28 February 2012

Flaws in the Defense of Free Trade

But there’s more to this than meets the eye. What we don’t see are the hidden costs of protectionism. The first is the waste from using costly production methods. Protectionism changes manufacturers’ incentives, and they use capital and labor that could have been better-used elsewhere to produce (say) cars. The economic imagination is useful here. If people weren’t making cars, they could be making medical devices. Or tacos. Or automotive repair services (it stands to reason that if you can build cars, you can probably also fix them). Or any of a number of other things. As Russell Roberts points out in The Choice, there might be some short-run costs for workers who have trouble retooling; however, free trade leads to new opportunities for the next generation.

Replace the word “protectionism” with the word “regulation,” and note that the resulting paragraph makes a compelling case against government regulation.  The altered paragraph also explains why free trade is terrible idea at this point in time:  there are a massive number of regulations imposed on businesses by the federal government.  Allowing for free trade, then, will not make the country wealthier.  Rather, all it will do is decrease the cost of consumable goods while simultaneously transferring wealth to foreign businesses.  As such, supporting free trade during a time of high domestic economic regulation is akin to supporting government-based foreign aid.

The second cost comes from the fact that tariffs increase the price of cars. When prices rise, people demand less of something. Consumers are worse off because they have fewer cars, and the cars they are no longer buying are cars that would cost less than consumers are willing to pay in the absence of tariffs. Interventions like tariffs raise the incomes of some workers by impoverishing others.

As mentioned before, there are a large number of governmental regulations that hinder the domestic economy.  If tariffs were enacted to enforce regulatory parity, prices would naturally go up (or the quality of products would go down) as a response because consumers would have to bear the costs of their government’s regulatory interference.  In a democratic country like the US, citizens would have to live with the consequences of the choices their elected representatives make.  Thus, by simultaneously desiring free trade and a high degree of regulatory “protection,” Americans are essentially saying that they want societal luxury goods (like minimum wage, reduced pollution, worker safety, etc.) without having to actually pay for them.  Unfortunately, nothing is free in this world, and the cost of regulation will be paid for, either in the form of higher prices, in the form of diminished capital, or in the form of increased debt.

The third cost comes from the change in incentives when it is discovered that people can raise their incomes by getting favors from the government. At best, favors from the government are a zero-sum transfer from one group of people to another. In reality, however, people use scarce resources to effect these transfers. Consider just one cost: the cost of flying to and from Washington, DC. The plane that is flying auto executives and union representatives from Detroit to DC could be used for something else, like flying people from Detroit to New York for business or from Detroit to Los Angeles for a vacation. The prospect of subsidies, tariffs, and other benefits from the government means that people will take valuable resources that could have been used to create wealth (planes, the time and energy of flight attendants and pilots, bags of roasted peanuts) and instead use them to transfer wealth. On net, we’re all worse off.

It is true that one government intervention usually begets another.  What’s ignored is that not all second-order governmental interventions are irrational or illogical.  While the initial tinkering in the economy usually leads to unintended and undesirable consequences, it does not follow that further interventions will do the same.  And thus, while it is better for the government to not tinker in the first place, it is ludicrous to suggest that further tinkering will always be a net negative.  Furthermore, if we take Carden’s argument at face value, the most appropriate response would be to focus our energy on deregulating the domestic economy instead pursuing free trade, since the domestic economy plays a much larger role in consumers’ lives than foreign trade.

Incidentally, coupling a highly-regulated domestic economy with free foreign trade is economic suicide in the long run because the domestic producers will their ability to innovate to be quite stifled (what with regulation and all), and so they will outsource their innovation to freer countries that offer comparable labor markets.  And since production usually initially occurs at the same place as the innovation that leads to said production, it stands to reason that the innovative industries of the future will begin outside of the highly regulated economy that has encouraged outsourcing via free trade.

As should be clear, Art Carden’s argument suffers from the same flaws as all the others made by free traders:  it’s shallow, ignores economic complexity, and is based on highly idealistic economic theories instead of actual reality. As such, his policy prescriptions should be ignored.


  1. I was first exposed to the 'free trade' argument back in the 80's and I knew it was BS. It's fine for the chattering classes to write their articles and books about anglers and bakers on an island or some other skill that doesn't take very long to learn the basics. Building a computer or a metal lathe or a car starting from raw materials doesn't take a week to learn and the factories aren't built in a week or two. Once displaced out of the country, the ramp up time to start anew is pretty steep. I'd bet most of the people who spout that nonsense never had a factory job, or a job involving the production of hardware, machines or software.

  2. @Carnivore- Worse yet, free trades often seem blind to the fact that domestic policy is always a hindrance to developing these industries. Between their magical belief that production can be moved from country to country on a moment's notice and their tendency to ignore the sheer expense of meeting domestic production regulations, their policy proposals resemble fairy tales more than serious analysis.