Should Economic Growth be Traded for National Defense?

One of the stronger arguments against free trade is the national defense argument: some industry may be so vital to national security to warrant its protection from foreign competition.  This justification may be easily abused, but let’s ignore that possibility for the moment.  Is it still worth restricting trade and reducing opulence for the sake of national security?

The trade-off between security and opulence doesn’t appear too clear cut to me.  Protected industries tend to become listless, stagnant, and non-dynamic.  Protected from the forces of competition, they can become complacent.  As AEI economist Mark Perry likes to say: competition breeds competence.  These protected industries may become so undynamic, so technologically backward or stagnant, that in the event of a national emergency, they are unable to handle the military needs.

Furthermore, protected industries (especially if they are subsequently subsidized) may discourage development of newer technologies that may be better suited for national defense.  Let’s say, for example, that the steel industry is vital for national defense.  Since steel is protected from competition, it can make it a more attractive investment for people given its security.  This would divert resources away from other developments that could rival the industry, say some sort of lighter metal or steel substitute.

If an industry is protected from competition and it becomes listless and non-dynamic, not only is it coming at a sacrifice for national wealth but may also be a hindrance to national defense as well if it cannot adapt to changing war needs.  This becomes deadly true if a climate of rent-seeking rather than innovation takes hold in the national economy.

In short, while theoretically, tariffs could be helpful for national defense, they could very well end up being detrimental.

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