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Free Trade, Managed Trade and the State, Part 3

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“Protectionism is purely and highly socialistic,” American economist Francis Walker observed in 1887. “Its purpose is so to operate upon individual choices and aims, so to influence private enterprise and the investments of capital, as to secure the building up, within the country concerned, of certain branches of production which could not be carried on, or would grow but slowly, under the rule of competition and individual initiative. With this object in view,” Professor Walker explained, “government begins by preventing the citizen from buying where he can buy cheapest; it compels him to pay ten, thirty or fifty percent advance, it may be upon the prices at which he could otherwise purchase; it even assumes to make existing industries support the industries which are thus called into being. Not incidentally, but primarily and of purpose, it affects vitally every man’s industrial conditions and relations.”

The proponents of managed trade in the Clinton administration would surely balk at Professor Walker’s accusation that what they advocate is a form of socialism. After all, they might respond, when speaking of the changes in post-Soviet Russia and in the former Soviet-bloc countries in Eastern Europe, they constantly say they advocate the establishment of a free market. And in the controversy over the North American Free Trade Agreement, spokesmen for the administration are equally adamant that they desire to see a greater openness for trading opportunities among these three economies on our continent.

Their Goal Is Not Free Trade

Yet, in spite of their rhetoric and lip service of advocacy for open doors for world trade, their goal is not free trade. Their view of trade among nations is guided by the following ideas:

1) International trade is not between private individuals searching out advantageous gains from exchange, but rather an economic war among nation-states in which the victories for one country require the defeat of another;

2) It is in the power of governments to forecast the world economic trends of the future and devise systems of import restrictions and technological and production subsidies for the artificial creation of patterns of comparative advantage that will assure that America gains a permanent edge in the manufacturing and sale of certain desirable lines of production;

3) If other governments restrict the importation of American goods into their countries, it is the duty of the United States government to use various weapons of economic warfare to force those foreign markets to open to American competition.

Let us look at each of these ideas and evaluate their validity and consequences.

The View That International Trade is Economic Warfare Among Nations:

Contrary to the Clinton view, international trade is merely an extension of the idea of the division of labor within a country to the residents of different geographical locations separated from each other by the drawing of political boundaries on the face of a map. By expanding the arena of trade to encompass more people around the world, all participants are made better off. The enlarged market enables an intensification of specialization to take advantage of the various and sundry skills and capabilities of a greater number of potential producers and traders in more parts of the globe. The increased specialization in the expanded market widens the field of competitors to assure that the prices at which goods are available in the global market are the lowest at which producers are capable of offering them to the consuming public.

Free Trade vs. Protectionism

In the arena of free exchange, all traders are gainers and none are losers. The decision to exchange one commodity or service for another demonstrates that both participants to the exchange view themselves as being better off because what induces them to give one thing for another is the following mutual belief: what they are giving up is of a lower value in comparison to what they obtain; otherwise, they would not voluntarily trade away what is originally in their possession.

But in an open market, individual competitors sometimes discover that they are unable to match the better prices or product qualities of their foreign competitors. And rather than accept the loss of market share or desired profit margins to those who can provide consumers at better terms than themselves, they turn to the state for assistance. They call upon the political authority to limit the liberty of the foreign seller from offering his wares in the home country and deny the consumers in the home country the greater freedom to purchase from him who offers the preferred goods at the more attractive terms.

The advocate of protection from the foreign competitors cloaks his special pleading in the rhetoric of the patriot who insists that his industry is essential to the national welfare or for the preservation of employment. But, in fact, the only welfare that is at stake is his own. And he wishes to sacrifice the welfare of others for his own benefit, because for his market share to be preserved or his profitableness to be maintained through various protectionist restrictions, the welfare of the individual consumers in his country must be reduced by their inability to buy the cheaper or better product from the foreign seller. And the welfare of the producers in the foreign country is also diminished since they are denied the opportunity to consummate trades that would have offered the more attractive return if not for the trade restrictions.

International Economic Wars

It is the intervention of the state into the nexus of exchange that now makes international trade a battlefield upon which economic wars are fought. Victory in the arena of global trade is now partly determined by the use of weapons of taxation, coercion and prohibition: thou shalt not sell your goods in the U.S. without first paying a toll meant to secure a minimum-guaranteed price for the domestic producers; thou shalt not sell your goods in the U.S. unless they contain a certain “domestic content” of American raw materials or have been manufactured with the assistance of a certain number of American workers; thou shalt not sell your goods at all in the U.S., because the market is to be the privileged preserve of those domestic producers with the political clout to close the market completely to foreign competition.

War is the use of force to obtain desired ends without having to obtain the voluntary consent of those who possess that which is wanted. And in international trade, it is only the state that can transform peaceful intercourse among the occupants of the world into a violent combat of political weaponry for the “capture” of customers and the “defeat” of rivals.

The Clinton administration is imbued with the spirit of the managed economy-socialism. The notion of leaving the market to its own development and outcomes is intolerable to its conception of social justice and belief in socially engineering economic results. The administration, therefore, must battle against the patterns the market would naturally take on if the government were not to intervene, and this necessarily results in foreign suppliers being aggressed upon in the combat as well.

If the state is to determine the desired direction of domestic economic development, then it is also the case that as part of the achievement of that end, the pattern of imports and exports must be managed too. Investment in certain types of technologies, methods of production, and lines of production that the government decides is necessary for national economic well-being require not only tax breaks, subsidies and “partnerships” between the government and private firms, they also require that foreign producers and suppliers not be allowed to undermine the domestic policy goals by offering products and technologies that American consumers would rather buy instead.

Barriers and limits to entry into the U.S. market must follow. At the same time, the sustaining of these domestic economic patterns also requires that the government support the exporting of those goods and services that are both consistent with and a part of the domestic policy plan for managed economic development.

The government then is in an economic war with both its own citizens and those of other countries. It battles against its own citizens, because some must be taxed, regulated or denied production and consumption opportunities so the state’s goals for a managed economy can be obtained. And foreign suppliers are aggressed against because the government denies them the right to enter peacefully the American market without molestation; coming through the door, they are mugged in the form of tariffs, quotas and domestic-content requirements.

International trade only becomes economic warfare when the state intervenes into the economic affairs of its own citizens and those of other countries. The economic warfare, however, is not between nation-states, but instead that of nation-states against private citizens. The confusion in clearly seeing this is due to the common use of linguistic shorthand in referring to the economic relationships between “America” and “Europe” or “Japan.”

But it is ultimately individuals who supply and demand, who produce and consume. It is impossible for the government to institute any policy other than the one of providing equal protection of each individual’s rights to life and property without infringing on some people’s rights to bestow privileges and favors on others. And to the extent that the state goes beyond this limited role of providing equal protection of rights before the law, it declares and initiates war against its own citizens.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).