When Our Trade Isn't Free, Neither Is Our Work

“Starvation, pauperism, and insufficient supply can only be removed from the masses by increasing the quantity to be divided among the masses.”Anti-Corn Law League, “A Plea for the Total and Immediate Repeal of the Corn Laws,” 1841.

When trade is considered by economists and commentators, too often the discussion centers on countries. This evolves from the misbegotten notion that countries, rather than individuals, trade.

Thanks to a facile approach to what is a very basic concept, we’re as a result bombarded with strange notions of trade “surpluses” and “deficits” as though free exchange could be anything but a positive. Happily, as former Fed Chairman Alan Greenspan has reminded us, for “the world as a whole, of course, exports must equal imports, and the world consolidated current account balance is always zero.”

Greenspan’s underlying point is that the trade that so many discuss in terms of countrywide imports and exports is really about individuals freely exchanging their surplus for that produced by others. In that case, all trade by definition balances.

And with the individual in mind, we can see clearly the faulty premise of protectionism. For an individual to act in ways protectionist would be for that person to live needlessly a life of deprivation. If this is doubted, imagine the living standards to which we would reduce ourselves if as individuals we relied solely on ourselves for food, clothing and healthcare, to list just a few of our wants. Assuming a long life, it would surely be one of immense poverty.

All of this is important in light of the almost monolithic move away from free trade among the G20 nations whose leaders recently gathered in London. Notably, officials of those same countries met in Washington last September, and while all promised to eschew protectionism, a new report from the World Bank reveals that in the aftermath of the September gathering, 17 of the 20 (including the United States) countries adopted no less than 47 protectionist measures.

The United States turns inward. Sadly, the numbers cited by the World Bank don’t even begin to describe what has actually occurred. If the U.S. is considered alone, our leaders have had us on a protectionist tilt of impressive proportions since last fall.

Indeed, while Washington has described the loans made to General Motors and Chrysler as simple bridge financing that will allow them to restructure their operations on the way to profitability, the subsidies have the effect of tariffs meant to give U.S. carmakers advantage against their foreign rivals. The loans have not only kept GM and Chrysler afloat, but they’ve allowed both to tempt potential customers with zero percent financing that other automakers, including Ford, have been unable to offer. More recently the Obama administration introduced a “cash for clunkers” program meant to subsidize the process whereby owners of older cars will receive a government check if they exchange their autos for new, American made cars.

And while there’s growing evidence that the Troubled Asset Relief Program (TARP) has unwittingly aided foreign banks, its imposition in the first place retarded the natural market process that would have allowed healthy banks, both domestic and foreign, to take market share from U.S.-based financial institutions made insolvent by their lending errors. Free trade also includes the free flow of human capital, but TARP recipients have seen their hiring scrutinized too, and have been told to cancel job offers made to foreign workers.

As part of the Obama administration’s stimulus package, a “Buy American” provision was inserted that would require companies receiving money for infrastructure projects to purchase most materials from U.S.-based firms. Not long after, U.S. trade officials, in a blatant violation of Nafta, re-imposed restrictions on the entrance into the United States of long-haul Mexican trucks seeking to deliver goods to American customers.

More broadly, and since 2001, officials at the U.S. Treasury have regularly decreed that markets should set the value of the dollar. This statement is pregnant with meaning, for it communicates to the markets that U.S. monetary officials would countenance a weaker dollar. A debased greenback has long but incorrectly been seen by Washington as a tool to enhance the prospects of U.S. exporters at the expense of foreigners.

Implications of our inward turn. To a certain degree, therefore, American politicians are seeking to put up barriers to the natural flow of goods. What are the implications? At its core, protectionism is the process whereby producers who are no longer meeting customer needs are foisted on those same consumers despite their desire to transact with someone else.

In that sense, it should be said that tariffs are as much a tax on work as those imposed on us by the IRS. Ultimately we all engage in some form of labor so that we can purchase what we don’t make, but when barriers to trade are erected, the very reason we work is discouraged due to our inability to buy what we want. And what we buy costs more.

Worse, when artificial barriers to trade are created, they restrict the natural expansion of the division of labor so essential to economic growth. Along those lines, we never consider the balance of trade between (for instance) the state of Washington and Texas. And for good reason. That Seattle-based Microsoft created Windows software for Texans in no way impoverishes the latter, but makes them more efficient, all the while making it possible for the rise of Dell and Compaq.

As Adam Smith’s famous observation on the pin factory made so clear, the introduction of new workers to the production process has the wonderful effect of increasing the productivity of all those participating. Conversely, when labor’s division is shrunk not only do we increase the cost of all goods, but we make all labor less efficient thanks to the duplication of work effort alongside the misdirection of capital necessary to fund less efficient work.

Barriers are based on the notion that trade is harmful rather than enriching, and that we must keep our supposed competitors in check lest they become too strong. But what’s rarely mentioned is what our economic situation would be like absent the myriad goods that reach our shores from foreign locales. No New York City financier would blink at a computer arriving from Texas in return for his or her productivity in finance; instead both the financier and the computer manufacturer are thankful for open lines of trade that allow each to do what they do best.

Looked at from an international perspective, are the individuals from whom we import competitors? Or are they the very people whose production of televisions, clothes and shoes allow us to do other, more enriching work? Not only can we not sell to foreigners if we’re not buying from them, but when we seek to retard the process whereby they export to us, we also reduce our own individual freedom to do the kind of work we want to do.

Mentioned earlier were the subsidies meant to keep dying banks, automakers and trucking firms afloat. It’s more than apparent that portions of each sector are not profitable. Would we prefer that foreign competition make unprofitable U.S. firms obsolete, or would it be better if individuals operating outside the States started competing with us in higher-margin areas?

Wages always and everywhere result from capital provided by investors. So if the policy objective from Washington is one meant to oxygenate those gasping for air, we’re merely setting the stage for capital to flow to foreigners eager to compete with us in more profitable, higher paying disciplines. Ultimately, open lines of trade free U.S. workers and capital from low-value areas so that both can be applied to industry that investors value more. As 19th century free trade advocate Nassau Senior observed, protection causes individuals “to divert their capital and industry from their natural courses.”

International implications of U.S. protectionism. The inward turn of the United States with regard to trade cannot be ignored. While economic logic would suggest that our foreign trade partners might turn a blind eye to our economic mistakes, history tells us they might do otherwise.

As H.C. Wainwright's David Ranson recently observed, news that President Hoover would eventually sign the 1930 Smoot-Hawley tariff bill was all the evidence investors needed that a worldwide trade war was looming. As the late Jude Wanniski pointed out thirty years ago, the barriers we put up to trade were met by our foreign trade partners and markets cascaded downward.

Some might respond that another trade war would never happen, that we’ve learned from past mistakes, and that there will never be another Smoot-Hawley. This is perhaps comforting to assume, but as historian John Batchelor recently observed about the 1930s in contrast with the present, “we are no smarter than our forebears, and they were no less informed than we are of the threats of trade, currency and prices.”

In short, our limping moves away from free trade are very real and, if not halted, there’s no telling what the foreign response might be. Better it would be if the United States showed leadership at a time when it’s much needed. We ought to be making plain to foreign leaders that no matter the lengths they go to offer their citizens a false form of protection, we’ll keep our markets open so that our citizens can continue to be gratified beyond their own ability to produce.