01.20.09The Case for Free Trade
Introduction
The case for free trade is one that has been conclusively accepted by economists for nearly two centuries. Despite this, many people continue to believe that free trade is harmful, and that protectionism is necessary for prosperity. The purpose of this article is to prove the irrefutable superiority of free trade over protectionism.
First, protectionism violates the right of individuals to engage in voluntary exchange; hence trade barriers are totally illegitimate. Second, free trade is always mutually beneficial in the ex ante sense. As Ricardo showed in 1817, specialization and trade are beneficial whenever there is absolute or comparative advantage between individuals. Next, protectionism is a negative-sum game: it makes everyone worse off, including the “protected” industries. Also, trade barriers destroy more jobs than they create. Fourth, protectionism can be handily refuted by a reductio ad absurdum, because if self-sufficiency is good for a nation, then it must also be good for individuals. Finally, objections concerning cheap foreign labor, infant industries, and national defense all fail to justify protectionism. In the end, free trade is supported by both morality and practicality; protectionism is immoral and impractical.
Rights
Self-ownership means that people can use their body and their property however they please, provided they do not violate the rights of anyone else. Trade is the voluntary exchange of property titles between consenting adults. From this it follows that free trade is a human right, derived from self-ownership; individuals have the right to engage in voluntary trade with any other consenting individual, domestic or foreign.
Protectionism, whether through tariffs or quotas, is the coercive prevention or regulation of peaceful, consensual trade. Since humans as self-owners have the right to free trade, protectionism must necessarily violate that right. Thus, all protectionism is illegitimate because it violates self-ownership. Further, protectionism is categorically identical to common crime, such as murder, rape, and robbery: all of these actions share the common trait of initiating violence against nonaggressors. Hence, protectionism should be considered as morally repulsive as any criminal act.
The case for free trade
First, trade is the voluntary exchange of property titles between consenting adults. Trade does not occur between countries or nations, but between individuals. Moreover, political boundaries have no economic meaning whatsoever; it simply does not matter if the parties to the exchange are from the same or different countries. Thus, the idea of an international theory of trade is a bogey. Only individuals trade, and hence trade must be analyzed at the individual level.
Next, trade is ex ante a positive-sum game. That is, both parties expect to gain from the exchange; in the anticipatory sense, trade is a win-win scenario. This must be true; otherwise, why would anyone agree to trade? For example, if A trades $10 with B for a pizza, then A values the pizza more than $10, and B values the $10 more than the pizza. Both parties anticipate benefit from the exchange; they expect the trade to be mutually beneficial. It is true that ex post, after the fact, someone might regret the trade. But, on the whole, people tend to make correct decisions. In contrast, those who claim that trade is a zero-sum game where one party benefits at the expense of the other are simply wrong. Again, in any voluntary exchange both parties must expect to benefit.
The basic case for free trade is that it is more efficient to specialize and trade rather than attempting a completely self-sufficient life. This is obvious when we analyze trade on the individual level. In our own lives, we do not produce all of the goods that we consume, but rather specialize in one area and trade for things we desire. For example, a computer engineer will specialize in computer science and trade for food, clothing, housing, etc. A key to understanding this is realizing that there are two ways to acquire a good. An individual can produce the good themselves, or they can produce a different good and “import” the desired good. Thus, our computer engineer will design software and use their income to “import” food from a grocery store. (See David Friedman’s “Iowa Car Crop”)
But why is specialization and trade more efficient than self-sufficiency? To understand this, we must analyze the cases where individuals have different advantages in production, and hence incentives to trade.
Perfect equality
First, in the case where all people are perfectly equal, and there are no advantages in production, specialization offers no monetary benefits. If no one can produce a good more efficiently than anyone else, there are no benefits from specialization and trade.
Consider the example of a primitive island economy, where John and George produce two goods, fish and berries. If both of them can produce 1 fish per hour and 10 berries per hour, then they will not gain from specialization. If they allocate their time equally to catching fish and picking berries, or if they each specialize in one activity and trade, the output will be the same. When people have no advantage over each other, trade is not beneficial. As Mises wrote: “If the earth’s surface were such that the physical conditions of production were the same at every point and if one man were as equal to all other men as is a circle to another with the same diameter in Euclidian geometry, men would not have embarked upon the division of labor.” (Human Action p. 157)
Absolute advantage
Second is the case of absolute advantage, where an individual can produce a good at a lower absolute cost than another. An individual has an absolute advantage if they can produce a good more efficiently. In this scenario, it is clear that specialization and trade will be beneficial.
Returning to our island economy, say John can catch 3 fish per hour, and can pick 5 berries per hour; George can only catch 1 fish per hour, but can pick 15 berries per hour. Working in isolation for five hours on each activity (ten hours total), John can produce 15 fish and 25 berries; George can produce 5 fish and 75 berries. In total they produce 20 fish and 100 berries. But if they specialize where they are more efficient and trade, John will catch 30 fish and George will pick 150 berries. John and George now have 10 fish and 50 berries more per day than they would have if they did not specialize. Regardless of how they divide the surplus, each of them is better off than before. Clearly, trade is beneficial where there is absolute advantage.
Comparative advantage
The third scenario is that of comparative advantage, where an individual can produce a good at a lower opportunity cost than another. Even when one person has an absolute advantage in every field, they would still benefit from specializing in the line of production in which they have the greatest relative, or comparative advantage.
For example, say John spends 6 hours catching 24 fish (4 fish/hour) and 4 hours picking 56 berries (14 berries/hour); George spends 8 hours catching 8 fish (1 fish/hour) and 2 hours picking 24 berries (12 berries/hour). Both of them working in isolation gives a total of 32 fish and 80 berries. Here, John can produce both goods more efficiently, but even in this case, specialization and trade is mutually beneficial. When John specializes where he is most efficient, namely in catching fish, and George specializes where he is least inefficient, picking berries, then trade will be beneficial. Thus, under specialization John catches 40 fish and George picks 120 berries, for a higher total output.
The reasoning is that George’s opportunity cost of producing 1 fish is 12 berries, and his opportunity cost of producing 1 berry is 1/12 fish. John’s opportunity cost of 1 fish is 3.5 berries, and his opportunity cost of 1 berry is 2/7 fish. Thus, John’s opportunity cost of fish (3.5 berries) is lower than George’s (12 berries); John will catch fish. On the other hand, George’s opportunity cost of berries (1/12 fish) is lower than John’s (2/7 fish); George will pick berries. Hence, when John and George specialize where they are most efficient, relative to each other, they both benefit.
A more intuitive way to understand comparative advantage is the case of the lawyer and the secretary. Say a lawyer is not only the best lawyer in town, but the best secretary as well. That is, the lawyer can both be an attorney and do paperwork more efficiently than a secretary. However, even though the lawyer is better than everyone at both jobs, he is a better lawyer than a secretary. Thus, the lawyer can be more efficient if he specialized in being a lawyer and hired a secretary to do paperwork, instead of trying to be “self-sufficient” and do both jobs himself. Once specialization and trade are introduced, both the lawyer and the secretary are better off.
Equal absolute advantage
The last possible scenario is that of perfectly equal absolute advantage: one person is superior to another in all aspects, but this superiority is equal. In this case, there is no relative advantage, i.e. no difference in opportunity cost, and hence no benefit from specialization and trade.
For example, say John can catch 3 fish and pick 15 berries per hour, and George can catch 1 fish and pick 5 berries per hour. Here, John is exactly three times more efficient than George in producing both goods, but George has no comparative advantage. George’s opportunity cost of 1 fish is 5 berries, and for 1 berry it is 1/5 fish; John’s opportunity costs are exactly the same. Hence, with no relative advantages, there are no benefits from specialization and trade.
With this in mind, we must note that humans are virtually never equal and that the environment varies immensely. Even if two people were completely equal, they could always find someone else with whom to divide their labor. Moreover, individuals and the environment are constantly changing. Accordingly, the first and fourth scenarios, of perfectly equal people and of perfectly equal absolute advantage, will practically never exist. We will always live in a world of absolute and comparative advantage, and hence specialization and trade will always be beneficial.
It is important to note that this is an a priori argument. Hence, any appeal to evidence, e.g. protectionism in Japan, is illegitimate. This is because evidence cannot be used to prove or disprove an a priori theory. Any appeal to evidence must be rejected on the grounds that it commits the post hoc ergo propter hoc fallacy. An a priori theory can only be disproven by another a priori theory. Anyone who wishes to dispute the above argument for free trade cannot appeal to evidence, but must do so on the level of theory.
It is also worth noting that “free trade” agreements like NAFTA and GATT are actually government-managed trade agreements. Whereas these managed trade agreements number in the thousands of pages, a true free trade agreement would consist of one line: “I hereby agree to free trade as of this date.” Thus, NAFTA is not an example of free trade; real free trade means no government involvement whatsoever.
The case against protectionism
Protectionism is the government policy of restricting trade in order to protect a domestic industry from foreign competition. The government can accomplish this through tariffs (taxes on imports), quotas (limits on the quantity of imports), or other trade barriers such as quality or content mandates on imported goods. Protectionism increases the price of imported goods, reducing the amount of imports, and thus protecting a domestic industry from foreign competition. A tariff or quota on automobiles, for example, raises the price of cars, making it easier for the domestic automobile industry to gain market share.
First of all, protectionism is intuitively a bad idea: everyone benefits from having more options at their disposal. It goes without saying that having more choices is better than having less choices. But tariffs and quotas restrict who we can trade with; they limit our choices. Clearly, protectionism conflicts with common sense.
Negative-sum game
Protectionism is a negative-sum game; it is a lose-lose scenario. To establish this, I will first prove the weaker claim that protectionism is a zero-sum game. That is, the protected industry benefits, but only at the expense of everyone else. Obviously, protectionism increases the price of imported goods. Thus, consumers are directly harmed; because they must spend more on goods from the protected industry, consumers have lower real incomes. Because consumers have less to spend, other domestic industries are harmed as well; spending more in the protected auto industry means spending less everywhere else. Domestic exporters are also injured by restricting the sales of foreigners. As foreigners have less wealth, they will demand less from domestic producers. [Since imports are ultimately paid for by exports, restricting imports means restricting exports. For example, restricting China's exports to the U.S. also reduces China's demand for U.S. exports.] Finally, foreign producers are directly harmed as their potential market is coercively restricted.
These are all ways in which protectionism hurts others to benefit a protected industry. But we can even make the stronger case that protectionism is a negative-sum game: everyone is made worse off. First, the protected domestic producers gain nothing in the long run: the higher profits in the protected industry will attract new capital and competition, thus driving down profits to the market rate, as the monopolistic gain is competed away. Next, trade barriers lead to a weakened division of labor, because comparative advantage is not exploited as fully as it could be. Trade barriers keep inefficient producers in business, when in a free market the most efficient producers would earn that market share. Hence, there is a lower standard of living for everyone, including the protected industry. For example, tariffs in the steel industry raise steel prices, which in turn raises prices in all industries that use steel. Finally, there is the cost of the protectionist bureaucracy: protectionism requires a government bureaucracy to enforce tariffs and quotas, and this must be paid for by the taxpayers. Thus, in the long run, even the protected industry loses more than it gains from protectionism. Because it makes everyone worse off, protectionism is a lose-lose scenario.
Protecting jobs?
Some people claim that protectionism is necessary to protect jobs. However, the reality is that, on net, protectionism actually destroys jobs. True enough, a protected industry gains temporarily from reduced competition; it can raise prices, earn higher profits, and raise wages. In the long term, however, these profits attract new entrepreneurs into the industry and will be competed away. But obviously, these domestic jobs are saved only at the expense of foreign jobs. An automobile tariff, for example, saves jobs in Detroit by destroying jobs in Japan.
Yet even if we focus only on the domestic effects, trade barriers destroy more jobs than they save. As we have seen, tariffs raise prices in the protected industries, as well as in all related industries. Accordingly, consumers everywhere have less money to spend in other domestic industries; jobs in these industries are destroyed by reduced consumer demand. Next, jobs in domestic export industries are destroyed; again, restricting imports means restricting exports. Finally, the weakened division of labor entails higher production costs and less employment in all industries; the entire economy is poorer because of protectionism. Thus, trade barriers destroy many more jobs than they save.
Closely related is the issue of job security. Under free trade, job security is rooted in producing goods that people voluntarily pay for; as long as workers produce value, they will tend to be employed. Under protectionism, on the other hand, the existence of jobs depends on fickle politicians and political favors; instead of producing value for consumers, workers have to engage in persuading and lobbying politicians. Free trade ensures a much higher job security than protectionism.
Absurdity
If we just think about the nature of barriers, the wild absurdity of trade barriers becomes laughably obvious. First, a barrier obstructing a bad thing is desirable. For example, obstructing a criminal is good. But trade, as we have seen, is a good thing; trade is a positive-sum game. Then how can a barrier obstructing a good thing ever create good consequences? A barrier is defined as something that impedes or obstructs. Synonyms of barrier include: barricade, blockage, difficulty, hamper, handicap, hindrance, impediment, obstruction, and restriction. These are universally recognized to be bad things. Difficulties, hindrances, and obstructions are all things we naturally wish to avoid. Then by what Orwellian twist of logic can we possibly conclude that trade barriers can ever have good consequences?! This is even more evident when we realize that a tariff is simply a tax. Since taxation by its very nature is the parasitic leeching off of production, it can never itself be productive; taxation is always destructive. And since tariffs are taxes, then tariffs can only be destructive.
Another way to see the absurdity of protectionism is to consider the parallel between tariffs and wartime blockades. The purpose of a tariff is to restrict or eliminate imports. The purpose of a wartime blockade is to prevent the enemy from trading with other countries, with the ultimate goal of starving them into submission. In this case, “foreign imports” are completely restricted, and domestic industries are completely protected, but the populace is reduced to bare subsistence living. Or consider the sieging of castle, where all trade is cut off. Again, imports are nonexistent, domestic industries are protected, and yet the end result is not prosperity but death by starvation. If a wartime blockade can destroy the economy of an enemy, then surely a peacetime tariff will destroy our own economy. Protectionism is doing to ourselves in peacetime what our enemies to do us in wartime.
In the end, only politically connected special interest groups gain from protectionism; and as we have seen, this gain is only temporary and is ultimately replaced by long term losses. More precisely, it is those producers who are too incompetent and too wasteful to satisfy customers in a competitive free market who appeal to coercive government intervention. These inept special interests are incapable of finding a willing buyer to purchase their product, so instead they rely on the violence of the State. As Isaac Asimov wrote, “Violence is the last refuge of the incompetent.”
Reductio ad absurdum
The protectionist thesis can be forcefully refuted by a reductio ad absurdum. Murray Rothbard has debunked protectionism in this manner:
Suppose that Jones has a farm, “Jones’ Acres,” and Smith works for him. Having become steeped in protariff ideas, Jones exhorts Smith to “buy Jones’ Acres.” “Keep the money in Jones’ Acres,” “don’t be exploited by the flood of products from the cheap labor of foreigners outside Jones’ Acres,” and similar maxims become the watchword of the two men. To make sure that their aim is accomplished, Jones levies a 1,000-percent tariff on the imports of all goods and services from “abroad,” i.e., from outside the farm. As a result, Jones and Smith see their leisure, or “problems of unemployment,” disappear as they work from dawn to dusk trying to eke out the production of all the goods they desire. Many they cannot raise at all; others they can, given centuries of effort. It is true that they reap the promise of the protectionists: “self-sufficiency,” although the “sufficiency” is bare subsistence instead of a comfortable standard of living. Money is “kept at home,” and they can pay each other very high nominal wages and prices, but the men find that the real value of their wages, in terms of goods, plummets drastically. (Man, Economy, and State, p. 1102-03)
Hans Hoppe has also given a similar, devastating refutation:
Any argument in favor of international protectionism rather than free trade is simultaneously an argument in favor of interregional and interlocal protectionism. Just as different wage rates exist between the United States and Mexico, Haiti, or China, for instance, such differences also exist between New York and Alabama, or between Manhattan, the Bronx, and Harlem. Thus, if it were true that international protectionism could make an entire nation prosperous and strong, it must also be true that interregional and interlocal protectionism could make regions and localities prosperous and strong. In fact, one may even go one step further. If the protectionist argument were right, it would amount to an indictment of all trade and a defense of the thesis that everyone would be the most prosperous and strongest if he never traded with anyone else and remained in self-sufficient isolation. Certainly, in this case no one would ever lose his job, and unemployment due to “unfair” competition would be reduced to zero. In thus deducing the ultimate implication of the protectionist argument, its complete absurdity is revealed, for such a “full-employment society” would not be prosperous and strong; it would be composed of people who, despite working from dawn to dusk, would be condemned to poverty and destitution or death from starvation. (Democracy: The God that Failed, p. 153)
One might object that this reductio misses the mark because it is not trade per se that is problematic, but trade with low-wage nations. Even so, the reductio still stands if we change the scenario to specify trade between a rich and a poor individual. But this just changes the logical conclusion of trade barriers from protectionism between individuals to protectionism between economic classes. The protectionist would be committed to supporting the absurd position that a rich person would benefit from cutting off all trade with everyone with a lower income, and only trading with people who earn the same income. That is, a person would always lose if they traded with someone with a different income (because if there is any difference in income, one party is by definition poorer). Hence, this nuanced protectionist position is also reduced to absurdity. More directly, this objection fails to understand the basic conclusions of comparative advantage: that even if a low-wage country is less efficient in all tasks, it still pays to trade with them.
Free trade against war
Free trade is one of the best bulwarks against war. People who engage in mutually beneficial trade are less likely to go to war with one another. In other words, people who are reciprocally dependent on each other will want to avoid upsetting their relationship and lose the benefits of trade. Protectionism, on the other hand, is a prime contributor to war. As Mises put it, “What generates war is the economic philosophy of nationalism: embargoes, trade and foreign exchange controls, monetary devaluation, etc. The philosophy of protectionism is a philosophy of war.” (Human Action, p.683) Protectionism violates the rights of foreign traders and damages foreign economies. Further, protectionism fosters racism, intolerance, and xenophobia, all factors which facilitate war. In the end, protectionism is based on fear: fear of different people, different cultures, foreign languages, and of course, fear of change. This fear can be exploited by politicians and used to start wars. Clearly, if war is ever to be ended, one key step will be following a policy of universal free trade.
Objections
Cheap foreign labor
The classic objection to free trade is that domestic industries cannot compete with cheap foreign labor, hence trade barriers are necessary to save jobs. But now that we have analyzed the case for free trade and against protectionism, we can answer conclusively that free trade is the best policy. To give an example, this objection says that people in the U.S. would not benefit from free trade with China, because Chinese wages are so much lower. However, the whole point of comparative advantage is that even when U.S. workers are more efficient in every task, it still pays for them to specialize where they are most efficient, and for Chinese workers to specialize where they have a comparative advantage, i.e. a lower opportunity cost. U.S. workers who are at a comparative disadvantage must shift to where they are at a comparative advantage, e.g. from textiles to computer technology.
So although low-skilled jobs are “lost”, more high-skilled jobs are created. Granted, the displaced workers are worse off; they must now be trained for a different job. But even though they lose in the short run, in the long run they are better off. Because comparative advantage will be more thoroughly exploited on a global scale, wages everywhere will rise. A strengthened division of labor also means cheaper goods, and hence a higher standard of living for everyone. Most importantly, protectionism would only make everyone worse off, through higher prices, a weakened division of labor, and the cost of a protectionist bureaucracy. Even if domestic workers are worse off in the short run, protectionism would only hurt them even more.
Infant industries
The infant industries argument is another classic objection to free trade. This argument claims that a country will benefit from protecting a developing industry in its infancy. In this period the industry is unable to compete without protection, but once mature it is competitive and can survive on its own. To analyze this objection, we must consider the present value (the current value of projected future profits and losses) of a firm during its infancy period. There are two possibilities: either the present value is positive, in which the industry will be funded privately and protection is unnecessary, or the present value is negative, in which case the industry may fail without protection. In the latter scenario there are two possibilities: either the profits of the mature industry outweigh the losses of infancy, or they do not. In the former case, the industry will generate net profits, and will be funded privately; protection is unnecessary. In the latter case, the industry generates overall losses, and is a waste of resources; protection is inefficient. Thus, the infant industries argument fails in all possible scenarios. It is merely sophistry used to procure coerced special privilege.
Exploited workers
Another objection is that foreign workers are exploited by free trade. In a free market, this objection is patently false. Obviously, if a company sets up a factory in India, it must offer wages equal to or higher than the prevailing rate in order to attract new workers, other things equal. For example, if the prevailing Indian wage is $3/hour, the company will not hire any workers unless it offers at least this amount. Thus, foreign workers are better off; far from being exploitation, free trade would have enormous effects on raising the Third World out of poverty. However, we do not live in a free market. Corporations and governments can and do collude to exploit workers. This is besides the point, however, because it is not an argument against free trade but against statism.
Capital mobility
Paul Craig Roberts has objected that the Ricardian case for free trade only holds true under conditions of capital immobility. He is not arguing in favor of tariffs, but only that the Ricardian case no longer applies in our world of capital mobility. However, this objection fails. As we have seen, there are only four possible scenarios when two individuals engage in trade. Either there is absolute or comparative advantage, in which case trade is always beneficial; or there is no advantage (humans and the environment are perfectly equal), or there is perfectly equal absolute advantage (no differences in opportunity costs), in which case trade offers no benefits. Again, these last two conditions are virtually non-existent. Unless Roberts can show that capital mobility leads to one of these last two scenarios, trade will always be beneficial.
It seems that Roberts is saying that, because of low transportation costs leading to net capital exports, U.S. workers will be made worse off by free trade, and hence free trade is flawed. But the case for free trade has never suggested that everyone will be better off then before. As Guido Hülsmann writes, “the case for free trade is squarely based on the fact that it makes all parties better off than they would have been without free trade…. The point is not that free trade necessarily makes people better off than they have been so far. Rather, it makes them better off than they would be if trade were to be henceforth obstructed by government interventions, or by other violations of property rights.” Some people may be harmed by free trade, but they would be harmed even more by protectionism.
National defense
The national defense argument is a popular justification for protectionism. Basically, the government must protect vital industries (e.g. steel) during peacetime because imports might be restricted during wartime, when they are needed for the war effort. There are many problems with this argument. First, security is too important an industry to be provided by government; like all economic goods, security must be provided on the market (see Hoppe). Second, as we have seen, protectionism itself is a cause of war; people who trade with each other are less likely to go to war. Third, free trade strengthens the division of labor and increases the prosperity of a nation, hence providing more resources during times of war. Protectionism causes poverty and reduces the amount of resources that can be used for war. Finally, the socialist calculation problem means that government officials cannot rationally determine how many resources to devote to protectionism, which industries to protect, when to protect them, etc. Thus, protectionism will only undermine our security.
Trade deficit
Another argument in favor of protectionism concerns the trade deficit, where a country is importing more goods than it is exporting (a trade surplus occurs when a country exports more than it imports). Trade barriers can be used to deter imports and eliminate the trade deficit. However, this argument fails because trade deficits and surpluses are completely meaningless. For example, if you “import” (purchase) more goods from Wal-Mart than you “export” (sell) to them, you have a trade deficit. Similarly, if you “export” your labor while working at McDonald’s, but do not “import” any goods from them, you have a trade surplus. So what? It does not matter one whit if you have a trade surplus or deficit. The entire concept is useless. It is absurd to worry about a trade deficit.
Globalization
Finally, some people might object that free trade would mean globalization and the spread of Western culture. Yes, of course, under free trade all countries would be integrated into the division of labor, because everyone would benefit. But if people genuinely want to prevent globalization or the spread of Western culture, they can certainly engage in voluntary protectionism, and lose the benefits of trade. Obviously, you do not have to trade if you do not want to; free trade also means the freedom not to trade. However, it is completely impermissible to initiate coercion to prevent other people from trading, whether they be citizens of the same or different countries. You can control your own life, but you cannot control the lives of others. Here we must note that what is currently referred to as “globalization” is statist globalization. That is, corporations collude with third world governments to rule over and exploit their populations. Free market globalization would be much different; individuals could run their own lives, and would no longer be dominated by corporation or State.
Conclusion
The case for free trade remains untouchable. To sum up, trade barriers violate the fundamental human right to engage in free trade. Trade is ex ante always mutually beneficial; specialization and trade are more efficient than self-sufficiency. Protectionism only makes everyone worse off, including those who are “protected”. Moreover, protectionism can be reduced to absurdity: if trade barriers are good between nations, why not between individuals? Free trade is also key in preserving peace and preventing war. Finally, every objection to free trade fails; cheap foreign labor, infant industries, exploited workers, capital mobility, national defense and trade deficits all cannot weaken the case for free trade. Thus, free trade is both the moral high ground and the most practical course of action.
