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Friday, July 1, 2016

The Case Against Protectionism

Thirty-six years ago, FEE president Lawrence Reed was a young economics professor in his fourth year of teaching at Northwood University in Midland, Michigan. His first article (of what now amounts to many hundreds) in FEE’s journal, The Freeman, had appeared in 1977. This piece on free trade and protectionism from October 1980 contains data and other details that were current at the time but the core arguments he presented here are every bit as clear and relevant today as they were then.

One thing we learn from history is that hardly anyone ever learns from history! Mistakes made in the past, some on a grand and glaring scale, have been repeated again and again. This is true particularly of the policies of central governments.

Much of the post World War II era was marked by a gradual return to relatively free trade.

International trade presently reflects the consequences of a mass lapse of memory. During the dark days of the Great Depression the world learned the painful lesson that rampant economic nationalism leads to a breakdown in world trade. The “isolationist economics” of the 1930s did much to prolong and deepen the agony of depression.

Much of the post World War II era was marked by a gradual return to relatively free trade. Barriers to commerce came down. Goods and services crossed national borders once again. Between 1938 and 1970 the value of world exports increased thirteenfold, from $23.5 billion to $311.5 billion.[1] With this expansion of peaceful, voluntary, and constructive activity came a wider division of labor and general prosperity.

The volume of world exports in the 1970s for the most part continued to grow. But a complicating factor emerged which has slowed the trend and threatens a return to the practices of the 1930s. The governments of the world are rapidly rejecting the logic and benefits of free trade. The specter of protectionism has reared its ugly head once again.

The protectionists use melodramatic, sometimes military, terms to describe what is essentially a network of peaceful transactions.

Protectionism is the policy of using coercion to restrict the importation of foreign goods, allegedly for the good of the domestic economy. Governments around the globe increasingly are employing it through higher tariffs, import quotas, exchange controls, and other artificial, political roadblocks. Market transactions in oil, soybeans, airline tickets, gold, bank loans and almost any other imaginable product or service routinely and hourly cross national boundaries on a vast scale, creating international markets and market prices. Both theory and history tell us that government policies which ignore this process or try to contravene it for national advantage must have deleterious effects.

The list of new and proposed restrictions, however, is growing almost daily. For example:

1. American steel manufacturers have filed suits charging “unfair competition” from Japanese and European steelmakers.

2. Florida tomato growers are demanding “protection” from Mexican tomatoes.

3. British manufacturers of greeting cards are calling for limits on Christmas cards imported from the Soviet Union.

4. The French government recently vetoed a French company’s purchase of four Japanese container ships and offered instead a $40 million subsidy to the company so it could buy ships built in France.

5. The governments of the Common Market countries caved in to demands that they restrict the import of acrylic fibers by American producers.

6. British shoe producers are appealing for import restrictions against shoes made in Brazil, Czechoslovakia, and Poland, claiming that these countries are dumping shoes in Britain.

7. The Italian car maker Fiat enlisted government support to block a deal between Alfa- Romeo and Japan’s Nissan Motors which would have given Nissan a foothold in the Italian market.

8. Auto makers and auto unions in the U. S. are lobbying for punitive measures against foreign imports.

9. Meanwhile, in Britain, the Transport Workers Union has launched a campaign to keep all foreign-built cars out of British salesrooms after 1980.

Today, Americans are crying with alarmist fervor, “The cars are coming! The cars are coming!”

One expert on the world economy estimates that more than 46% of world trade is controlled by governments through various measures—up from 40% in 1974. Agricultural trade remains as fully controlled as ever, but more than 21% of trade in manufactured goods is now regulated, up sharply from 13% six years ago.[2]

The vocabulary of the protectionists indicates the seriousness with which they regard the “problem” of imports. The use of melodramatic, sometimes military, terms to describe what is essentially a network of peaceful, voluntary transactions is quite prevalent. The entry of goods from outside national boundaries is variously referred to as an “invasion,” an “assault,” or a “flood.”

Two hundred years ago when Americans cried “The British are coming! The British are coming!” it was a call to arms against an enemy who intended to do violence to life and property. Today, with equal fervor in some quarters, Americans are crying “The cars are coming! The cars are coming!” as if a foreigner selling a car to a dentist in Peoria constitutes an act of aggression.

Why Trade?

In dealing with this problem, it is instructive to pose the question: Why trade? The answer should be obvious: people trade because they want to acquire something! To get it, they offer something in exchange. The fundamental, universal principle of free exchange is that both sides to the transaction benefit.

This principle becomes abundantly clear when one recognizes that “nations” do not trade. A “nation” is a collective term for something which exists only in the abstract; it is not a living, breathing, acting, decision-making entity. Only individuals live, breathe, make decisions, act, and trade. What thinking individual would freely and consistently give up what he has in order to acquire things he values less?

So it is that trade is a natural development among men seeking to improve their individual welfare. It requires no central authority to decree it; it simply requires that the central authority stand aside and not hinder it! It takes the use of force (fines, taxes, prison sentences) for trade to disappear.

Too often we see the good that restricting imports might do for a few and ignore the very real injury which would be inflicted on the many.

This use of force in international trade is gaining new respectability these days as an effective means to deal with what is known as “dumping.” A somewhat nebulous concept, dumping has been defined as selling abroad below the cost of production or at a price lower than that prevailing in the exporter’s home market.

No attempt has been made in American anti-dumping law to define “cost of production.” What seems concrete to the legislator is slippery to the economist, who uses many different concepts of “cost,” including “marginal,” “average,” and “total.”

Steven E. Plaut, in an excellent article entitled “Why Dumping is Good for Us,” explains the morass that this definitional problem has created: 

The bureaucratic process through which foreign producers are judged to be dumping is cumbersome. Any American businessman who believes his company has been hurt by cheap imports can file a complaint with the Commerce Department. After an investigation that can take up to eleven months, Commerce determines whether goods have been sold at “less than fair value.” Simultaneously, the International Trade Commission decides whether such sales have been “injurious” to American industry. If both findings are positive, dumping in the legal sense is deemed to have occurred, and anti-dumping duties are levied. There is no penalty to the petitioner if he loses his case, which encourages a blizzard of filings.[3]


In a 1977 case concerning alleged dumping of Japanese steel plate, the U. S. Treasury decided that the Japanese firms were indeed dumping their steel. A crucial part of the finding involved adding an 8% profit to the Treasury’s rather capricious computation of the Japanese firm’s costs. As Lindley H. Clark of the Wall Street Journal stated, “If steel- makers have to get an 8% profit on everything they sell, many steel companies in the U. S. and elsewhere have been dumping quite a great deal of steel.”[4]

The Fallacy Exploded

Anti-dumping levies are frequently proposed in the name of “fairness” in order to “equalize the conditions of production.” The fallacy embedded in that notion was exploded by the French economist and statesman, Frederic Bastiat, a century and a half ago:

To equalize the conditions of production is not only to obstruct exchange to some extent but also to attack exchange at its very foundations; for exchange is based precisely on the diversity, or, if you prefer, on the inequalities of fertility, skill, climate, and temperature, that you are seeking to eliminate. If Guienne sends wines to Brittany, and if Brittany sends wheat to Guienne, it is because these two provinces offer different con ditions of production. Is international trade conducted on a different basis? Moreover, to attack the inequalities in conditions that give rise to exchange and that account for it is in effect to attack exchange itself. If the protectionists had the power to give legal effect to their convictions, they would reduce all men to the snail’s life of utter isolation.[5]

Bastiat’s conclusion is inescapable: it is always beneficial for a nation to specialize in what it can produce best, and then trade with others to acquire goods at costs lower than it would take to produce them at home.

Certainly American auto makers, some of whom are urging their fellow citizens to “buy American” and the U. S. Congress to restrict imports of foreign cars, understand Bastiat’s principle when they act as “buyers” in the market. Finding a truly all-American car these days is virtually impossible. Almost everything Detroit turns out contains components, from engines to brakes, which are made in other countries.

Purchasing these quality parts at the lowest price helps keep the American auto industry competitive, regardless of where those parts originate.

A Mercantilist Notion

The charge that foreign manufacturers will “dump” their goods until domestic competitors are forced to close and then raise prices to exploit a market devoid of competition dates back at least to the mercantilist era. In those days, it was believed that a domestic manufacturer had a “right” to the local business. Those consumers who would have preferred foreign products were prevented from buying them by restrictive legislation. The result was a reduction in efficiency and competition, higher prices and fewer choices to the consumer, and ultimately less attractive employment opportunities.

Moreover, to quote Steven Plaut again,

. . . predatory dumping that reduces competition, like a domestic price war, involves a period of gain for consumers (or the consuming country) followed by a period of loss, as the emerging monopolist or oligopolists extract excess profits. Dumping will result in a net national loss for the importing country only if the eventual loss outweighs the earlier gain. There has never been a well-documented case of net consumer loss resulting from a domestic price war. Nor is there convincing evidence of a single case in which a country suffered a net loss from dumping.[6]

Whichever definition of the word one employs, “dumping” has some very rational explanations in its favor. What about the legitimate concept of variable pricing, for in stance, which involves different prices in different markets because supply and demand conditions are not everywhere identical?

As long as people are free to reap the benefits of trade, they have a direct and immediate interest in tranquil relations.

Sometimes dumping occurs with products which are no longer in great demand in home markets, left over when models change, or outlawed for domestic political reasons.

At other times, a foreigner will attempt to acquire a market share in another country by offering his wares at cut rate. Is that any different from the corner grocery store which advertises toothpaste at 50¢ off in order to get customers in the store?

Under other circumstances, a producer may maintain a certain output during an economic decline at home and sell his products abroad at “below cost” because the alternative of closing for the duration of the decline would be even more costly.

And because of price and exchange rate fluctuations which may take place over the life of a sales contract, the final sales price of imported products could easily end up below cost or below the domestic price.

No free trade advocate should ever argue that free trade makes life easy for every domestic producer. While broadening the choices open to consumers, it can simultaneously deny a producer the security of a guaranteed home market. But any policy of protectionism designed to provide that security will do harm to consumers. Too often we see the good that restricting imports might do for a few and ignore the very real injury which would be inflicted on the many. There simply is no escaping the fact that protectionism as an idea does violence to the logic of liberty, peace, and economics.

For the true libertarian, the liberty argument against protectionism ought to be sufficient refutation by itself. Humans have a natural right to be free from arbitrary interference in their peaceful affairs. Trade restrictions disrupt and punish a peaceful, voluntary, and mutually-beneficial activity. The legitimate function of government is to prevent and punish violence, not to initiate it. Protectionism must be regarded as a manifest violation of liberty, and its advocates must tell us what earthly goal their policy serves that is greater than human liberty.

Peace Through Trade

The peace argument against trade controls was well summarized by Professor W. M. Curtiss in his book, The Tariff Idea: “If goods do not cross frontiers, armies will!”[7] In other words, when people sever their economic ties, war becomes a distinct possibility. The course of events is painfully repetitious to the historian: one side raises trade barriers, the other retaliates, and the war of words subsequently degenerates into armed conflict.

The progress of mankind has not come from making life more difficult!

As long as people are free to reap the benefits of trade, they have a direct and immediate interest in tranquil relations. But raise the tariff and close the borders, as was done in the 1930s, and relations deteriorate. What a nation cannot get through trade, it may attempt to take at gunpoint.

For hundreds of years prior to 1815, Britain and France were at each other’s throats. During this long period of antagonism, inhibiting trade was national policy in both countries. After 1815, under the influence of the free trade notions of Adam Smith, the two countries reduced their barriers and have since enjoyed peaceful political relations. This is no mere coincidence. So as each brick is mortared to the protectionist wall, those who argue in its favor must tell us why peace is not important.

Preventing free trade fails to make any economic sense as well. Though it may benefit (at least in the short run) domestic industries by reducing competition from abroad, the economic harm done by it is nonetheless real and identifiable.

Just who is harmed economically by a tariff, for instance? First, all individuals who purchase a product upon which the tariff is levied. By the amount of the tariff, they now have less wealth than they would have had without it. They are that much poorer.

Next, all those domestic businesses which now sell less to Americans because Americans must spend more for the “tariffed” items.

Then, all those domestic businesses which now export fewer goods to foreigners because foreigners earn fewer dollars in America to pay for those American exports. That’s not an insignificant point if one considers that one out of every eight man ufacturing jobs in this country produces for export, one out of every three acres of American farmland produces for export, more than half of our wheat, soybeans, and rice is sold abroad, and almost one out of every three dollars of U. S. corporate profits comes from international activities of U. S. firms.

And finally, everybody loses as the advantages of international specialization and lower cost production evaporate. The situation is even worse if, instead of a tariff, restrictions are imposed which deny entry of the foreign good altogether.

Such detailed argumentation would not be necessary if men understood what the very concept of protectionism represents. In a nutshell, protectionism pulls people apart. It does not enhance cooperation. It makes exchange not easier, but more difficult. It raises barriers, obstructions, roadblocks, and impediments. It creates problems; it does not solve them. The progress of mankind has not come from making life more difficult!

As the rising tide of protectionism hangs over the world like a Damocles’ Sword, the centerpiece of American foreign policy ought to be a ringing defense of free trade. Other nations may persist in their primitive policies of coercion, but let that not be cause for America to blow out the candle and leave us all in darkness. Our motto must be, “Let’s import their goods, not their folly.”

1.   United Nations, Statistical Yearbook, 1971, p. 383.

2.   Philip Revzin, “Rising Barriers,” Wall Street Journal, March 12, 1980, p. 1.

3.   Steven E. Plaut, “Why Dumping is Good for Us,” Fortune, May 5, 1980, p. 213.

4.   Lindley H. Clark, “Analyzing Imports,” Wall Street Journal, Nov. 1, 1977, p. 20.

5.   Frederic Bastiat, Economic Sophisms (Irvington-on-Hudson, New York: The Foundation for Economic Education, 1964), pp. 2930.

6.   Plaut, p. 214.

7.   Curtiss, W. M., The Tariff Idea (Irvington-on-Hudson, New York: The Foundation for Economic Education, 1953), p. 80.

  • Lawrence W. Reed is FEE's President Emeritus, having previously served for nearly 11 years as FEE’s president (2008-2019). He is also FEE's Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty. His Facebook page is here and his personal website is