• Protectionism and the Destruction of Prosperity

    Email Print

    first published by the Mises Institute,
    for printing from PDF

    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

    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

    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.

    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.

    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

    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

    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.


    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.

    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

    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


    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.


    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.

    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.

    from Mises.org.

    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.

    Rothbard Archives

    Email Print