All Commentary
Friday, November 1, 1974

The “New” Protectionism

Mr. Stevens is a free-lance writer who specializes in the field of economics and monetary policy.

The term protectionism is most often used to mean international trade restrictions. However, its root is implanted in government power to “protect” men from competition and the free market. Thus, protectionism begins at home. Wage and price controls are a form of protectionism in that government tries to “protect” men from the effects of inflation. Rationing, too, is a form of protectionism in that government tries to “protect” men from shortages.

Both the domestic and international aspects of protectionism arise from the same assumption: that government must enter the economy and make decisions for its citizens, which they allegedly are incapable of making for themselves.

When governments (politicians) attain the power to impose their ideas and values on other men domestically, it is not surprising to see the same kind of protectionist policies extended into the international economic and monetary spheres. And for the same reasons that men are not protected by protectionism internationally, they are not thereby protected domestically.

Though our main concern may be with the international repercussions of a recently renewed interest in protectionism, the root of the matter lies embedded in domestic political economic theory. It is at this root that we must begin pulling if we wish to reach a major source of today’s economic and monetary problems.

The Essence of Protectionism

The essence of protectionism is compulsion. For example, some men expect and demand that government provide public programs, services, and favors to certain citizens. This will allegedly protect men from an “uncertain world” and provide guarantees against the “harmful” consequences of “change.” Such services as unemployment benefits, welfare handouts, health care, business subsidies, and the like can be provided only at the expense of other citizens; and government, by taxation, compels men to finance these services. Since men do not like taxes, the government resorts to inflation as a method of financing expensive programs. Thus, government must also compel men to accept paper money which government controls and depreciates. But men dislike inflation, too, and usually demand that price rises be reduced or eliminated. Since today’s generally rising prices are simply an effect of inflation, there can be no cure to rising prices unless the artificial creation of money substitutes and credit by government is halted.

In the guise of protecting men from inflationary effects, government compels men to buy and sell goods at government-decreed prices and work for government-decreed wages. Such political compulsion does not protect anyone —it violates man’s right to defend himself and his property. Clearly, buying and selling or working at voluntarily established and mutually agreeable prices does not entail coercion. But the prohibition of such peaceful and voluntary action is coercive.

Controls on wages and prices, then, result in certain economic effects, i.e., shortages. Men dislike shortages, and again, when social pressure mounts for government to protect men against these government-caused effects, government enters the economy and imposes rationing. Men are then compelled to produce and trade at government-decreed rates, and they are told what they can and cannot do with their property. Again, the call for government action against economic effects leads to compulsion (a loss of freedom) but not to a cure for the immediate cause of shortages — not to a cure for inflation combined with wage and price controls.

Another example of domestic protectionism is consumer protection. The result of freedom, free enterprise and free markets is economic diversity and an abundance and variety of goods and services for consumers to choose from. Not all goods and services are of the quality that consumers anticipate; some goods are of poor quality, others are better than expected.

In a free society, the consumer must learn to shop in the market place. He can have no prior experience with or knowledge of many new products, and since the economic world is forever a changing and uncertain place to live in, a consumer must constantly decide which actions best serve his self-interest. To help him make these decisions there are magazines, books, and private organizations supplying information on how to shop and what to buy.

If the consumer buys a product and is disappointed with it, he will not buy it again. If the product harms him in any objectively measurable way, he can sue for damages. But when the government attempts to “protect” men from purchasing shoddy or “potentially” harmful products, economic diversity is reduced and profit (the incentive to produce) dwindles. Government thus gains a monopoly on “shopping sense”, i.e., what politicians consider shoddy or “potentially” dangerous merchandise. This kind of regimentation subordinates the majority of men’s freely chosen values to the values of a few “omniscient” politicians. This leads to injustice because the government is necessarily arbitrary. This leads to a reduced standard of living as the marketplace is constricted and confined to government-determined “standards” of what should be produced and its quality. Again, the act of producing and selling products or services does not entail coercion, but preventing peaceful and voluntary production, sales, and purchases is coercive.

In all forms of domestic protectionism where the government enters the economy to protect men from the effects or “potential’ effects of an economically uncertain future, there exists government-initiated force, i.e., government’s attempt to subordinate the consumer’s judgment and actions to the judgments and decrees of politicians. This is the antithesis of government’s proper role — the protection of individual rights, The protection of individual rights means protection from compulsion, be it initiated by private citizens or government agencies.

Domestic Protectionism At Work

All economic controls and regulations are established in the name of protecting some men, yet all economic controls and regulations result in the loss of freedom and economic well-being for all men. As decisions, judgments, and choices are taken out of the hands of individuals and regimented by government, the economy shifts from a market economy to a government controlled economy; and to control an economy means to control men.

One of the great economic benefits of a market economy is the efficient production and distribution of goods and services. Domestic protectionism (i.e., controls and regulations over production, prices, wages, and consumer choices) strangles the economy to the point of economic stagnation — depression.

Domestic protectionism has always existed to some extent in the United States, but its recent alarming growth comes with the assumption that government has an obligation to care for and protect its citizens economically. The movement toward economic protectionism is not new — it has been developing most rapidly in this country since the turn of the century. The signs of economic deterioration are becoming more and more visible domestically, yet the results of applying protectionist policies internationally are only now surfacing.

Governments have so completely adopted the political philosophy of controls and regulations to “solve” domestic economic problems, that the same kinds of controls have been extended without question into the international economic and monetary spheres. But, just as domestic protectionist policies have the power to cause a depression nationally, international protectionist policies can cause a world-wide depression. To understand the nature and potential danger of international protectionism, a brief history of its development and the role it played in contributing to the Great Depression is in order.

International Protectionism At Work

The world has never achieved a period of free, unregulated international trade. It has, moreover, vacillated between periods of greater freedom in, and greater restrictions on, trade. It is not merely coincidental that freer international trade was more prevalent during times of greater domestic freedom, and that restrictions on international trade were more prevalent during times of greater domestic statist controls and inflation.

Prior to the 18th century movement toward greater individual freedom, the trade policies of the world developed as an extension of statism. The years from 1500-1700 were in general an era of mercantilism, which dominated trade policies of governments. Both domestic and international economic activity during this era can only be described as stagnant.

But during the 18th century there developed a genuine intellectual movement against statist domination and for greater personal and economic liberty. From the works of a series of writers, there began a movement toward laissez-faire which resulted in political revolution (culminating in the Industrial Revolution).

The free-trade movement emerged from men’s interest in greater individual liberty. Mercantilist theories which had dominated the policies of state were thoroughly and expertly demolished. By the 1800′s, the world’s major powers embraced both a philosophy of freer domestic trade and greater political liberty. This led to an unprecedented expansion of world trade and productivity and to over a century of peace between nations. Statism, fiat money, and protectionism had given way to capitalism, an international gold standard, and an era of international free trade.

But this transition was not complete. Statist principles were not entirely rejected; the gold standard was not free of government meddling; and free trade was only more free — not fully free. These remnants of statism were not eliminated, so they continued to grow. Toward the end of the nineteenth century, statist trends began to again dominate the world — a condition which later led to abolition of the gold standard and free trade.

The U.S., a bastion of freedom and a growing world power, proved no exception to the statist trend. Greater government intervention into the economy led to greater restrictions over domestic exchange. A growing populist movement urged government to engage extensively in economic matters. Inflationists began propagating massive government programs that would not likely gain popular support if financed through direct taxation.

By the 1920′s, government had gained total control over the issuance of money substitutes and was using this power to finance new and ever-growing government programs. Although the gold standard was not officially abandoned, for all intents and purposes it became non-operational. Meanwhile, international trade was faltering; the accumulated debts of major nations and the undercutting of gold flows (which, under normal circumstances, would lead to price equilibrium among nations), were creating serious international economic and monetary distortions.

The Depression hit the world after only a relatively few years of implementing statist-inflationist policies. And the political response was a resort to greater domestic and international protectionism to “solve” the world’s problems.

In 1930, protective tariffs were raised to the highest level in United States history — an average of over 52 per cent on dutiable imports. Of course, foreign nations retaliated with their own import restrictions. As a result, between 1929 and the third quarter of 1932, the volume of world trade contracted by one-third while the gold value of world trade fell by nearly two-thirds.

One of the main justifications offered for raising tariffs was to increase exports. Did the increased tariffs increase exports? Not at all. In 1932, the volume of United States exports had in fact declined by 53 per cent from the 1929 level. The trade “war” of the early 1930′s is just one more eloquent illustration of how protectionist measures contract world trade and reduce men’s standard of living.

How could the world move toward such an insane trade policy? How, after centuries of evidence on the vices of trade restrictions and the virtues of free trade, could such protectionist policies be reenacted into law? The answer is that when governments chose statism and inflation as a way to deal with social, economic, and monetary problems domestically, they chose force as their primary method of dealing with men. And domestic problems and policies soon enough became international policies and problems. In a time of emergency, good sense, reason, and truth became “impractical” —nothing less than brute force would do. Protectionism, a world trade “war,” and economic chaos were (and will always be) the product of this kind of thinking.

Past Folly and Current Nonsense

Unfortunately, the lessons of history and common sense seem seldom sufficient to prevent a recurrence of past folly.

Ask any economist if wage and price controls work or have ever worked. With rare exceptions, the answer will be, “No; wage and price controls are only a temporary panacea that attempts to deal with the symptoms of inflation rather than the cause and, at best, leads to economic dislocations and shortages.” Ask if rationing is the best way to deal with shortages and, again with exceptions, the answer will be, “No; rationing requires an army of bureaucrats and this is no substitute for the free market. It’s expensive to ration, it’s inequitable to ration, and it is economically dangerous to ration.”

Such policies as wage and price controls and rationing are not scientific or reasoned approaches to problems, nor are they historically proven solutions. Why, then, are they forever plaguing men, like a recurring disease? The answer becomes apparent if one goes to the root of today’s political action. There he will find statism at work and a statist mentality to generate it. “The nation is in a crisis, inflation is raging, something must be done. This is an emergency!” Whenever one hears these words, he can be sure that new statist measures are about to be advocated. The statist sees there is a pressing problem, but has no idea of the solution. He offers, with great confidence and moral indignation, “something must be done,” in place of exactly what should be done to end the emergency. He cannot be bothered to check into causes, scientific investigations, rational or historical evidence. His only concern is to forcibly prevent men from doing whatever it is they’re cluing to cause a crisis.

While rationing and other related proposals are being advocated to meet problems such as the energy crisis, the one potential proposal that has the power to do perhaps the greatest economic harm lingers in the background. It is rarely mentioned by politicians, yet is a very real threat to the world. The threat is that politicians may repeat the past follies of the 30′s, and by dramatically increasing trade restrictions, throw the world into a new trade “war.”

Toward a “New” Era of Protectionism

Despite much talk about (and even some action on) reducing trade and money barriers, there is a growing protectionist mood in the world. The European Economic Community (EEC) has been hailed for its increased free trade policies, but these policies are of dubious merit. While trade between EEC nations has been liberalized, trade policy between the EEC and other nations has changed little since World War II. Further, the kind of “free” trade that exists within the EEC is highly suspect: it is enveloped in controls over men, money, and markets in an attempt to legally fix exchange rates and support controlled prices.

The EEC has for years shown artificial export surpluses, by restricting imports, discouraging foreign investment, and undervaluing their currencies. EEC intervention to keep the value of its currencies at unrealistic rates indicates the true sentiment in Europe. Europe demands from the rest of the world both the right to inflate and to export, but governments refuse to allow their citizens the use of export revenues to freely import foreign goods.

Japan likewise has erected insurmountable trade barriers for many goods, and has imposed a protectionist web of exchange controls.

Meanwhile, the United States imposed a temporary 20 per cent surcharge on all foreign goods at the first sign of “trouble” in 1971. The fact that this surcharge has ended would be encouraging except for another fact: Congress granted the President power to determine trade policy, which means the power to decrease or increase tariffs and quotas as he sees fit.

In the past, trade “wars” have been sparked by currency depreciation and the attempt to legally fix exchange rates. This caused great distortions and disequilibrium, which resulted in devaluations, then in a series of “competitive” devaluations, and finally in a trade “war” as all nations attempted to “protect” the home industries from competition. While it is certainly possible that a trade “war” could result once again from the monetary turmoil of “competitive” devaluations and the attempt to artificially increase exports and restrict imports, a new factor on the horizon warrants examination: the energy crisis.

The Mid East’s oil embargo represented a major step toward protectionism. Oil is now often referred to as a “weapon.” The export ban on oil led to a renewed awareness of the importance of energy and natural resources. The energy crisis began to cause shortages of goods throughout the world, and the massive amounts of existing fiat money (plus the newly created fiat money printed to “stimulate” national economies) resulted in hoarding of goods and to skyrocketing prices.

Call for Intervention

It is always in this kind of panic atmosphere that protectionists step forth: “The government must do something! We must preserve our natural resources and combat the threat from the Mid East.” Governments have not yet seriously increased protectionist restrictions, but the mood in the world is ominous. Here are a few of the questions that nations must face: How will nations obtain more oil? Will they encourage the domestic exploration and production of oil by decreasing restrictions on production domestically, or will they increase international protectionist policies and restrict exports of scarce goods? How will nations pay for the higher-priced oil they must obtain? Will they increase their national money supplies (inflate) to pay for oil, will they restrict imports of other foreign products in order to run artificial trade surpluses, or will they reduce trade barriers in order to achieve maximum exports? What will become of the billions of dollars that flow to the oil-abundant Arab nations? Will Arabs be allowed to freely invest and spend this money in other nations, or will they be discouraged from doing so by “new” protectionist policies? How will the balance of payments problems (the huge deficits of oil importing nations) be handled? Will the currencies of deficit nations be free to seek their market level, or will they be legally prevented from doing so? The answers to these questions and others like them will help determine whether the world embraces a new era of free trade or a new era of protectionism.

The potential sparks that can kindle a new world trade “war” are numerous. Governmental refusal to allow the free export of natural resources is one potential spark. When nations jealously protect natural resources it is only a matter of time before other nations retaliate with similar protectionist measures. The attempt to artificially increase imports and decrease exports — or vice versa —never increases natural resources; it only serves to reduce world trade and contract the amount of imports on which nations depend.

Attempts to pay for higher-priced oil by means of inflation is another potential spark. The Arab nations are very conscious of monetary depreciation and thus will not tolerate massive artificial increases of money. This can only add an inflationary strain to an international monetary system that is already being strained to the breaking point. Similarly, any attempt to artificially devalue national currencies in order to stimulate exports or artificially revalue national currencies in order to pay for oil and “solve” balance of payments problems, can only result in “competitive” devaluations or revaluations by other nations. And this could lead to the kind of monetary turmoil that sparked the trade “war” of the 30′s.

What can be done to head off or combat the threat of a world trade “war”? Men must speak out against irrational fears with rational arguments. It must be urged that nations begin to decrease restrictions on men, money, and markets. This is the only moral and economically practical course of action open to nations.  

Men must realize that the attempt to solve economic problems by imposing progressively greater protectionist policies will fail as it has always failed, and that it has the potential of culminating in a world trade “war.” Such a trade “war” will not end adverse economic effects such as shortages, or balance of payments problems, nor will it stimulate exports or imports. It will only multiply present problems, just as past problems were increased during the trade “war” of the 30′s.

One point must be stressed: while it appears the world is certainly moving toward a “new” era of protectionism, a trade “war” is not inevitable. It can only occur through submitting to ignorance and fear and can be averted by combating statist-inflationist policies in general and protectionist policies in particular.

Toward a New Era of Intellectualism

The free trade movement did not come to the world accidentally — it came as the result of applying reason to the political and economic sciences, i.e., as a result of moving toward capitalism. Likewise, protectionism did not come to the world accidentally, but resulted from increased coercive government power and men’s failure to properly challenge that power, i.e., as a result of moving toward statism.

The proper way to suppress government power in a free society is with ideas. One good idea by one thinking individual is worth more than any number of guns and laws aimed at forcing men to blindly take actions. It is far easier for men to identify with common sense and facts than with blind force. Men are receptive to reason, and as such are likely to learn, to correct errors of thinking, and to act rationally and productively. When men are commanded to obey laws, they are more likely to be confused, frustrated, apathetic or rebellious.

This nation was born as the result of an intellectual revolution. Ideas on liberty led to economic heights previously inconceivable. Then came the anti-intellectual “revolution” of the twentieth century, and with it regression toward ignorance, concern for effects rather than causes, and the political-economic expression of such regression: increased statist controls. The result of the anti-intellectual “revolution” has been greater economic and political problems and the beginning of a steady decline in the material well being of United States citizens.

But not all men are satisfied with their political leaders and the stale, meaningless “answers” supplied by today’s “intellectuals.” Increasingly, men question the credibility and worth of their leaders’ statements. There may be only a handful of true intellectuals today, but from these men of reason, and out of the dissatisfaction and questioning of millions of Americans, there can evolve a new intellectual revolution.

A new era of protectionism may well be awaiting the world; but this time, to combat it, hopefully to avert it, and perhaps to end it once and for all, a new era of intellectualism may also be awaiting.

It has always been characteristic of Americans that when they are given the choice between force and reason as a way of life, they will in the last analysis choose reason. The main task today is to rationally speak out against the government initiated coercion that fuels economic controls and regulations, so that Americans will be provided with that choice.