Protectionism might be the oldest economic fallacy that will never die. We have been refuting it for hundreds of years and will still be refuting it for hundreds more.
But protectionist arguments take many forms, going in and out of style. “We understand that tariffs make products more expensive for the consumer”, they tell us, “But this is a sacrifice we need to make to protect from ‘x’.” In this case ‘x’ being unfair trade agreements, trade deficits, currency manipulation, problems with intellectual property, foreign labor, etc etc. Right now the excuse is national security, or independence.
The truth about the mercantilist talking points is that none of them are original, as Frederic Bastiat was exploding all of them around the 1840’s, and that nearly all of them boil down to just a few economic fallacies. Calls for protection of particular American industries have been more popular since the return of economic nationalism, and tenfold since the outbreak of the coronavirus. Cases against free trade have popped up in the Wall Street Journal twice this week for medicine and oil.
Their argument is this: Higher prices and lower efficiency should be a willing sacrifice for the insurance of being prepared for war. If war and other emergencies break out, the domestic economy will need strong industries in steel, and other materials for the war effort. Dependence for materials and products on foreign nations is an issue of national security, not economic efficiency. Similar is the case for preparedness for a pandemic, in the case of medicines and drugs.
Frederic Bastiat first points out that these arguments were often insinuated by the same monopolists that support tariffs for their self interest. Various protectionist arguments come from the same individuals seeking support from government to profit at the expense of others, and this is just new rhetoric to change their tune.
Bastiat’s more important contribution however, is that “dependence” on a nation is reciprocal and antithetical to war. Protectionists that speak of a nation being dependent on one another due to trade in an unhampered market ignore the two way street of exchange. Both parties of a voluntary trade depend on one another for the product desired. For every good or service that Americans depend on from foreign nations, other nations depend on the Americans for some good or service. Not only is “dependence” always interdependence, it is interdependence which fosters peace and harmony between nations, creating a driving force against the hypothetical wars the nationalists are worried about. The wars the economic nationalists believe the government needs to anticipate through trade restrictions can often be caused and provoked by trade disagreements themselves.
This is certainly a significant point from Bastiat, who championed defending free trade in Europe against the popular mercantilists. But this argument does not clinch the debate. It plays devil’s advocate against the nationalists but does not point out the deeper fallacies in the thought process.
To counter Bastiat, we could ask, “Although interdependence aids peace between nations, what about the radical regime that attacks anyway. What if the mere incentive for peace is not infallible. Or what about the global pandemic, which is irrelevant to global politics, and implies a need for stronger domestic medical supply chains? Trade crates interdependence, but what if the US does not produce the materials most urgently needed in the crisis?
The major fallacy in the national security argument is to assume the market to be static. To assume the hypothetical model for economic thought of the “static economy” is not just a model, but reality. That prices and production are not constantly changing and actors and entrepreneurs cannot anticipate changes in market data. The case against free trade for national security implies this ignorance.
In the real world, prices are changing to new data and the expectations of speculators on the market. Speculators are aware of the supply chains, their domestic origins, and possibilities for future demand of specific products. With free pricing, the market anticipates future rises in demand over supply, because after all, a war or pandemic is a supply shock for the market.
Since a Wall Street Journal article points out oil as a “national security” product, assume that the US imports 100 percent of its oil. Then assume that a war, or some other type of emergency becomes probable in the near future. Would the market for oil be static at its previous data as if there was no risk of the emergency? Or would prices rise in anticipation of future higher demand for oil, with speculators stock piling it for the future (as they already do)? The latter case is always true for a market with free pricing. An anticipated rise in the price of oil would also incentivise greater production to even induce domestic capital that the nationalists wish for government to plan.
When the supply shock does hit the market, prices consequently rise to ration the product for its most important use: for the emergency. In a war, steel and oil are speculated and rationed for war materials. For a pandemic, medical supplies are speculated and rationed for treatment of the infection. Ironically, it is sometimes the same interventionists making fallacious arguments for protectionism calling for government intervention to prevent so-called price gouging.
In both cases, interventionists seem to pretend the functions of the market, of speculation and stock piling in anticipation of emergency, price incentives to produce more of the given material, and rationing through higher prices do not exist, and then they call for government coercion to provide the speculation and rationing, which will always be less efficient than the former.
Given the conditions of a market economy without interference, it is real wealth of a nation, not domestic capital of the specific materials required, that most efficiently treats the crisis. A war, in economic terms, extracts real wealth from the economy and destroys it, for the supposed protection of its citizens. As long as factors of production are free to convert into the channels that are needed in anticipation of a crisis, it is real wealth, not artificially propped up domestic producers, that will most efficiently come to the rescue.
- BASTIAT, FREDERIC. WHAT IS FREE TRADE? OUTLOOK VERLAG, 2019.