“In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind.” – Adam Smith, The Wealth of Nations
In 1776, the same year that the Declaration of Independence was signed, Scottish philosopher and economist Adam Smith published his most renowned work, The Wealth of Nations. Smith made such a thorough, convincing argument for free trade that for over 200 years economists have been in almost unanimous support of it.
Free trade is good for all countries involved, to be sure, but the Trump administration will officially betray free trade policy and impose steel and aluminum tariffs on Canada, Mexico, and the European Union. This is a disappointing setback for a U.S. economy that has been on an upward trend. Trump has stayed true to his word on several issues, however, and we can now add trade protectionism to the list.
We're prone to wonder... If free trade has such widespread agreement among economists, why do we continue to endure world leaders that are opposed to it?
Trump’s campaign slogans “Make America Great Again” and “America First” can be interpreted in a few different lights. On the one hand, it can simply mean support for America’s nation-state sovereignty and a pull back from Obama’s relentless concessions to international organizations. Many conservatives agree with this aspect. But among more ardent Trump supporters, “America First” is mostly mistaken to mean support of trade barriers and protectionist policies against foreign competition – as if trade restrictions are in the best interest of the American public.
Trade protectionism, however, is not unique to America. There’s growing pushback in the European Union, for example, against the Chinese “dumping” steel and aluminum at lower than fair value costs. To explain EU duties of up to 35.9 percent on imports of hot-rolled steel from China, EU Trade Commissioner Cecilia Malmstrom recently said, “We are continuing to act, when necessary, against unfair trading conditions in the steel sector, and against foreign dumping.”
The political premise espoused by the EU Trade Commissioner is built on the High-Wage Fallacy. It argues that prosperous countries that have higher wages are unable to compete with low-wage countries. Low-wage countries can produce goods at a cheaper cost and then export them at cheaper prices. But this common example is shallow and doesn’t distinguish between wage rates and labor costs. A prosperous country might have higher wages, but due to better management, organization, talent, and machinery, it can produce goods at a cheaper labor cost per unit.
Beyond wage rates, if Country A is willing to subsidize exports and allow Country B to purchase them at a cheaper price, then how does that hurt the citizens of Country B, exactly? In this scenario, Country A’s subsidized exports could be looked at as a form of foreign aid to Country B. As Milton Friedman used to say, protectionist trade policies protect only one thing: they protect Americans from paying lower prices. Aside from narrow, short-term protectionism benefiting specialized industries, there is no argument to voluntarily raise prices for American or European citizens.
Even from a national security standpoint, it’s a dubious argument that steel imports are a threat to national security. Unlike Russian rocket engines or Chinese microchips, which are specialized technologies that can be compromised, steel is a commodity that carries no threat to national security. Steel is not in short supply, and instead, cheap steel imports help our defense industry.
The interests that press forward for protectionism are concentrated, and those harmed by protectionism are spread and diffused. Trade protectionism is built upon the false premise that international trade is a zero-sum game – as if there are a fixed number of jobs that are to be fought over between two countries. “We’re shipping our jobs overseas.”
When the North American Free Trade Agreement was passed in 1993, there were threats that the American auto industry would hear “a giant sucking sound” of jobs moving to Mexico. Instead, American jobs increased.
We hear these anti-free trade arguments all the time, and Trump uses this protectionist rhetoric to justify his protectionist policies.
In his book, Capitalism and Freedom, Milton Friedman said:
"Interferences with international trade appear innocuous; they can get the support of people who are otherwise apprehensive of interference by government into economic affairs; many a business man even regards them as part of the "American Way of Life"; yet there are few interferences which are capable of spreading so far and ultimately being so destructive of free enterprise. There is much experience to suggest that the most effective way to convert a market economy into an authoritarian economic society is to start by imposing direct controls on foreign exchange. This one step leads inevitably to the rationing of imports, to control over domestic production that uses imported products or that produces substitutes for imports, and so on in a never-ending spiral.”
The reality is that tariffs and trade barriers hurt the very people that they’re intended to help; the American people. The plight of specialized industries often has a loud and prominent political voice. When they struggle against foreign competition, self-interested parties understandably look to the government for help. And herein lies the problem. Special interests are politically visible, but the damage from protectionist policies is diluted across the entire population. It’s pain is diffused and muted.
The price we pay for products that use steel and aluminum will increase, but only by so much. And while some apathetic Americans might not care, they might notice their checking accounts are a little lighter than normal. It’s basically an added tax on our citizens. The steel worker unions, on the other hand, will be grateful. Their jobs were saved from “unfair” competition.
There is no national interest for America to try to control and manipulate the price of steel, aluminum, or any other commodities. Tariffs on steel and aluminum only ensure that Americans will pay more for a variety of goods.
As Thomas Sowell said in Basic Economics:
“At any given time, a protective tariff or other import restriction may provide immediate relief to a particular industry and thus gain the financial and political support of corporations and labor unions in that industry. But, like many political beliefs, it comes at the expense of other who may not be as organized, as visible, or as vocal. Economists have long blamed the international trade restrictions around the world for needlessly prolonging the worldwide depression of the 1930s. Economists, however, do not have many votes. Nor do many of the voters know much economics.”