June 27, 2022

Buy American? What Protectionists Get Wrong about Free Trade

One of the reasons the US is so prosperous is the fact that we have a gigantic domestic free trade area.

Even many of those who are otherwise inclined in the direction of free enterprise have an Achilles Heel when it comes to free trade.

High up on the list of such public intellectuals would be Pat Buchanan. In his view, “’Make America Great Again!’ will be recorded among the most successful slogans in political history.”

“Yet it raises a question,” he continues. “How did America first become the world’s greatest economic power? The first major bill passed by Congress was the Tariff Act of 1789. Weeks later, Washington imposed tonnage taxes on all foreign shipping.”

In his view, America’s greatness was the direct result of her protectionism. “19th-century free trade did not work out well for Britain,” he says elsewhere. “America’s freedom is tied to her economic independence. America’s Industrial Revolution took place with high tariffs. Reduce dependence on trade; support the Monroe Doctrine.” And for one last bit of economic illiteracy from this otherwise supporter of lower taxes and less regulation, consider this phrase: “Tariffs — The taxes that made America great.”

Why Protectionists Are Wrong on Trade

Certainly, Mr. Buchanan would bitterly oppose a Milton Friedmanite US unilateral declaration of free trade with all (peaceful, civilized) nations, to be implemented whether or not they reciprocate by eliminating their own tariffs on US goods.

Mr. Trump, another protectionist (this is a misnomer; barriers to trade do not “protect” us), relishes all sorts of “deals” with our trading partners, not free trade. As for Buchanan, it is probably no exaggeration to say that he never contemplated a tariff, quota, or other trade barrier he didn’t support.

So why is Buchanan wrong? What is the case for free trade? For one thing, every time a commercial interaction of this sort occurs, whether it is barter or sale or purchase or renting or borrowing or investing, both parties necessarily gain, at least in the ex ante sense (that is, they expect to gain when looking toward the future).

If I purchase a shirt for $20, for instance, I value it more at the time I buy it than the $20, otherwise I would not have agreed to undertake this transaction. The seller, for his part, values this product less than this dollar value, otherwise he would not have sold it to me. The point is, we both benefit from the trade. There are no exceptions to this general rule. This can also be true ex post, after the fact, but not necessarily so. Sometimes people change their minds and regret the economic exchange.

Another argument for free trade comes from the fact that specialization is limited by the extent of the market. The bigger the market, the more trade that takes place, the more prosperous everyone becomes.

This argument is easy to see in the case where one trading partner has an absolute advantage over another. For example, it makes no sense for a northern country like Canada to grow bananas in gigantic, expensive hot houses. They can get this product from a southern nation such as Guatemala far more cheaply than they can produce this tropical fruit themselves. Nor is it sensible for the Guatemalans to produce their own maple syrup, for which they would need gargantuan, costly, refrigerators and have to place 100 foot tall maple trees in them (don’t ask!).

But what about comparative advantage? Suppose one possible trading partner is more efficient in the production of all goods or services. Then, surely, it would not pay for them to trade? Wrong!

Consider a lawyer who is also a typist. Let’s say he can earn $1000 per hour in court and $100 hourly from typing. Let’s also assume that for every 60 minutes of the former he needs an equal amount of time of the latter. If he does his own typing, he earns $1000+$100=$1100 every two hours.

Now consider the role of the secretary. The lawyer can type faster than the secretary, who takes two hours of pounding away at this machine instead of one to generate the same $100 of value ($50 per hour). But consider the scenario in which he pays her $100 for two hours instead of doing both jobs himself. The lawyer then earns $1000+$1000-$50-$50=$1900 every two hours. Even if he had to hire a second secretary for the typing associated with his second hour of work ($1000+$1000-$100-$100=$1800 every two hours), he is still far better off than if he did the typing himself. So trade pays, even when the attorney is more productive than the typist at both jobs.

Trade Helps Countries, Too

It is precisely the same with countries. From an economic point of view, individuals and nations are the same. This is one of the reasons the US imports many manufactured goods from abroad.

Now, of course, when trade opens up between Canada and Guatemala, the banana industry in the north, and the maple syrup producers in the south will face tremendously difficult times. They both go bankrupt. If they are wealthy they pay publicists and stubborn economists to make the case that free trade is horrid. But no. All market participants necessarily gain from exchange, it is just that the Canadian banana producers and the Guatemalan syrup farmers are no longer part of the market. (A similar fate befell blacksmiths and typewriter manufacturers).

The absurdity of the protectionist stance becomes even more apparent when the scale of the discussion is changed. For instance, if tariffs and quotas really help economic development, as Messrs. Buchanan and Trump believe, then this should apply to states in the union as well as entire nations. Maine should exclude imports of wine from California, and the latter should set up roadblocks against potatoes stemming from the former. No, no, a thousand times no, this is fallacious. One of the reasons the United States is so prosperous is the fact that we have a gigantic domestic free trade area.

The same reasoning applies to all other trade restrictions. Humans prosper when trade is open and we suffer when it is impeded.

This article, Buy American? What Protectionists Get Wrong about Free Trade, was originally published by the Foundation for Economic Education and appears here with permission.  Please support their mission.