Principles of Macroeconomics/Monetary Policy and International Trade/Tariffs and quotas/Trade barriers

Introduction
When he wrote Wealth of Nations in 1776, Adam Smith referred to "a certain propensity in human nature... to truck, barter, and exchange one thing for another."[1] Even children are known to be prone to swap such items as stamps, bubblegum cards, marbles, and other items of mutual desire. But enjoyable and beneficial though trade may be, there is also a propensity to stifle it. Even the Reagan Administration, with a strong and outspoken penchant for free markets, has succumbed to pressures to curb imports of cars, steel, textiles, motorcycles, and other products from foreign lands.

About 50 years after Adam Smith wrote, John Stuart Mill in 1829 clearly explained and soundly denounced such restrictive policies in an admirable essay entitled "Of the Laws of Interchange Between Nations." Mill was following in the footsteps of Smith, who openly opposed the mercantilistic policies whereby European nations had interfered with trade. As the basis for his arguments, Mill expounded the ideas of his more recent predecessor, David Ricardo, who had demonstrated that there is mutual benefit for countries which specialize and trade on the basis of "comparative advantage."

This simple and fundamental principle can be readily illustrated by the examples of the businessman who hires a secretary, the doctor who employs an accountant, or the working mother who turns her child over to a baby sitter. The businessman may be a better typist, the doctor may have superior calculating abilities, and the mother may excel in providing affection and entertainment for her child. But by directing their time and energy to their professional duties, these three people will earn more than enough to pay their employees. The businessman and doctor will have even more time for leisure, and the working mother will be better able to provide her child with needed food and clothing.

Yet, what we all implicitly accept and practice in our daily lives, we are pathetically apt to forget when we read or hear news about how some American industry is "hurt" by foreign competition. Nonetheless, the same principle applies. If the Japanese can produce cars and motorcycles more efficiently relative to other products such as beef, then we should buy our cars from them in exchange for our beef. If the Chinese can produce textiles by giving up less of other products than we must forgo here, then we should buy from them. Not only will we enable our consumers—especially the poorer ones—to improve their living standards; we will also provide jobs for our producers of wheat and soybeans, items in which we have a comparative advantage. If some people criticize the Chinese for "underselling" our producers, they should take note of Mill’s words: "the world at large, buyers and sellers taken together, is always a gainer by underselling."[2]

Yet, despite the common sense of the free-trade argument, we continue to erect barriers to impede trade. Just as Ricardo and Mill advocated free trade, they reviled restrictions. In 1817, Ricardo had written that "the sole effect of high duties on the importation either of manufactures or corn... is to divert a portion of capital to an employment which it would not naturally seek."[3] Mill similarly deplored barriers which have "the effect of encouraging some particular branch of domestic industry," for, he said, they are "purely mischievous."[4]

We hurt ourselves
Sometimes it is argued that since foreign governments impose barriers and provide subsidies of their own, they have rendered laissez faire unfair. Certainly, such policies abound and they surely hurt our exporters. Shouldn’t we engage in "tit for tat"? If we do, we are sure to suffer for it; as Mill put it, trade barriers are "chiefly injurious to the countries imposing them."[5]

The loss to American consumers when our government restricts imports outweighs the gain to the protected industry. Trade barriers such as quotas and tariffs raise the price on all the protected products, whether their origin is domestic or foreign. That is the clear impact, for example, in the case of the agreement by Japan to limit the export of cars to the U.S. Both American and Japanese producers can hike their prices; both Chrysler and Toyota gain. The costs to our consumers exceed our producers’ benefits.

Moreover, by setting up trade barriers, we abdicate the opportunity for setting a good example. As Mill wrote in his essay, "A country cannot be expected to renounce the power of taxing foreigners unless foreigners will in return practice towards itself the same forbearance."[6] We should expect foreign countries to do as we do, not as we say. Until we renounce our own protectionist sins, how can we justify throwing stones?

Before yielding further to the temptation to plunge deeper into the web of trade restraints, it helps to remember that basic fact of all economics: our resources are scarce. We simply cannot produce all the goods and services people want and need. Thus we must bend all our efforts to ward employing our resources to their utmost efficiency. Mill said it well: it is "the common interest of all nations that each of them should abstain from every measure by which the aggregate wealth of the commercial world would be diminished."[7] On these grounds we should oppose all laws requiring our cars to be manufactured on the basis of "local content" and others forcing us to "buy American." Suggesting that they simply emulate the practice of others is to argue that two wrongs make a right.

Of course, it may be sadly true that if the Reagan Administration had not acted, Congress would "beat it to the punch" with even more punitive legislation. In that sense, the Administration’s policies may well be a lesser evil. But there is another option. The Administration could, instead, devote some time and effort to explaining to the American public the folly of such policies. Then, just like the businessman, the doctor, and the working mother mentioned before, President Reagan and his staff would be making the best use of their resources. And if they need any assistance articulating their ideas, they will find ample help in an essay more than 150 years old written by John Stuart Mill.

1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (New York: Modern Library, 1937), p. 13.

2. John Stuart Mill, Essays on Some Unsettled Questions of Political Economy (2nd ed., 1874; New York: Augustus M. Kelley, 1968), p. 36n.

3. David Ricardo, The Principles of Political Economy and Taxation (first published in 1817; New York: E. P. Dutton, 1911), p. 210.

4. Mill, p. 28.

5. Mill, p. 38.

6. Mill, p. 29.

7. Mill, p. 31.