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Free Trade, Managed Trade and the State, Part 5

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In the 1870s, English classical economist Henry Faucett warned, “I think it cannot be doubted that protection must exert an inevitable tendency to foster . . . socialistic demands for State assistance. If a people are accustomed as they must be under a system of protection, to believe that the prosperity of each separate branch of industry depends not so much upon individual energy as upon the amount of protection it can obtain from the government, there can be no surer way of encouraging the growth of a belief not only that industrial prosperity but that the general social well-being of the country is chiefly to be secured not by individual effort but by State help.”

And a few years earlier, the American economist and sociologist William Graham Sumner had pointed out other political consequences that followed from a policy of protectionism:

“This continual law making about industry has been prolific of industrial and political mischief. It has tainted our political life with log-rolling, presidential wire-pulling, lobbying, and custom-house politics. It has been intertwined with currency errors all the way along. It has created privileged classes in the free American community, who were saved from the risks and dangers of business to which the rest of us are liable. It has controlled the election of congressmen, and put inferior men in office, whose inferiority has reacted upon the nation in worse and worse legislation.”

The Clinton administration’s declared policy of managed trade between the United States and the rest of the world will only succeed in intensifying the tendencies which Faucett and Sumner warned about more than a hundred years ago: an increased dependency upon the state by a growing number of sectors of the economy, along with a belief that such dependency is the only path to economic prosperity; and a growing corruption of the political process as more and more groups in the society turn to Washington for favors and privileges, both to gain advantages at the expense of rivals in the marketplace and as a defensive mechanism against the political lobbying efforts of others.

Three errors dominate the Clinton administration’s case for managed trade. The first is the belief that international trade is an economic war between nation-states; the belief is that if one nation gains, some other nation must lose. The second error is the belief that the state has the capacity to anticipate the future direction of technological development and to design policies to assure that American industry will have a permanent edge in the battle for winning world markets against our trading partners. The third error serves as the pragmatic rationale for a policy of managed trade:

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

It is argued that if, in a world of free trade, another nation closes its market to some or all of American goods, while desiring to sell its own goods in the United States, the U.S. government should put retaliatory pressure on that country to open its market through the imposition of reciprocal tariffs and other trade restrictions.

Writing in the early 19th century, the French classical-liberal economist Jean Baptiste-Say, admitted that

“[U]ndoubtedly, a nation that excludes you from all commercial intercourse with her, does you an injury — robs you, as far as in her lies, of the benefits of external commerce. . . . But it must not be forgotten that retaliation hurts yourself as well as your rival; that it operates, not defensively against her selfish measures, but offensively against yourself, in the first instance, for the purpose of indirectly attacking her. The only point in question is this, what degree of vengeance you are animated by, and how much will you consent to throw away upon its gratification.”

The fact is that the use of reciprocal trade restrictions as a weapon of economic warfare to punish another country for closing its own markets to American exports results in harm to the general American consuming public; raises the cost of various commodities previously purchased from the foreign nation now experiencing American revenge and retaliation; and imposes financial burdens on the import industries in the U.S. no longer able to obtain certain foreign goods on as favorable terms as before the retaliatory trade restrictions were put into place.

Closing a portion or all of the American market to the exports of the foreign country subjected to the wrath of the U.S. government narrows the competitive alternatives available to American consumers. Their set of choices is now limited to those offered by American sellers of various products and those foreign sellers of other countries not affected by the retaliatory trade barriers. The variety of goods, therefore, from which the U.S. consuming public may select is smaller than before. Because some American exporters have been put in a less favorable position due to the foreign country’s trade limitations, all other Americans are denied buying opportunities by their own government.

At the same time, prices will now be higher for the particular products upon which there have now been imposed the retaliatory trade restrictions. The segment of the American consuming public that was previously buying the foreign goods in question will now find themselves having to pay higher prices for those commodities. Whether the retaliation takes the form of a tariff or a limit on the quantity of the foreign good now permitted to enter the United States, the good’s price will tend to rise. If a tariff has been imposed, the foreign seller will have to sell his good at a higher price to cover his costs (now including a higher import tax) or to retain the rate of return that makes it advantageous to sell the good in the U.S., as opposed to somewhere else. If restrictions are imposed on the quantity that may be sold in the U.S., the total quantity available in the American market will now be smaller, which will tend to result in a higher price. Because U.S. export “X” is not permitted to be sold in the foreign country in question, American consumers will now be faced with higher prices and smaller quantities of imports “Y” and “Z” purchased from that other country.

Also, the segments of the American import industry that sell the goods now under retaliatory restriction will find themselves with the burden of having to pay more for the goods they purchase from the foreign seller and then having to try to sell those goods to American consumers under less competitive terms than before. Because an American exporter claims harm, income earners in an unrelated importing sector of the U.S. economy will have to pay for the exporter’s misfortune.

Many of these effects remain hidden from view by governments’ arguing in terms of “our” nation being harmed by “theirs.” But once we stop thinking in this aggregative and collectivist manner and ask who is harmed or helped in terms of particular individuals or groups of individuals, the consequences are seen to be more complicated than the simplistic categories of “them” versus “us.”

The real effect of trade retaliation is something more like the following: The government of Boobistan prohibits the sale of American bicycles in Boobistan, resulting in fewer foreign sales for American bicycle manufacturers and higher prices for bicycles in Boobistan to benefit Boobistani bicycle manufacturers at the expense of Boobistani consumers. Therefore, in retaliation, the U.S. government imposes a tariff or prohibits the sale of Boobistani dingbats in America. American consumers of Boobistani dingbats now find themselves paying more and buying a smaller quantity of this valued commodity, and the American import companies that make their living selling Boobistani dingbats find it more difficult to make a living in this line of business.

Who gains from this retaliation against Boobistan? Not American bicycle manufacturers — they are still locked out of the Boobistani market. Not American consumers or importers of Boobistani dingbats — they bear the negative effects we have just explained. If the retaliation has taken the form of a higher import tariff on dingbats, the U.S. government may or may not gain greater tax revenues, depending on how many Boobistani dingbats are now brought into the United States at the higher tariff. The only gainers are the manufacturers of the American version of dingbats, who now face less price and quantity competition from their Boobistani rivals, and the sellers of goods that are bought by American consumers as substitutes for the now more expensive dingbats.

But what have dingbats — and helping American dingbat manufacturers to earn higher profits — have to do with the lost sales and lower profits experiences by American bicycle manufacturers caused by Boobistani trade barriers? Nothing. They simply provide the rationale for American dingbat producers to lobby for restrictions of Boobistani imports. And they enable American politicians to “act tough” with Boobistan, thereby looking good in the eyes of American voters who have been led to believe that Boobistan is destroying American jobs because “they” won’t buy “our” bicycles.

Might not Boobistan back down and eliminate its trade barriers against American bicycles under the threat of retaliation against their export trade in dingbats? Yes, they might. And the proponents of trade-war brinkmanship often use this as an argument to defend the use of the retaliatory threat.

But the danger of accepting this rationale for one of the tools of economic warfare among governments is that it legitimizes the idea that the state is responsible for and has the right to intervene in the exchange relationships between their own citizens and the citizens and governments of other nations. It accepts the nationalization of international trade, because it accepts the premise that among the state’s duties is supervision of the patterns of terms of trade among the producers and consumers of the world.

Furthermore, if the Boobistani government doesn’t blink first, the retaliatory restrictions must then be put in place — if the threatening government is not to lose credibility both at home and abroad. And this creates the risk that Boobistan might counter-retaliate, setting in motion a spiral of expanding trade barriers and the disintegration of an increasing portion of the international division of labor.

Unfortunately, this is the path that the Clinton administration is threatening to lead us down even further than we have already come. And the further we travel down this path, the more difficult it will become to retrace our steps and return to the high road of individual liberty and free trade.

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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).