A Tale of Two Roads

Commenting on this blog post at Carpe Diem, commentator (and friend of the blog) Walt Greenway says:

If people trade and not countries, should we condone theft from the Chinese people [in the form of subsidies on exported goods] just because we get a good deal in the U.S.?

Here is my response:

There are two issues here:

1) The question before us is whether or not trade with China (who subsidizes their stuff) harms us, Americans. That is an emphatic “no.”

2) As an economist, I advocate free trade for all. Were the Chinese government (or were I a Chinese citizen) to ask me what the best course to take would be, I’d argue for liberalizing trade. But I am not a consultant for the Chinese government nor a Chinese citizen. I am an American. I can only affect US barriers, not Chinese barriers. Therefore, I will content myself with reducing half of the trade barriers if I cannot reduce them all.

Allow me to elaborate in the manner of Frederic Bastiat:

There are two countries: Libertas and Protectistan.  The two build a road between one another; a road which overcomes barriers like mountains and deserts, allowing the two to trade with each other more cheaply.  For many years, both countries prosper from the trade.  One year, in a fit of madness, both erect artificial barriers (checkpoints, potholes, erroneous signs, anything to slow the flow and raise the price) along their halves of the road to keep the other from “flooding” their market.  As time moves along, the citizens of Libertas get frustrated they’re no longer once prospering the way they once did.  They hold a meeting.

One man gets up and says: “Our issues began when we erected barriers on the road to Protectistan.  First we paid for the road and then we paid for the obstructions!  That is absurd.  If we remove our barriers, we can improve our lot by making cheaper the goods we can get from Protectistan.  Let us do this post haste!”

Another man (this one from the government) stands up and says: “Do not listen to that crazy person.  We can only reduce our barriers if Protectistan lowers theirs! We have sent diplomats to Protectistan to negotiate the removal of barriers and they refused.”

The first man gets up again: “Sir, we have no control over what Protectistan does, but we do have control over what Libertas does.  Let us uphold our end and remove our barriers.  Perhaps, one day, they will see the folly of their ways, but why should we be punished just because they don’t want to remove barriers?”

The government man replies: “Do not listen to this dreamer, this theorist.  We can only prosper if our barriers are kept in balance.  Why, if we removed our barriers, all would be lost!  It would be more difficult to go than come, to export than import.  Our ruin would follow just as quickly as it has followed the cities at the mouths of the Mississippi, the Thames, the Amazon, the Yellow River, for it is easier to go downstream than upstream.”

A lady in the back responds: “The cities at the mouths are wealthier than the cities on the tributaries.”

The government man cries: “That is impossible!”

The same voice: “But it is a fact.”

The government man: “Then they have prospered against the rules!

The government man finished his oration by appealing to all manner of things: nationalism, patriotism, etc.  He spoke of murderous competition, of loss of pride.  The assembly, so moved, voted to keep the barriers in place, agreeing that it is only by paying and not receiving can profit be achieved.

Theory vs Practice

I always find it interesting that protectionists call us free-traders the fantacists, the theorists, the academic scribblers (etc), and cast themselves as the realists. They claim they are the ones who represent what people want, that we are just too deep in our cloistered academic world to understand that.

That may be true, but it’s strange. If they were really correct, that the supposed costs of mercantilism are really benefits, the supposed benefits are really costs, that people understand this and we do not…

If all that were true, why the need for tariffs? Why the need for government at all? Wouldn’t people just naturally buy domestic and never foreign?

In practice, no one is a mercantilist.  If we take their position to its logical conclusion, we can see this: no one, even the most hard-core mercantilist, abstains from trade.  Indeed, they personally act as though they agree with the free-market principle that it is better to buy what is more expensive for one to produce.  No mercantilist grows his own food, sews his own clothes, brews his own beer, etc.  He gladly trades for those items.  And yet, paradoxically, he argues that, in theory (but not in practice!) these actions harm people.

It seems to me that we are the realists and the mercantilists are the theorists given they need to force reality to coincide with their theory.

Reality vs Perception

Over at the Liberty Law Blog, Prof. John McGinnis has an excellent piece on legislating.  He writes (emphasis added):

A Nebraska Senator has introduced a bill to require photo identification for voting, not because voting fraud is an actual problem, but because Nebraskans perceive there to be such fraud, whether it exists or not.

If voting is a fundamental right protected by the Constitution, legislation should burden its exercise only to address actual harms, not some people’s impressions of reality.  Thus, the legality of these laws should turn on the question of actual voter fraud and the utility of voter identification in curbing it.

I agree with the good professor, and think this rule should apply not to just legal matters, but economic matters as well.  An argument I’ve heard more and more in recent months in favor of protectionism from people who are nominally free market is that, with our current trade policy, it creates the perception of unfairness; it creates the perception of China “stealing jobs”, of a “hollowing out of the manufacturing base,” of “economic stagnation.”  It doesn’t matter that the data say otherwise, but the perception is there and that’s why Trump won.  Therefore, they conclude, we need some trade barriers to keep the protectionists at bay.

This argument is very similar to the one McGinnis addresses: there is this perception, so therefore we should pass legislation to combat the perception, even if it infringes on people’s rights.  For the same reasons McGinnis rejects the argument in the link, I do so here: legislation that burdens the free exercise of a right should only address an actual harm, not a perceived harm.  Given that free exchange is a fundamental human right, the infringement of such requires the burden of proof to be on those calling for tariffs; they must demonstrate actual unique and substantial harm, not just the perception of it and demonstrate the usefulness of their proposed actions in addressing the harm.*

In short, the perception of harm is not enough to justify the infringement of the right to trade.

*Notice I said “actual unique and substantial harm,” instead of just “harm.”  The reason for this, which will be addressed in a forthcoming blog post, is because any action whatsoever can conceivably harm anyone, but that alone is not grounds for outlawing it.

A Tale of Trade

A farmer in rural Iowa says to his wife, “My love: I will take our corn to market, and from the proceeds I will buy our daughter a dress!”  So, he loads up his truck with his corn (which was grown with the sweat of his brow) and takes it to Iowa City.  He enters the market and a Frenchman says:

“Sir!  How fine it is to see you!  I have just what you are looking for.  I have this collection of fine dresses from Paris.  If you give me your corn, I can sell you four dresses for your lovely daughter.”

A Bostonian then approaches the farmer and says: “I will give you two dresses for your corn.”

The farmer considers both offers and decides to deal with the Frenchman.

“Wait!” says the custom officer.  “Do not buy those four dresses from Europe.  My orders are to keep you from buying French goods.  Rather, for the same price, you can buy these two dresses from Boston.  You, and our nation, will be better for it.  Surely you can see America will be worse if you get the four dresses rather than the two.”

“Two dresses for the same price as the four?  How will such a deal make me wealthier?”

“Oh, I can’t answer that question!” says the customs official.  “But it is a fact;  for all our secretaries and department heads and legislators and journalists agree that the more a nation receives for its goods, the poorer it becomes.”

And so the farmer deals with the Bostonian, but he (and everyone else) is left wondering why a person is ruined receiving four dresses instead of two.

(With special thanks to Frederic Bastiat for inspiring this modern retelling of his Tale of the Winemaker)

Destroy the City to Save the City

Commenting on this blog post, a “Daniel DiMicco” says:

Your commentary couldn’t be more misleading and dead wrong. Rather than the picture you paint, the Steel Industry is the “canary in the coal mine”. It is the case study for the Massive trade Mercantilism and cheating that China is perpetrating on the USA’s entire Manufacturing sector. Your propaganda doesn’t pass the smell test!

Below is my response:

Daniel Dimicco:

You say that the steel industry is the “case study for the Massive [sic] trade Mercantilism [sic] and cheating that China is perpetrating on the USA’s entire Manufacturing sector.”

Presumably, this means China’s low steel prices are harmful to the American manufacturing sector.

However…what would happen to the US manufacturing sectors that are dependent on steel? Like auto-making, construction materials, and the like? They’d face higher price pressures from any resulting tariffs you demand. Assuming they can’t adjust prices, this would mean they’d need to cut adjust costs elsewhere…perhaps lay off workers, perhaps cut hours, all kinds of things. They’d be negatively impacted by your steel tariffs.

Even if they could adjust their prices, now you’re looking at the effects on the consumers of these steel products. They’d start looking for more cheap substitutes or simply cut back on the amount they purchase. This would weigh on the manufacturing sector as well (as well as the consumers).

In short, your effort to save one canary will kill off several others.

On a related note, I found a picture of protectionists celebrating a tariff hike:

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Today’s Quote of the Day…

…is from page 35 of Economic Sophisms by Frederic Bastiat (1964 Foundation for Economic Education edition):

Moreover, free trade also equalizes the conditions of enjoyment, of satisfaction-in short, of consumption.  People seem never to take this aspect of the matter into consideration; yet it is the crux of the whole discussion, since, after all, consumption is the ultimate goal of all our productive efforts.  Under a system of free trade, we should enjoy the benefits of the Portuguese sun just as Portugal itself does; and the inhabitants of Le Harve would have just as much access to the advantages that Nature has conferred upon Newcastle in the form of mineral resources, and under the same conditions, as the people of London do.

JMM: Free trade is the ultimate sharing of the wealth.  Despite living in Virginia, I can enjoy the same goods as people all over the country and the world.  I needn’t live in Florida to get oranges, or India to get curry, or England to get tea.  I can enjoy these things just as equally as if I lived in Miami, or Bombay, or London (and likewise they can enjoy tobacco, dairy, and soybeans just as they lived in Richmond).

The Ricardian Insight on Trade

Is it possible for a nation to become impoverished by trade by outsourcing everything?  Some people seem to think so.  For example, see this comment by a “William Ryan” on this Carpe Diem blog post:

Then we can just let China and Mexico make everything for us so the few at the top can hoard all profits and prosper from.

The problem with this sentiment is that it is mathematically impossible.  If we stick with the standard theory of trade (and one which these folks appear to accept), then the actor that produces something at the lowest economic cost will specialize in that production.  However, it is impossible to be the lowest-cost producer in everything.  “Lowest economic cost” is a relative term.  If one has a lower economic cost at one thing, s/he necessarily has a higher economic cost in another thing.  The example we gave yesterday of Bananaland and Fisherland provide a mathematical example of this concept.

This insight was developed by David Ricardo 200 years ago.  It is still relevant today.