Protectionism and the Destruction of Prosperity

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Monograph
first published by the Mises Institute,
1986
Available
for printing from PDF

Protectionism,
often refuted and seemingly abandoned, has returned, and with a
vengeance. The Japanese, who bounced back from grievous losses in
World War II to astound the world by producing innovative, high-quality
products at low prices, are serving as the convenient butt of protectionist
propaganda.

Memories of
wartime myths prove a heady brew, as protectionists warn about this
new "Japanese imperialism," even "worse than Pearl
Harbor." This "imperialism" turns out to consist
of selling Americans wonderful TV sets, autos, microchips, etc.,
at prices more than competitive with American firms.

Is this "flood"
of Japanese products really a menace, to be combated by the U.S.
government? Or is the new Japan a godsend to American consumers?

In taking our
stand on this issue, we should recognize that all government action
means coercion, so that calling upon the U.S. government to intervene
means urging it to use force and violence to restrain peaceful trade.
One trusts that the protectionists are not willing to pursue their
logic of force to the ultimate in the form of another Hiroshima
and Nagasaki.

Keep Your
Eye on the Consumer

As we unravel
the tangled web of protectionist argument, we should keep our eye
on two essential points: (1) protectionism means force in restraint
of trade; and (2) the key is what happens to the consumer. Invariably,
we will find that the protectionists are out to cripple, exploit,
and impose severe losses not only on foreign consumers but especially
on Americans. And since each and every one of us is a consumer,
this means that protectionism is out to mulct all of us for the
benefit of a specially privileged, subsidized few – and an inefficient
few at that: people who cannot make it in a free and unhampered
market.

Take, for example,
the alleged Japanese menace. All trade is mutually beneficial to
both parties – in this case Japanese producers and American consumers – otherwise
they would not engage in the exchange. In trying to stop this trade,
protectionists are trying to stop American consumers from enjoying
high living standards by buying cheap and high-quality Japanese
products. Instead, we are to be forced by government to return to
the inefficient, higher-priced products we have already rejected.
In short, inefficient producers are trying to deprive all of us
of products we desire so that we will have to turn to inefficient
firms. American consumers are to be plundered.

How To Look
at Tariffs and Quotas

The best way
to look at tariffs or import quotas or other protectionist restraints
is to forget about political boundaries. Political boundaries of
nations may be important for other reasons, but they have no economic
meaning whatever. Suppose, for example, that each of the United
States were a separate nation. Then we would hear a lot of protectionist
bellyaching that we are now fortunately spared. Think of the howls
by high-priced New York or Rhode Island textile manufacturers who
would then be complaining about the "unfair," "cheap
labor" competition from various low-type "foreigners"
from Tennessee or North Carolina, or vice versa.

Fortunately,
the absurdity of worrying about the balance of payments is made
evident by focusing on inter-state trade. For nobody worries about
the balance of payments between New York and New Jersey, or, for
that matter, between Manhattan and Brooklyn, because there are no
customs officials recording such trade and such balances.

If we think
about it, it is clear that a call by New York firms for a tariff
against North Carolina is a pure ripoff of New York (as well as
North Carolina) consumers, a naked grab for coerced special privilege
by less efficient business firms. If the 50 states were separate
nations, the protectionists would then be able to use the trappings
of patriotism, and distrust of foreigners, to camouflage and get
away with their looting the consumers of their own region.

Fortunately,
inter-state tariffs are unconstitutional. But even with this clear
barrier, and even without being able to wrap themselves in the cloak
of nationalism, protectionists have been able to impose inter-state
tariffs in another guise. Part of the drive for continuing increases
in the federal minimum-wage law is to impose a protectionist devise
against lower-wage, lower-labor-cost competition from North Carolina
and other southern states against their New England and New York
competitors.

During the
1966 Congressional battle over a higher federal minimum wage, for
example, the late Senator Jacob Javits (R-NY) freely admitted that
one of his main reasons for supporting the bill was to cripple the
southern competitors of New York textile firms. Since southern wages
are generally lower than in the north, the business firms hardest
hit by an increased minimum wage (and the workers struck by unemployment)
will be located in the south.

Another way
in which interstate trade restrictions have been imposed has been
in the fashionable name of "safety." Government-organized
state milk cartels in New York, for example, have prevented importation
of milk from nearby New Jersey under the patently spurious grounds
that the trip across the Hudson would render New Jersey milk "unsafe."

If tariffs
and restraints on trade are good for a country, then why not indeed
for a state or region? The principle is precisely the same. In America
‘s first great depression, the Panic of 1819, Detroit was a tiny
frontier town of only a few hundred people. Yet protectionist cries
arose – fortunately not fulfilled – to prohibit all "imports"
from outside of Detroit, and citizens were exhorted to buy only
Detroit. If this nonsense had been put into effect, general starvation
and death would have ended all other economic problems for Detroiters.

So why not
restrict and even prohibit trade, i.e., "imports," into
a city, or a neighborhood, or even on a block, or, to boil it down
to its logical conclusion, to one family? Why shouldn’t the Jones
family issue a decree that from now on, no member of the family
can buy any goods or services produced outside the family house?
Starvation would quickly wipe out this ludicrous drive for self-sufficiency.

And yet we
must realize that this absurdity is inherent in the logic of protectionism.
Standard protectionism is just as preposterous, but the rhetoric
of nationalism and national boundaries has been able to obscure
this vital fact.

The upshot
is that protectionism is not only nonsense, but dangerous nonsense,
destructive of all economic prosperity. We are not, if we were ever,
a world of self-sufficient farmers. The market economy is one vast
latticework throughout the world, in which each individual, each
region, each country, produces what he or it is best at, most relatively
efficient in, and exchanges that product for the goods and services
of others. Without the division of labor and the trade based upon
that division, the entire world would starve. Coerced restraints
on trade – such as protectionism – cripple, hobble, and destroy
trade, the source of life and prosperity. Protectionism is simply
a plea that consumers, as well as general prosperity, be hurt so
as to confer permanent special privilege upon groups of less efficient
producers, at the expense of more competent firms and of consumers.
But it is a peculiarly destructive kind of bailout, because it permanently
shackles trade under the cloak of patriotism.

The Negative
Railroad

Protectionism
is also peculiarly destructive because it acts as a coerced and
artificial increase in the cost of transportation between regions.
One of the great features of the Industrial Revolution, one of the
ways in which it brought prosperity to the starving masses, was
by reducing drastically the cost of transportation. The development
of railroads in the early 19th century, for example, meant that
for the first time in the history of the human race, goods could
be transported cheaply over land. Before that, water – rivers
and oceans – was the only economically viable means of transport.
By making land transport accessible and cheap, railroads allowed
interregional land transportation to break up expensive inefficient
local monopolies. The result was an enormous improvement in living
standards for all consumers. And what the protectionists want to
do is lay an axe to this wondrous principle of progress.

It is no wonder
that Frdric Bastiat, the great French laissez-faire economist
of the mid-19th century, called a tariff a "negative railroad."
Protectionists are just as economically destructive as if they were
physically chopping up railroads, or planes, or ships, and forcing
us to revert to the costly transport of the past – mountain
trails, rafts, or sailing ships.

"Fair"
Trade

Let us now
turn to some of the leading protectionist arguments. Take, for example,
the standard complaint that while the protectionist "welcomes
competition," this competition must be "fair." Whenever
someone starts talking about "fair competition" or indeed,
about "fairness" in general, it is time to keep a sharp
eye on your wallet, for it is about to be picked. For the genuinely
"fair" is simply the voluntary terms of exchange, mutually
agreed upon by buyer and seller. As most of the medieval scholastics
were able to figure out, there is no "just" (or "fair")
price outside of the market price.

So what could
be "unfair" about the free-market price? One common protectionist
charge is that it is "unfair" for an American firm to
compete with, say, a Taiwanese firm which needs to pay only one-half
the wages of the American competitor. The U.S. government is called
upon to step in and "equalize" the wage rates by imposing
an equivalent tariff upon the Taiwanese. But does this mean that
consumers can never patronize low-cost firms because it is "unfair"
for them to have lower costs than inefficient competitors? This
is the same argument that would be used by a New York firm trying
to cripple its North Carolina competitor.

What the protectionists
don’t bother to explain is why U.S. wage rates are so much higher
than Taiwan. They are not imposed by Providence. Wage rates are
high in the U.S. because American employers have bid these rates
up. Like all other prices on the market, wage rates are determined
by supply and demand, and the increased demand by U.S. employers
has bid wages up. What determines this demand? The "marginal
productivity" of labor.

The
demand for any factor of production, including labor, is constituted
by the productivity of that factor, the amount of revenue that the
worker, or the pound of cement or acre of land, is expected to bring
to the brim. The more productive the factory, the greater the demand
by employers, and the higher its price or wage rate. American labor
is more costly than Taiwanese because it is far more productive.
What makes it productive? To some extent, the comparative qualities
of labor, skill, and education. But most of the difference is not
due to the personal qualities of the laborers themselves, but to
the fact that the American laborer, on the whole, is equipped with
more and better capital equipment than his Taiwanese counterparts.
The more and better the capital investment per worker, the greater
the worker’s productivity, and therefore the higher the wage rate.

In short, if
the American wage rate is twice that of the Taiwanese, it is because
the American laborer is more heavily capitalized, is equipped with
more and better tools, and is therefore, on the average, twice as
productive. In a sense, I suppose, it is not "fair" for
the American worker to make more than the Taiwanese, not because
of his personal qualities, but because savers and investors have
supplied him with more tools. But a wage rate is determined not
just by personal quality but also by relative scarcity, and in the
United States the worker is far scarcer compared to capital than
he is in Taiwan.

Putting it
another way, the fact that American wage rates are on the average
twice that of the Taiwanese, does not make the cost of labor in
the U.S. twice that of Taiwan. Since U.S. labor is twice as productive,
this means that the double wage rate in the U.S. is offset by the
double productivity, so that the cost of labor per unit product
in the U.S. and Taiwan tends, on the average, to be the same. One
of the major protectionist fallacies is to confuse the price of
labor (wage rates) with its cost, which also depends on its relative
productivity.

Thus, the problem
faced by American employers is not really with the "cheap labor"
in Taiwan, because "expensive labor" in the U.S. is precisely
the result of the bidding for scarce labor by U.S. employers. The
problem faced by less efficient U.S. textile or auto firms is not
so much cheap labor in Taiwan or Japan, but the fact that other
U.S. industries are efficient enough to afford it, because they
bid wages that high in the first place.

So, by imposing
protective tariffs and quotas to save, bail out, and keep in place
less efficient U.S. textile or auto or microchip firms, the protectionists
are not only injuring the American consumer. They are also harming
efficient U.S. firms and industries, which are prevented from employing
resources now locked into incompetent firms, and who could otherwise
be able to expand and sell their efficient products at home and
abroad.

"Dumping"

Another contradictory
line of protectionist assault on the free market asserts that the
problem is not so much the low costs enjoyed by foreign firms, as
the "unfairness" of selling their products "below
costs" to American consumers, and thereby engaging in the pernicious
and sinful practice of "dumping." By such dumping they
are able to exert unfair advantage over American firms who presumably
never engage in such practices and make sure that their prices are
always high enough to cover costs. But if selling below costs is
such a powerful weapon, why isn’t it ever pursued by business firms
within a country?

Our first response
to this charge is, once again, to keep our eye on consumers in general
and on American consumers in particular. Why should it be a matter
of complaint when consumers so clearly benefit? Suppose, for example,
that Sony is willing to injure American competitors by selling TV
sets to Americans for a penny apiece. Shouldn’t we rejoice at such
an absurd policy of suffering severe losses by subsidizing us, the
American consumers? And shouldn’t our response be: "Come on,
Sony, subsidize us some more!" As far as consumers are concerned,
the more "dumping" that takes place, the better.

But what of
the poor American TV firms, whose sales will suffer so long as Sony
is willing to virtually give their sets away? Well, surely, the
sensible policy for RCA, Zenith, etc. would be to hold back production
and sales until Sony drives itself into bankruptcy. But suppose
that the worst happens, and RCA, Zenith, etc. are themselves driven
into bankruptcy by the Sony price war? Well, in that case, we the
consumers will still be better off, since the plants of the bankrupt
firms, which would still be in existence, would be picked up for
a song at auction, and the American buyers at auction would be able
to enter the TV business and outcompete Sony because they now enjoy
far lower capital costs.

For decades,
indeed, opponents of the free market have claimed that many businesses
gained their powerful status on the market by what is called "predatory
price-cutting," that is, by driving their smaller competitors
into bankruptcy by selling their goods below cost, and then reaping
the reward of their unfair methods by raising their prices and thereby
charging "monopoly prices" to the consumers. The claim
is that while consumers may gain in the short run by price wars,
"dumping," and selling below costs, they lose in the long
run from the alleged monopoly. But, as we have seen, economic theory
shows that this would be a mug’s game, losing money for the "dumping"
firms, and never really achieving a monopoly price. And sure enough,
historical investigation has not turned up a single case where predatory
pricing, when tried, was successful, and there are actually very
few cases where it has even been tried.

Another charge
claims that Japanese or other foreign firms can afford to engage
in dumping because their governments are willing to subsidize their
losses. But again, we should still welcome such an absurd policy.
If the Japanese government is really willing to waste scarce resources
subsidizing American purchases of Sony’s, so much the better! Their
policy would be just as self-defeating as if the losses were private.

There is yet
another problem with the charge of "dumping," even when
it is made by economists or other alleged "experts" sitting
on impartial tariff commissions and government bureaus. There is
no way whatever that outside observers, be they economists, businessmen,
or other experts, can decide what some other firm’s "costs"
may be. "Costs" are not objective entities that can be
gauged or measured. Costs are subjective to the businessman himself,
and they vary continually, depending on the businessman’s time horizon
or the stage of production or selling process he happens to be dealing
with at any given time.

Suppose, for
example, a fruit dealer has purchased a case of pears for $20, amounting
to $1 a pound. He hopes and expects to sell those pears for $1.50
a pound. But something has happened to the pear market, and he finds
it impossible to sell most of the pears at anything near that price.
In fact, he finds that he must sell the pears at whatever price
he can get before they become overripe. Suppose he finds that he
can only sell his stock of pears at 70 cents a pound. The outside
observer might say that the fruit dealer has, perhaps "unfairly,"
sold his pears "below costs," figuring that the dealer’s
costs were $1 a pound.

"Infant"
Industries

Another protectionist
fallacy held that the government should provide a temporary protective
tariff to aid, or to bring into being, an "infant industry."
Then, when the industry was well-established, the government would
and should remove the tariff and toss the now "mature"
industry into the competitive swim.

The theory
is fallacious, and the policy has proved disastrous in practice.
For there is no more need for government to protect a new, young,
industry from foreign competition than there is to protect it from
domestic competition.

In the last
few decades, the "infant" plastics, television, and computer
industries made out very well without such protection. Any government
subsidizing of a new industry will funnel too many resources into
that industry as compared to older firms, and will also inaugurate
distortions that may persist and render the firm or industry permanently
inefficient and vulnerable to competition. As a result, "infant-industry"
tariffs have tended to become permanent, regardless of the "maturity"
of the industry. The proponents were carried away by a misleading
biological analogy to "infants" who need adult care. But
a business firm is not a person, young or old.

Older Industries

Indeed, in
recent years, older industries that are notoriously inefficient
have been using what might be called a "senile-industry"
argument for protectionism. Steel, auto, and other outcompeted industries
have been complaining that they "need a breathing space"
to retool and become competitive with foreign rivals, and that this
breather could be provided by several years of tariffs or import
quotas. This argument is just as full of holes as the hoary infant-industry
approach, except that it will be even more difficult to figure out
when the "senile" industry will have become magically
rejuvenated. In fact, the steel industry has been inefficient ever
since its inception, and its chronological age seems to make no
difference. The first protectionist movement in the U.S. was launched
in 1820, headed by the Pennsylvania iron (later iron and steel)
industry, artificially force-fed by the War of 1812 and already
in grave danger from far more efficient foreign competitors.

The Non-Problem
of the Balance of Payments

A final set
of arguments, or rather alarms, center on the mysteries of the balance
of payments. Protectionists focus on the horrors of imports being
greater than exports, implying that if market forces continued unchecked,
Americans might wind up buying everything from abroad, while selling
foreigners nothing, so that American consumers will have engorged
themselves to the permanent ruin of American business firms. But
if the exports really fell to somewhere near zero, where in the
world would Americans still find the money to purchase foreign products?
The balance of payments, as we said earlier, is a pseudo-problem
created by the existence of customs statistics.

During the
day of the gold standard, a deficit in the national balance of payments
was a problem, but only because of the nature of the fractional-reserve
banking system. If U.S. banks, spurred on by the Fed or previous
forms of central banks, inflated money and credit, the American
inflation would lead to higher prices in the U.S., and this would
discourage exports and encourage imports. The resulting deficit
had to be paid for in some way, and during the gold standard era
this meant being paid for in gold, the international money. So as
bank credit expanded, gold began to flow out of the country, which
put the fractional-reserve banks in even shakier shape. To meet
the threat to their solvency posed by the gold outflow, the banks
eventually were forced to contract credit, precipitating a recession
and reversing the balance of payment deficits, thus bringing gold
back into the country.

But now, in
the fiat-money era, balance of payments deficits are truly meaningless.
For gold is no longer a "balancing item." In effect, there
is no deficit in the balance of payments. It is true that in the
last few years, imports have been greater than exports by $150 billion
or so per year. But no gold flowed out of the country. Neither did
dollars "leak" out. The alleged "deficit" was
paid for by foreigners investing the equivalent amount of money
in American dollars: in real estate, capital goods, U.S. securities,
and bank accounts.

In effect,
in the last couple of years, foreigners have been investing enough
of their own funds in dollars to keep the dollar high, enabling
us to purchase cheap imports. Instead of worrying and complaining
about this development, we should rejoice that foreign investors
are willing to finance our cheap imports. The only problem is that
this bonanza is already coming to an end, with the dollar becoming
cheaper and exports more expensive.

We conclude
that the sheaf of protectionist arguments, many plausible at first
glance, are really a tissue of egregious fallacies. They betray
a complete ignorance of the most basic economic analysis. Indeed,
some of the arguments are almost embarrassing replicas of the most
ridiculous claims of 17th-century mercantilism: for example, that
it is somehow a calamitous problem that the U.S. has a balance of
trade deficit, not overall, but merely with one specific country,
e.g., Japan.

Must
we even relearn the rebuttals of the more sophisticated mercantilists
of the 18th century: namely, that balances with individual countries
will cancel each other out, and therefore that we should only concern
ourselves with the overall balance? (Let alone realize that the
overall balance is no problem either.) But we need not reread the
economic literature to realize that the impetus for protectionism
comes not from preposterous theories, but from the quest for coerced
special privilege and restraint of trade at the expense of efficient
competitors and consumers. In the host of special interests using
the political process to repress and loot the rest of us, the protectionists
are among the most venerable. It is high time that we get them,
once and for all, off our backs, and treat them with the righteous
indignation they so richly deserve.

Reprinted
from Mises.org.

Murray
N. Rothbard
(1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic vice
president of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report
, and appointed Lew as his
literary executor. See
his books.

Murray
Rothbard Archives

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