat en listed government support to block a deal between Alfa-Romeo and Japan's Nissan Motors which would have given Nissan a foothold in the Italian market. 8. Auto makers and auto unions in the U. S. are lobbying for punitive measures against foreign imports. 9. Meanwhile, in Britain, the Transport Workers Union has launched a campaign to keep all for eign-built cars out of British sales rooms after 1980. One expert on the world economy estimates that more than 46% of world trade is controlled by govern ments through various measures up from 40% in 1974. Agricultural trade remains as fully controlled as ever, but more than 21% of trade in manufactured goods is now regu lated, up sharply from 13% six years ago.2 The vocabulary of the protection ists indicates the seriousness with which they regard the ~~problem" of imports. The use of melodramatic, sometimes military, terms to de1980 THE CASE AGAINST PROTECTIONISM 581 scribe what is essentially a network of peaceful, voluntary transactions is quite prevalent. The entry of goods from outside national boundaries is variously referred to as an ~~inva sion," an «assault," or a «flood."

Two hundred years ago when Americans cried ~~The British are coming! The British are coming!" it was a call to arms against an enemy who intended to do violence to life and property. Today, with equal fer vor in some quarters, Americans are crying «The cars are coming! The cars are coming!" as if a foreigner selling a car to a dentist in Peoria constitutes an act of aggression. Why Trade? In dealing with this problem, it is instructive to pose the question: Why trade? The answer should be obvious: people trade because they want to acquire something! To get it, they offer something in ex change. The fundamental, universal principle of free exchange is that both sides to the transaction bene fit. This principle becomes abun dantly clear when one recognizes that «nations" do not trade. A ~~na tion" is a collective term for some thing which exists only in the ab stract; it is not a living, breathing, acting, decisionmaking entity. Only individuals live, breathe, make de cisions, act, and trade. What think ing individual would freely and consistently give up what he has in order to acquire things he values less?

So it is that trade is a natural de velopment among men seeking to improve their individual welfare. It requires no central authority to de cree it; it simply requires that the central authority stand aside and not hinder it! It takes the use of force (fines, taxes, prison sentences) for trade to disappear. This use of force in international trade is gaining new respectability these days as an effective means to deal with what is known as ~~dump ing." A somewhat nebulous concept, dumping has been defined as selling abroad below the cost of production or at a price lower than that prevail ing in the exporter's home market. No attempt has been made in American anti-dumping law to de fine ~<cost of production." What seems concrete to the legislator is slippery to the economist, who uses many different concepts of ~~cost," includ ing ~~marginal," ~~average," and ~~total." Steven E. Plaut, in an excellent article entitled «Why Dumping is Good for Us," explains the morass that this definitional problem has created: The bureaucratic process through which foreign producers are judged to be dumping is cumbersome. Any American businessman who believes his company has been hurt by cheap imports can file 582 THE FREEMAN October a complaint with the Commerce Depart ment. After an investigation that can take up to eleven months, Commerce de termines whether goods have been sold at cCless than fair value." Simultane ously, the International Trade Commis sion decides whether such sales have been Uinjurious" to American industry.

Ifboth findings are positive, dumping in the legal sense is deemed to have oc curred, and anti-dumping duties are lev ied. There is no penalty to the petitioner if he loses his case, which encourages a blizzard offilings. 3 In a 1977 case concerning alleged dumping of Japanese steel plate, the U. S. Treasury decided that the Jap anese firms were indeed dumping their steel. A crucial part of the finding involved adding an 8% profit to the Treasury's rather capricious computation of the Japanese firm's costs. As Lindley H. Clark of the Wall Street Journal stated, CCIf steel makers have to get an 8% profit on everything they sell, many steel companies in the U. S. and else where have been dumping quite a great deal of steel."4 The Fallacy Exploded Anti-dumping levies are fre quently proposed in the name of ufairness" in order to cCequalize the conditions of production." The fal lacy embedded in that notion was exploded by the French economist and statesman, Frederic Bastiat, a century and a half ago: To equalize the conditions of produc tion is not only to obstruct exchange to some extent but also to attack exchange at its very foundations; for exchange is based precisely on the diversity, or, if you prefer, on the inequalities of fertil ity, skill, climate, and temperature, that you are seeking to eliminate. IfGuienne sends wines to Brittany, and if Brittany sends wheat to Guienne, it is because these two provinces offer different con ditions of production. Is international trade conducted on a different basis?

Moreover, to attack the inequalities in conditions that give rise to exchange and that account for it is in effect to at tack exchange itself. If the protection ists had the power to give legal effect to their convictions, they would reduce all men to the snail's life of utter isolation. 5 Bastiat's conclusion is inescap able: it is always beneficial for a na tion to specialize in what it can produce best, and then trade with others to acquire goods at costs lower than it would take to produce them at home. Certainly American auto makers, some of whom are urging their fel low citizens to CCbuy American" and the U. S. Congress to restrict im ports of foreign cars, understand Bastiat's principle when they act as CCbuyers" in the market. Finding a truly all-American car these days is virtually impossible. Almost every thing Detroit turns out contains components, from engines to brakes, which are made in other countries.

Purchasing these quality parts at 1980 THE CASE AGAINST PROTECTIONISM 583 the lowest price helps keep the American auto industry competi tive, regardless of where those parts originate. A Mercantilist Notion The charge that foreign manufac turers will ((dump" their goods until domestic competitors are forced to close and then raise prices to exploit a market devoid of competition dates back at least to the mercantilist era. In those days, it was believed that a domestic manufacturer had a ((right" to the local business. Those con sumers who would have preferred foreign products were prevented from buying them by restrictive leg islation. The result was a reduction in efficiency and competition, higher prices and fewer choices to the con sumer, and ultimately less attrac tive employment opportunities. Moreover, to quote Steven Plaut again, ... predatory dumping that reduces competition, like a domestic price war, involves a period of gain for consumers (or the consuming country) followed by a period of loss, as the emerging monop olist or oligopolists extract excess prof its. Dumping will result in a net na tional loss for the importing country only if the eventual loss outweighs the earlier gain. There has never been a well-documented case of net consumer loss resulting from a domestic price war.

Nor is there convincing evidence of a single case in which a country suffered a net loss from dumping. 6 Whichever definition of the word one employs, ((dumping" has some very rational explanations in its favor. What about the legitimate concept of variable pricing, for in stance, which involves different prices in different markets because supply and demand conditions are not everywhere identical? Sometimes dumping occurs with products which are no longer in great demand in home markets, left over when models change, or outlawed for domestic political reasons. At other times, a foreigner will at tempt to acquire a market share in another country by offering his wares at cut rate. Is that any differ ent from the corner grocery store which advertises toothpaste at 50¢ off in order to get customers in the store? Under other circumstances, a pro ducer may maintain a certain out put during an economic decline at home and sell his products abroad at ((below cost" because the alterna tive of closing for the duration of the decline would be even more costly: And because of price and ex change rate fluctuations which may take place over the life of a sales contract, the final sales price of im ported products could easily end up below cost or below the domestic price.

No free trade advocate should ever argue that free trade makes life easy for every domestic producer. While 584 THE FREEMAN October broadening the choices open to con sumers, it can simultaneously deny a producer the security of a guar anteed home market. But any policy of protectionism designed to provide that security will do harm to con sumers. Too often we see the good that restricting imports might do for a few and ignore the very real injury which would be inflicted on the many. There simply is no escap ing the fact that protectionism as an idea does violence to the logic of lib erty, peace, and economics. For the true libertarian, the lib erty argument against protection ism ought to be sufficient refutation by itself. Humans have a natural right to be free from arbitrary inter ference in their peaceful affairs. Trade restrictions disrupt and pun ish a peaceful, voluntary, and mu tually-beneficial activity. The legit imate function of government is to prevent and punish violence, not to initiate it. Protectionism must be regarded as a manifest violation of liberty, and its advocates must tell us what earthly goal their policy serves that is greater than human liberty.

Peace Through Trade The peace argument against trade controls was well summarized by Professor W. M. Curtiss in his book, The Tariff Idea: «If goods do not cross frontiers, armies will!"7 In other words, when people sever their economic ties, war becomes a distinct possibility. The course of events is painfully repetitious to the histo rian: one side raises trade barriers, the other retaliates, and the war of words subsequently degenerates into armed conflict. As long as people are free to reap the benefits of trade, they have a di rect and immediate interest in tran quil relations. But raise the tariff and close the borders, as was done in the 1930s, and relations deterio rate. What a nation cannot get through trade, it may attempt to take at gunpoint. For hundreds of years prior to 1815, Britain and France were at each other's throats. During this long period of antagonism, inhibit ing trade was national policy in both countries. After 1815, under the in fluence of the free trade notions of Adam Smith, the two countries re duced their barriers and have since enjoyed peaceful political relations.

This is no mere coincidence. So as each brick is mortared to the protec tionist wall, those who argue in its favor must tell us why peace is not important. Preventing free trade fails to make any economic sense as well. Though it may benefit (at least in the short run) domestic industries by reduc ing competition from abroad, the economic harm done by it is none theless real and identifiable. Just who is harmed economically 1980 THE CASE AGAINST PROTECTIONISM 585 by a tariff, for instance? First, all individuals who purchase a product upon which the tariff is levied. By the amount of the tariff, they now have less wealth than they would have had without it. They are that much poorer. Next, all those domestic busi nesses which now sell less to Amer icans because Americans must spend more for the ((tariffed" items. Then, all those domestic busi nesses which now export fewer goods to foreigners because foreigners earn fewer dollars in America to pay for those American exports. That's not an insignificant point if one consid ers that one out of every eight man ufacturing jobs in this country produces for export, one out of every three acres of American farmland produces for export, more than half of our wheat, soybeans, and rice is sold abroad, and almost one out of every three dollars of U. S. corporate profits comes from international ac tivities of U. S. firms.

And finally, everybody loses as the advantages of international special ization and lower cost production evaporate. The situation is even worse if, instead of a tariff, restric tions are imposed which deny entry of the foreign good altogether. Such detailed argumentation would not be necessary if men understood what the very concept of protectionism represents. In a nut shell, protectionism pulls people apart. It does not enhance coopera tion. It makes exchange not easier, but more difficult. It raises barriers, obstructions, roadblocks, and im pediments. It creates problems; it does not solve them. The progress of mankind has not come from making life more difficult! As the rising tide of protectionism hangs over the world like a Damo des' Sword, the centerpiece of American foreign policy ought to be a ringing defense of free trade. Other nations may persist in their primi tive policies of coercion, but let that not be cause for America to blowout the candle and leave us all in dark ness. Our motto must be, ((Let's im port their goods, not their folly." , -FOOTNOTESlUnited Nations, Statistical Yearbook, 1971, p.383.

2Philip Revzin, "Rising Barriers," Wall Street Journal, March 12, 1980, p. 1. 3Steven E. Plaut, "Why Dumping is Good for Us," Fortune, May 5,1980, p. 213. 4Lindley H. Clark, "Analyzing Imports," Wall Street Journal, Nov. 1, 1977, p. 20. 5Frederic Bastiat, Economic Sophisms (lr vington-on-Hudson, New York: The Founda tion for Economic Education, 1964), pp. 29 30. 6Plaut, p. 214. 7Curtiss, W. M., The Tariff Idea (lrvington onHudson, New York: The Foundation for Economic Education, 1953), p. 80.