Debating Free Trade vs. Protectionism, Round One Replies

Below are the replies to round one of an ongoing HuffPo debate over the merits of free trade vs. protectionism. Round one, with Ian Fletcher vs. William Bernstein, may be found here. This round's participants are Ian Fletcher (from the previous round) of the U.S. Business & Industry Council, author of Free Trade Doesn't Work: What Should Replace It and Why vs. Ed Tower and Wazi Ligomeka. (Ed is a professor of economics at Duke University, and Wazi is an economist at the Malawi Ministry of Finance who is working on his MA at Duke.)

History Shows Free Trade Doesn't Bring Peace
Ian Fletcher

SOME MYTHS are so appealing, so coherent, and sound so wise when intoned with a world-weary and compassionate air - spiced with a bit of tough-sounding realpolitik - that it is easy to forget to apply a bit of old-fashioned empiricism to them and find out whether they really stand up to the data. The myth that free trade brings peace belongs in this category. When the French intellectual Frederic Bastiat (1801-1850) wrote that, "If goods are not allowed to cross frontiers, soldiers will," this was a superb achievement in sloganeering, but this slogan belongs with a lot of other hoary clichés that sound good on paper.

What does history really record on this question? Start with the fact that the leading free-trade economic power of the 19th century, Great Britain, which fulfilled at that time much the same evangelistic role concerning this doctrine that the U.S. does today, also fought more wars than any other power. Sometimes this was done with the openly-stated aim (imperialism wasn't so bashful then) of opening up foreign nations to freer trade. That's how Hong Kong became British.

Little has changed. Since WWII, Japan has been the most protectionist major economy in the world--a fact even free traders concede by having complained about this fact for decades. And yet how many wars has protectionist Japan fought since 1945, compared with free-trading America? Whatever one may think about the justifiability of America's wars from Korea to Afghanistan, they cannot be classified as peace.

Supposedly, free trade brings peace because nations do not wish to kill their own customers. But experience suggests that free trade also brings a global scramble for resources which, being finite, cannot avoid being the objects of rivalry pursued by all feasible means--including armed conflict. Does anyone maintain with a straight face that if the U.S. had a sufficient tariff on imported oil to be self-sufficient in energy, we would have been as involved in the Middle East as we have been?

Free trade also supposedly brings peace because it brings prosperity, which creates consumer societies uninterested in dying for their governments. But history shows that every nation which has industrialized and achieved prosperity actually did so by means of protectionism, not free trade. Britain was protectionist in the 18th century, we ourselves were roughly up to the end of WWII, 19th-century Germany employed this policy following Bismarck, Japan did after the Meiji Restoration of 1868, and aspiring nations like China pursue it today.

The much-repeated myth that the Smoot-Hawley tariff of 1930 caused the Great Depression which began in 1929 is debunked by Mr. Bernstein himself on p. 354 of his book A Splendid Exchange (viewable on Look Inside the Book on Amazon.com).

A trade war today is even less likely, for the simple reason that our trading partners are the ones with the huge surpluses to lose, not us. With the U.S. running an astronomical deficit, how exactly is our trade situation supposed to quantitatively worsen if the U.S. imposes a tariff? Token retaliation and loud squealing is likely, but that's it. After all, the world has survived our major trading partners' trade barriers long enough.

The reality is that, between China's currency manipulation, Japan's well-oiled mercantilism, and the EU's behind-the-scenes manipulation of non-tariff barriers, we already live in a world that is half protectionist. The only crisis this has produced is the one af-flicting those nations, like the U.S., which for reasons of ideology and political corruption fail to competently play the game.

Anything A Tariff Can Do Something Else Can do Better
Ed Tower and Wazi Ligomeka

Ian Fletcher gives us some arguments for restricting international trade. Over a century ago, F. Y. Edgeworth, Keynes' predecessor as editor of the journal of the Royal Economic Society, anticipated much of my response to Fletcher. He wrote about the idea that the national advantage could be served by the optimum tariff:

"Thus the direct use of the theory is likely to be small. But it is to be feared that its abuse will be considerable. It affords to unscrupulous advocates of vulgar Protection a particularly specious pretext for introducing the thin edge of the fiscal wedge. [The author of the optimum tariff argument] may be compared to a scientist who, by a new analysis, has discovered that strychnine may be administered in small doses with prospect of advantage in one or two more cases than was previously known; the result of this discovery may be to render the drug more easily procurable by those whose intention, or at least whose practice is not medicinal. ... Let us admire the skill of the analyst, but label the subject of his investigation POISON."His concern is that lobbying groups are likely to capture the tariff, and it will serve their interest rather than the public interest.

I go further. The ideal doctor wants to cure the disease with as little collateral damage as possible. He or she wants to use strychnine only if it is the best medicine possible. Fletcher cites externalities. If the issue is pollution, tax pollution. Don't tax the industry output or tax exports.

If the issue is a positive externality, such as the fertilization that bees provide to apple trees, don't tax honey imports. Subsidize bees located close to orchards, and keep honey imports flowing. If the problem is unemployment, cut minimum wages.

A tariff on manufactures is the best policy only when our goal is to reduce manufactured imports. To expand R&D in manufacturing, subsidize it. To expand manufacturing employment, subsidize it or tax every other kind of employment. To alleviate poverty among the unskilled, introduce a negative income tax for those in the bottom of the income scale, which benefits the low wage earner without mucking up incentives too much. To patch up inadequate demand, lower interest rates. Like good doctors we want to do good things with few nasty side effects. Using a tariff to fix the economy is like performing a lobotomy with a spade--not the right tool.

The limits to the growth of protection are weak. An import tariff or quota subsidizes producers. Import restriction is a shadowy tax on consumers. Better is a subsidy. Here the drain on the government budget is obvious to all and it is likely to raise the ire of voters before it gets too big. Tariffs are not as transparent as subsidies. Remember the Dracula effect. Just as Dracula shrivels into nothingness when the morning sunlight hits him, exposing the evil of favors for special interests, to the transparency of subsidies helps to destroy it.

Finally, "protectionism" is a loaded term. Every time one sector is protected with a tariff some other sector is persecuted as resources are drawn away from it. One sector's protection is another's persecution. Moreover, by tilting the playing field between different domestic activities the national interest is persecuted as well.