David Hume, in his 1752 essay, “Of Commerce,” wrote:
“The greater part of mankind may be divided into two classes; that of shallow thinkers, who fall short of the truth; and that of abstruse thinkers, who go beyond it.”
The December 4, 2010 “Remarks by the President at the Announcement of a U.S.-Korea Free Trade Agreement” reflects belief in a system based on fallacy: mercantilism. The system benefits government, since it is used to justify its power over trade and its favoring of special interests.
Mercantilism assumes that countries benefit from exports, and are harmed by imports. The concept leads to the concern with “trade deficits,” an illusory problem regularly raised by media and politicians.
The Truth About Trade
Hume, in the essay noted above, recognized the truth that countries benefit from imports as well as exports:
“[A] kingdom, that has a large import and export, must abound more with industry, and that employed upon delicacies and luxuries, than a kingdom which rests contented with its native commodities. It is, therefore, more powerful, as well as richer and happier.”
In 1776, Adam Smith explained in An Inquiry Into the Nature and Causes of the Wealth of Nations that the protection of exports irrationally comes at the cost of consumers:
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce.
In 1817, David Ricardo, in On the Principles of Political Economy and Taxation, developed the theory of comparative advantage. Professor Dwight R. Lee explains the power of the concept:
Understanding comparative advantage has the same effect on concerns about free trade as water had on the Wicked Witch of the West. Free trade with other countries (regardless of how much or little their workers are paid) doesn’t increase unemployment or lower wages. Indeed, one of the best ways of increasing the wages of U.S. workers is by allowing them to compete with workers (even very low paid workers) in other countries through free trade.
In 1845, Frédéric Bastiat further expounded on the benefits of free trade in Economic Sophisms, and mocked the concern with what we now call trade deficits:
The truth is that we should reverse the principle of the balance of trade and calculate the national profit from foreign trade in terms of the excess of imports over exports. This excess, minus expenses, constitutes the real profit.
Mr. Obama’s Mercantilist View
The truth about trade, then, has been known since at least the time of Hume’s observations 258 years ago, and has been accessible through Bastiat’s work for 165 years. Yet consider that Mr. Obama noted only the benefits of exports, deriding imports and rejecting freedom of trade as inherently virtuous:
- “[W]e don’t simply want to be an economy that consumes other countries’ goods.”
- “I’m not interested in signing trade agreements for the sake of signing trade agreements. I’m interested in agreements that increase jobs and exports for the American people and that also help our partners grow their economies.”
- “This deal is a win for American workers. For our farmers and ranchers, it will increase exports of American agricultural products. From aerospace to electronics, it will increase our manufacturing exports to Korea… In particular, manufacturers of American cars and trucks will have much more access to the Korean market…”
- “[T]he tariff reductions in this agreement alone are expected to boost annual exports of American goods by up to $11 billion.”
The statement ignores the benefits of lowering trade barriers to imports. The fact that consumers (many of whom are “workers”) will have more affordable goods, and manufacturers will have more affordable commodities or components, is ignored. The reason is that identifiable special interests—companies that export, and their workers–benefit from exports, while the broader public benefits from the availability of imports. Government tends to favor narrow interests, while dismissing the public interest.
Trade Barriers As Plunder
The agreement with South Korea leaves some tariffs in place. The Wall Street Journal reports: “A 25% tariff levied by the U.S. on South Korean truck imports would remain in place for eight years…” The role of special interests was blatant:
In an unusual step, Ford Motor Co. chief executive Alan Mulally took a personal role in the negotiations, pressing to maintain tariffs on imported South Korean vehicles for as long as a decade, before agreeing to the five-year compromise.
Tariffs and other trade barriers are immoral. They are an abuse of government power, used to transfer income from one group, consumers, to another, exporters. Bastiat, in The Law, referred to protective tariffs as a form of government plunder, explaining: “The protective tariff is a violation, by law, of property.”
Unilateral Free Trade
Rather than entering into trade agreements, countries should follow the example of Hong Kong and Singapore, and unilaterally remove their own barriers to trade, and impediments to their own prosperity. Milton Friedman and Rose D. Friedman recommended this course:
We could say to the rest of the world: We believe in freedom and intend to practice it. We cannot force you to be free. But we can offer full cooperation on equal terms to all. Our market is open to you without tariffs or other restrictions.
References:
Bastiat, Frédéric, First Series, Chapter 6: “The Balance of Trade,” Economic Sophisms, first published 1845, Library of Economics and Liberty, http://ur.ly/xG5f.
Bastiat, “Slavery and Tariffs are Plunder,” The Law, first published 1850, Library of Economics and Liberty, http://www.econlib.org/library/Bastiat/basLaw1.html.
Dorn, James A., “Slouching Toward Mercantilism,” Cato Institute, May 22, 2007, http://www.cato.org/pub_display.php?pub_id=8253.
Friedman, Milton, and Friedman, Rose D., “The Case for Free Trade,” Hoover Digest, Hoover Institution, Oct. 30, 1997, http://www.hoover.org/research/case-free-trade.
Hume, David, “Of Commerce,” Essays, Moral, Political, and Literary, first published 1752, Library of Economics and Liberty, http://www.econlib.org/library/LFBooks/Hume/hmMPL24.html.
Kling, Arnold, “International Trade,” Concise Encyclopedia of Economics, 2nd edition, http://www.econlib.org/library/Enc/InternationalTrade.html.
LaHaye, Laura, “Mercantilism,” Concise Encyclopedia of Economics, 2nd edition, http://www.econlib.org/library/Enc/Mercantilism.html.
Lee, Dwight R., “Comparative Advantage,” Freeman, Oct. 1999, http://www.thefreemanonline.org/columns/comparative-advantage/.
Ricardo, David, On the Principles of Political Economy and Taxation, Library of Economics and Liberty, first published 1817, http://www.econlib.org/library/Ricardo/ricP.html.
Rothbard, Murray N., “Mercantilism: A Lesson for Our Times?” Freeman, Nov. 1963, http://www.thefreemanonline.org/featured/mercantilism-a-lesson-for-our-times/.
Smith, Adam, An Inquiry Into the Nature and Causes of the Wealth of Nations,” Library of Economics and Liberty, first published 1776, 5th edition, http://www.econlib.org/library/Smith/smWN.html.
White House, Office of the Press Secretary, “Remarks by the President at the Announcement of a U.S.-Korea Free Trade Agreement,” Dec. 4, 2010, http://www.whitehouse.gov/the-press-office/2010/12/04/remarks-president-announcement-a-us-korea-free-trade-agreement.
Williamson, Elizabeth, “U.S. Sets Sweeping New Deal on Trade,” Wall Street Journal, Dec. 3, 2010, http://ur.ly/y53d.
