In light of President Trump’s recent tariff proposals, it’s worth noting why free trade has almost unanimous support among economists.
Imagine Joe in Minnesota wants to purchase bread. Suppose he can buy from Sam, who resides in Minnesota, or from Tom, who lives in Wisconsin. Sam sells his bread for $5; Tom sells his for $3. Using his common sense, Joe purchases from Tom. While Sam’s bread business may lose, free trade benefits consumers like Joe, who have access to the lowest rates on the market.
But imagine instead we lived in a “protectionist” world, much like under mercantilism before the eighteenth century. Suppose the governor of Minnesota wanted to “protect” Sam’s job and the broader Minnesota public by throwing a tax—tariff—on Tom’s bread. The result is that Tom’s loaves now cost $6 to purchase in Minnesota. While Sam’s business may benefit, everyone else pays higher prices as a result.
This basic illustration offers a few lessons. First, “protectionism” not only hurts consumers and producers, who lose business as a result of artificially higher prices, but in the long run it also harms the very workers protectionist policies are intended to “protect.” Sheltering inefficient work—like Sam’s bread business—prevents workers like Sam from finding and developing a skill set that the economy needs.
Nor does the equation change when countries subsidize their producers to sell products abroad below cost. Such “cheating,” as media and politicians often describe it, hurts only nations that cheat, as their citizens pay the subsidies via higher taxation. Meanwhile, consumers abroad reap the benefit of low prices. The only people for whom this is “unfair” are the citizens whose taxes pay for their governments’ folly.
Second, like seventeenth-century mercantilists, today’s anti-free traders think in zero-sum terms—that is, the belief that the wealth of one country comes at the expense of another. Before the eighteenth century it was widely believed that hoarding gold and silver would increase a nation’s power relative to others’. To capture gold, nations desired a “favorable balance of trade”—that is, maximizing exports and restricting imports.
Modern anti-free traders, who have simply replaced the emphasis on gold with an emphasis on “jobs,” often also stress the need for “favorable trade.” As Nobel Prize-winning economist Milton Friedman explained, however, a “‘favorable balance of trade’ really means exporting more than we import, sending abroad goods of greater total value than the goods we get from abroad. In your private household, you would surely prefer to pay less for more rather than the other way around, yet that would be termed an ‘unfavorable balance of payments’ in foreign trade.”
Put simply, prosperity results not from a “favorable balance of trade” or from “jobs,” but from productive activity. If jobs were what mattered, we could achieve full employment tomorrow by hiring every unemployed person to dig and fill ditches, but Friedman has also exposed the mistake here, from an experience he had traveling.
While abroad, he once observed workers using shovels to build bridges. Puzzled, he asked his host why they weren’t using machines. “Because,” his host replied, “machines would result in fewer jobs.” “Oh,” retorted Friedman, “I thought you were interested in building bridges. If you want to create jobs, why not give them spoons instead of shovels?”
In a word, the protectionist concern for jobs rather than for productivity often yields slower economic growth and less overall wealth. Using spoons to build bridges makes construction take longer, meaning delayed commute time for those whom the bridge would provide shorter travel, along with greater consumption of scarce resources, including labor, which are taken from more productive alternatives in the economy.
Third, high tariffs may incite trade wars. To continue with the example above, if Wisconsin dislikes that Minnesota is “stealing” local business, it could retaliate by imposing its own tariff on Sam, which may encourage Minnesota to reciprocate, thereby launching a trade war. In fact, fear of this is at least partly responsible for recent market volatility. Our politicians would do well to consult the history books, which reveal that anti-free trade policies helped precipitate the Great Depression.
Although the stock market collapsed in 1929, according to historian Claude Barfield, the United States hadn’t entered the “full onset of the Great Depression” until after the Smoot-Hawley Tariff Act of 1930. Following the initial crash, Congress and President Herbert Hoover enacted the misbegotten tariff in an attempt to protect American jobs.
The results were both predictable and predicted by economists at the time. Other countries quickly retaliated with tariffs of their own, which dumped a bucket of cold water on global trade flows, sending world economies deep into depression. As Barfield writes, the Smoot-Hawley Tariff Act “prolonged [the depression] and possibly deepened it around the world, not just in the United States but for other countries.”
Unfortunately, however, lofty emotional appeals to “saving jobs” and “protecting American workers” make protectionism good politics, despite demonstrative economic and historical evidence against it. Perhaps that is why economist Thomas Sowell once observed that “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” With regard to free trade, that increasingly seems to be the case.