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FREE TRADE VERSUS PROTECTIONISM

By RICHARD M. EBELING

A specter is haunting the economies of the world. It is the
specter of protectionism. In one country after the other,
cries are heard that international trade, rather than bringing
mutual prosperity, imposes economic hardship on some nations
so that others may gain. Trading practices among nations are
declared to be "unfair." Jobs are supposedly lost through
"cheap" imports flooding domestic markets. Balance of trade
deficits threaten the financial stability of not only third-
world countries, but the United States as well.

And the solutions proposed are the same everywhere: demands
are made for the imposition or stiffening of trade
restrictions--the raising of barriers in the path of trade
among nations. It is claimed that limitations on amounts of
foreign supplies entering the domestic market, through either
tariffs that make foreign goods more costly or quotas that
prohibit the quantities which may be imported, will increase
the market share of domestic companies as well as enhance
employment opportunities at home.

The reasoning seems straightforward and sensible. However, it
suffers from one handicap: It is dead wrong! When implemented,
protectionist policies bring economic harm, as well as lower
standards of living, for the people of every nation choosing
to follow this path.

If the protectionist argument is correct, that buying Japanese
goods, for example, is harmful to American industry and jobs
as a whole, then the same logic would have to imply that
importing New Mexico goods is harmful to Texas industry and
jobs; and that buying Fort Worth goods is harmful to Dallas
industry and jobs. Why does the Japanese-U.S. argument seem
plausible, while the Fort Worth-Dallas argument appears
suspect? Because people still suffer from the tribal notion
that suggests that the accident of a political boundary across
the face of a map must imply antagonism between the human
beings who live on different sides of that boundary.

International trade is nothing more than an extension of the
social division of labor across national borders. And the same
advantages that arise from a division of labor between members
of the same nation apply among members of different nations.
It enables a specialization of skills and abilities, with each
member of the world economic community tending to specialize
in that line of production in which he has a comparative
advantage (a relative superiority) in relation to his trading
neighbors.

Through such a division of tasks and activities, the wealth
and prosperity of every nation is increased, as compared to a
situation in which individuals or nations are required to
obtain what they desire through their own efforts, in economic
isolation from their fellow men.

But what of the particular charges presently leveled against
our foreign trading partners? What about the detrimental
effects which supposedly result from the trading policies of
other nations? Let us examine some of these charges:

1. Unfair Trading Practices. A number of nations have been
accused of unfairly subsidizing the export of goods to
America, i.e., at prices which are below their "actual" cost
of production.

The world is going through a dramatic technological and
economic revolution, with many underdeveloped nations finally
entering the industrialized era. Their lower prices often
merely reflect their lower costs of production, as they shift
into positions in the international division of labor which
reflect those areas where their relative economic efficiencies
are greatest. As these nations sell more in the United States,
they earn the purchasing power to buy more from America.
American exports, therefore, increase because the only way for
foreigners to buy more from Americans is for Americans to sell
more to foreigners.

To the extent that foreign governments do subsidize some
products sold in the U.S., this means that Americans are able
to buy them below what would have otherwise been the market
price. In other words, we are given a bargain, a bargain that
saves us resources that would have been devoted to the making
of more products to pay for what otherwise would have been
higher-priced imports. And these resources are now available
to make other things that we would not have been able to
produce without this bargain. It is the citizens of those
other nations who should be outraged since they, not us, have
to foot the tax bill to pay for the subsidies.

2. Foreign Products Cause Loss of Jobs. The charge is made
that the sale of foreign goods in America "steals" markets
away from American companies, with a resulting loss of jobs in
America.

This argument ignores the fact that these foreign goods must
be paid for. It is true that jobs in those sectors of the
economy which directly compete against certain foreign
products may be lost. But other jobs are created in those
industries which manufacture goods which foreigners are
interested in purchasing from Americans. The sale of foreign
goods in America may change the locale and types of
employments in the U.S., but it need not result, over time, in
any net loss of jobs.

Furthermore, with free trade, Americans end up spending less
of their income on certain products because they are bought
more cheaply from foreign suppliers. This leaves them with
extra dollars by which they are able to increase their demand
for other goods on the market. The net effect, therefore, is
to stimulate even more employment opportunities than
previously existed.

3. The Balance of Trade Deficit and Foreign Investment. The
leading issue during the last several years has been the
charge that America buys more abroad than it sells, resulting
in a trade deficit that threatens the economic stability of
the United States.

It is true that in terms of tangible or visible goods, the
U.S. has been buying more than it has sold. But this overlooks
the overall trade "balance sheet." Instead of buying American
commodities with the dollars they have earned, foreign earners
of dollars have returned some of them to America in the form
of savings in the credit markets, or as direct investment in
U.S. industry. The overall balance of payments between the
United States and the rest of the world has balanced.

When this is pointed out, the concern expressed is that
foreigners are "buying up America." "They" will control "us."
Actually, however, when the foreign investment is "indirect,"
i.e., loaned to Americans through the banking system, this
merely increases the pool of savings in the United States; and
this pool of savings is available to domestic businessmen who
desire to expand or improve their plant and equipment. If
wisely used, the money borrowed will be paid back, with
interest. And, in a few years, the productive capital in
America will be greater and more efficient. Industry will
still be in "our" hands.

But what if the investment is direct? Won't foreigners
"control" America by buying out existing companies or starting
up new businesses which successfully compete against American-
owned firms? Again, this reflects the collectivist notions of
past ages, notions which think of those who belong to other
nations--"tribes"--as inherently dangerous enemies.

But those of other nations who invest in America are actually
"our" captives--if one wishes to use this form of reasoning.
They have invested their savings in America because it has
offered the most attractive economic and political
environment. Their own fortunes and futures are linked to
continuing American prosperity; and they must manage their
investments in judicious, market-oriented directions if they
are to generate the profits for which they hope.

But what if "they" pulled out?  Would that not hurt "us" by
disrupting "our" economy? In such a case, the physical plant
and equipment remain in America. To "pull out," they would
have to find willing buyers. And to do that, they would have
to offer attractive prices to prospective buyers. And they
would only want to sell out if either the political or
economic climate in the U.S. became less attractive as
compared to other countries. But are these not the same
incentives and motives which guide Americans who invest and
save in New York rather than California, or in the U.S. rather
than some other country?

While there will always be necessary adjustments to new and
changing circumstances, free trade between nations ultimately
benefits all who participate. Protectionism can only lead us
down a road of impoverishment and international commercial
tensions. To paraphrase the great 18th century, free-market
thinker, David Hume, when he criticized the protectionists of
his time: Not only as a man, but as an American, I pray for
the flourishing commerce of Germany, France, England and even
Japan. Why? Because America's prosperity and economic future
are dependent upon the economic prosperity of all of those
with whom it trades in the international division of labor.

Professor Ebeling is the Ludwig von Mises Professor of
Economics at Hillsdale College, Hillsdale, Michigan, and also
serves as vice-president of academic affairs for The Future of
Freedom Foundation, P.O. Box 9752, Denver, CO 80209.

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From the January 1991 issue of FREEDOM DAILY,
Copyright (c) 1991, The Future of Freedom Foundation,
PO Box 9752, Denver, Colorado 80209, 303-777-3588.
Permission granted to reprint; please give appropriate credit
and send one copy of reprinted material to the Foundation.