Free Trade vs. The Folly of Protectionism

by | May 21, 2020 | Trade

Protectionism fully implemented across all industries would mean a lower standard of living, because it would result in capital and labor unnecessarily being diverted into the production of goods that could more economically be produced elsewhere.

Protectionism fully implemented across all industries would mean a lower standard of living, because it would result in capital and labor unnecessarily being diverted into the production of goods that could more economically be produced elsewhere.

Some say imports are bad for the economy. But consider one implication of that belief. It would mean that during war you’d want to ship your enemy as many goods as possible. After all, the imports would hurt his economy, right?

Obviously the exact opposite is true. A nation at war wants to block its enemy’s trade precisely because trade is beneficial.

Thus protectionists, in the words of one economist, “want to do to their own country during peacetime what the country’s enemies would wish to do to it during wartime–that is, close its borders to imports.”

Many think of free trade in terms of nations doing business. One hears that America has so many millions of dollars worth of trade with Taiwan, for example, and so many millions with Singapore. But actually the commerce is between companies, not countries.

For instance, when you see something labeled “Made in Taiwan” on a store shelf, it’s there because owners of a company in Taiwan and owners of a company in America cooperated with one another, as individuals should be at liberty to do. To oppose that is to oppose freedom.

Indeed, when protectionists seek to block imports– often under the banner of “patriotism”– what they’re really blocking is the free exercise of property rights. And there’s nothing American about that.

Protectionism is as wrong in practice as it is in theory. Just as you’re better off “importing” goods into your house from stores rather than laboring to produce everything yourself within the borders of your home, so too is a nation better off observing that same principle.

Consider that if it were true that imports from other nations hurt America, that principle would also apply to goods imported into one state from another, and into one county, city or municipality from another county, city or municipality.

So we’re to believe, then, that New Yorkers would be more prosperous if they could ban, say, Florida oranges and Hawaiian pineapples in order to produce them locally?

Certainly New York businessmen could, at great expense, construct special environments suitable for growing orange trees and pineapple plants. And that would indeed create jobs in New York that didn’t previously exist, jobs being one of the main rationales for thwarting imports.

But New Yorkers– including those employed in the newly created industries– would end up paying much higher prices than if the goods were simply imported from locales where factors of production were cheaper.

To further illustrate, imagine if American labor unions managed to get high tariffs levied on clothing manufactured outside the US. Results? For one, we’d all pay more for clothes, including union members. And that, in turn, means we’d have less money available for life’s other needs and pleasures.

Moreover, because the tariffs would erase the advantage of cheap foreign labor, it would become artificially profitable to manufacture clothing in the US.

“Wonderful!” exclaim labor leaders. “That’s exactly what we want– more goods made on American soil.”

But consider that the artificially induced profitability of the clothing manufacturing industry, brought on by tariffs, would tend to attract capital away from other areas.

For instance, because consumers would be poorer for having to pay more for clothes, sales of less basic goods– high tech products, for example– could very well lag. Thus some of the capital that might otherwise have gone into creating, say, the next generation of computers or wireless communications might instead be diverted into building blue jeans factories and the like.

Or perhaps some capital might flow away from the pharmaceutical industry.

After all, if capitalists can suddenly get a good bang for their buck making T-shirts, risky long-term drug research becomes that much less attractive.

Bottom line: protectionism fully implemented across all industries would mean a lower standard of living, because it would result in capital and labor unnecessarily being diverted into the production of goods that could more economically be produced elsewhere.

Imagine a couple of decades of such folly, and some graying union boss learning he has a terminal illness. No doubt he’d fault “greedy capitalists” for not having found a cure. But the cumulative effects of his own foolish policies would very well be at least partly to blame.

Let’s just hope somebody would be there to throw a T-shirt in his face and say, “There’s where your cure went, brother.”

Originally published in Capitalism Magazine in 2004.

3 Comments

  1. Free trade is good as long as it is equal for both sides. The US has always been on the short end of the deal. Example we can’t sell cars in Japan, why? I would not allow them to sell their cars here and to close their plants here. How long would it take for them to renegotiate a trade deal that was equal? The deal would also have to include wages for workers in the industry. If you pay someone $5 an hour and someone else $10 and hour, and they both produce the same thing, how can the higher paid worker compete with the lower paid worker? So the lower paid worker must have their rate raised to equal the American worker. That is the only way that countries will be on equal footing. I can hear company owners and their executives squealing already. There was a time when companies actually cared about their employees and employees gave their loyalty to the company. Now it’s only about the bottom line. So if a trade deal that makes it fair for both sides hurts the owners and their executives, I say screw em. Let them come back to reality.

  2. Lets think one layer deeper, China charges at 15% VAT tax on all goods that end up exported to the U.S. Free trade benefits both parties, our trade with China despite the 15% VAT tax (we can call that an export tax) benefits the U.S. However, why should China get to charge that? That is our money they are stealing by NOT having free trade. Seems like we should charge a tariff high enough where China would have to lower their VAT tax in order to maintain their sales to the U.S. This is what Trump is hoping to do, however, in negotiations the most valuable chip the side with all the money can have is the possibility of walking away… Trump has that, ‘he might just be crazy enough to do it’ factor, Hillary and Obama are just door mats.

  3. False.

    Your whole post is socialist .

    Trade doesn’t need government deals, Trumpkin.

    You reject capitalism utterly

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Wayne Dunn writes about political and cultural events from an Objectivist perspective.

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