Why The Free Trade Fanatics Are Wrong
International Trade is a Balancing Act Between Self-Interest and Moral Obligation
International trade gets plenty of coverage in the news. On the one hand you have proponents of free trade amongst nations including some “free trade at all costs” economists and the bastion of economic thinking - The Economist. On the other hand, you have those who want to restrict the free movement of goods, for a variety of reasons. To fully understand international trade, it is important that you also understand certain fundamental concepts.
Encyclopedia Britannica describes free trade as follows: Free trade, also called laissez-faire, is a policy by which a government does not discriminate against imports or interfere with exports by applying tariffs (to imports) or subsidies (to exports).
When you think about it, free trade makes a lot of sense. The United States is the largest producer of wheat in the Americas. Brazil is the largest producer of coffee in the Americas. So, it simply makes sense for Americans to buy coffee from Brazil and for Brazilians to buy wheat from America. I had the pleasure of visiting a produce warehouse in Los Angeles a while ago and that company imported fruits and vegetables from around the globe including ginger from China, grapes from South Korea, and mangoes from Mexico.
International trade becomes a little more complicated when it involves manufactured goods. Encyclopedia Britannica goes on to discuss more on free trade. The theoretical case for free trade is based on Adam Smith’s argument that the division of labor among countries leads to specialization, greater efficiency, and higher aggregate production.
I think most of us can understand the concept. Germany might be better at manufacturing precision machine tools, the United States might be better at manufacturing aircraft and China might be better at manufacturing frying pans (“better” meaning the many attributes of what makes a product better than a competing product such as quality, reliability, safety, and price). Therefore, it makes sense for Germany to buy planes from the US and frying pans from China, for China to buy machine tools from Germany and planes from the US, and for the US to buy frying pans from China and machine tools from Germany.
The concept of free trade, whether it be for manufactured goods or agricultural products, is theoretically sound. Greater free trade lowers costs, gives consumers access to items they might not otherwise be able to get and supports economic growth amongst nations. It is a win-win for everyone.
However, free trade is not problem free. There are major problems with free trade. Free trade works great when trading partners are on an even playing field. However, in many cases they are not. A manufacturer of barbeques in the United States is burdened by onerous labor laws, workers compensation insurance requirements, environmental laws, zoning regulations, property taxes, minimum wages, and many other government-imposed rules and regulations that result in both higher materials costs and higher labor costs than competitors in some other countries.
Not only is there often not a level playing field, but some other countries actively work to undermine the playing field by giving their own manufacturers special treatment that manufacturers in the US do not get, such as low-cost loans, free or low-cost land, and a variety of other subsidies (including allowing the use of slave labor).
Even worse, some countries engage in nefarious activities to support exports. Honey comes from bees and in most western countries a product sold as honey must come from a bee. The Chinese produce a product made from sugar and pass it off as honey. When the US banned imports of the Chinese fake honey, the Chinese shipped their fake honey to other countries like Indonesia and then Indonesians were shipping that same fake honey to the US.
Another problem is over reliance on one source of supply. If one country has the lowest costs for producing certain products, other countries may come to rely on that country and when emergencies happen, it could result in problems getting critical supplies. This happened during COVID when the United States found that there were no domestic manufacturers of masks, hand sanitizer and certain drugs. China, the primary manufacturer of these products, through a combination of restricting supplies and businesses being shut down by overzealous government agencies, could not supply what the United States needed.
Another negative consequence is that jobs in one country could be eliminated as manufacturing moves to other countries that are more efficient or have lower costs. That happened in the United States where we lost manufacturing jobs to Japan in the automobile industry and to China in the electronics industry. While consumers in general may have benefited from lower costs, there is an argument that says the general population must make certain financial sacrifices for the well-being of our fellow citizens (this is the argument made by every politician who ever proposed or proposes any form of social program such as minimum wages, food stamps, welfare, school lunches, and section 8 housing).
To add to the list, we do business with many countries whose social and political systems are at odds with the concepts of freedom, liberty, individualism, and capitalism upon which the United States was founded. Does it really make sense for us to do business with people who engage in totalitarianism, who abuse basic human rights, who throw gay people off rooftops, who allow for the use of slave labor, who deny citizens the right of self-determination, who stone women to death, and who engage in all manner of despicable enterprises and activities?
The trading of goods between nations is overseen by the World Trade Organization. However, much like other international organizations, such as the World Health Organization and the United Nations, its effectiveness can be eroded by member countries who engage in skullduggery and activities that are not aligned with the mission and goals of this international organization designed to facilitate the free flow of goods.
So, what happens when the United States puts tariffs on imported products? One blistering article in the Economist critical of tariffs states that “the burden actually falls on American consumers, via higher prices. A 10% universal levy would cost each American household an average of $2,000 a year.” So, a tax on goods from China will cost Americans and average consumers will pay the price. With about 124 million households in the US, the burden of a blanket 10% tariff on all imported goods would be about $250 billion.
I searched the Economist’s website for the term “tariff burden on consumers.” On the very first page of search results there were several articles discussing how tariffs negatively affect consumers. I then searched for the phrase “excise tax burden on consumers.” There were no results that included any discussion on the cost of excise taxes to consumers. I then searched for the term “sales tax burden on consumers.” There were no results that include any discussion on the cost of excise tax to consumers.
Sales taxes in the United States cost consumers close to $700 billion. Excise taxes (special taxes on such things as gas, alcohol, tobacco, airline tickets, tanning salons) costs consumers in the United States another $900 billion. The Economist is surprisingly quiet on these costs, but somehow outraged that our government would collect taxes on imported goods.
Why is it that government taxes on consumer spending such as sales tax and excise taxes seem perfectly acceptable to the Economist, but government taxes on imported goods to protect American workers and businesses from government created trade disadvantages, international skullduggery and criminal activities, over-reliance on foreign sources of critical supplies, trading with people whose personal value system is not compatible with that of Americans, and trading activities that hurt American workers is okay?
Even the Economist begrudgingly admits that tariffs do help US manufacturers and that tariffs on products from China have resulted in less reliance on China as the sole trading partner for many products.
Free trade for all the reasons mentioned is not a good idea. However, controlled trade certainly is a good idea. If there is a role for government, it is ensuring our trade policies are to the advantage of Americans, or at the very least, neutral. To the degree that international trade hurts Americans, it should be expected that our governments steps in and helps. I call that smart trade.
As for tariffs, the government is going to tax us anyway, whether it be excise tax, sales tax, or tariffs. There certainly is an argument that tariffs are “better” taxes than either excise taxes or sales taxes. I have no choice with an excise tax or a sales tax, but I can avoid paying a tariff by choosing not to purchase goods manufactured in foreign countries. Of course it would help if excise taxes and tariffs were a line-item on a receipt so we as consumers could make an informed judgement.
One argument for free trade that never gets much mention is the moral argument. I could not find a single mention of this argument on the Economist website. However, the Cato Institute argues that there are numerous moral reasons for free trade. One reason is as follows:
“Free trade and free markets empower poor people by giving them greater opportunity to create wealth and support their families. By dispersing economic power more widely, free trade and free markets undercut the ability of elites in less developed countries to pillage a nation’s resources at the expense of its poor. Proof can be found in the immigration patterns of poor people throughout the world. By the millions, they seek to leave closed and centrally controlled economies for those that are more open and less controlled. Poor people themselves understand that a free economy serves their interests, even if many of their self‐appointed intellectual advocates in the West do not.”
We as Americans have a moral obligation to engage in free trade. On every product sold, whether in the US or another country, there is a profit. Accumulated profits add wealth to any nation. Our system in the US, founded on principals of liberty, freedom, individualism, and capitalism, produced the economic powerhouse that is the United States of America. We produce wealth. Many other countries, with their systems, either do not produce wealth or produce wealth at a rate substantially below that of the US.
When looking around the globe at starving people living in abject poverty, how can we best help them? One way is to give money to charity. Another way is to have our government give their governments money. However, neither of these strategies results in the creation of wealth for average people in those countries. However, by purchasing products (or services) from those countries, we in effect are exporting wealth and allowing average working people in those countries to create wealth.
The Brookings Institute reports that “The last 30 years have seen dramatic reductions in global poverty.” The Guardian reports that “Global poverty has seen a spectacular decline since the 1960s – when about 80% of the world’s population lived in extreme poverty. Today that number has been reduced to nearer 10%, with hundreds of millions of people removed from the extremes of hardship.”
A huge factor in this astounding reduction in global poverty is the willingness of Americans to purchase products from across the global, despite the many reasons we have discussed why free trade is not such a good idea. We have been exporting wealth to other nations for the past 60 years, if not longer. How is it that we could export that much wealth and still have a robust and from time-to-time roaring economy? It is entirely attributable to our system of freedom, liberty, individualism, and capitalism that underlay our Constitution, our form of government, our social systems, and our culture.
Perhaps one day the people that lead the countries from whom we purchase goods will figure that out.
CHECK OUT MY BOOKS.
The Secrets to Raising Capital
The Key to Landing a Job - The Interview
The Secrets to Job Success or How To One Up Your Boss
NEED HELP WITH YOUR BUSINESS? Raising capital, business plans, financial forecasts, part time CFO, accounting systems, financial strategy or just cleaning up a mess. I can help. Check out my website.