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Free Trade

Most economists from the time of Adam Smith have favored free international trade and have opposed tariffs and quotas. A tariff is a tax on an import and a quota is a limitation on the number of units that may be imported. On the other hand, a great many people over the years have argued for some form of restriction on international trade, for "protection" from foreign producers. Politicians have at times been persuaded by economists and others who have been in favor of free trade, and have been persuaded at other times by those arguing for restrictions. The United States and other Western nations have had sizable fluctuations in the average level of tariffs.

Those who favor protection sometimes claim that it is unfair to ask Americans to compete with cheap foreign labor. Some go on to argue that because labor is cheaper abroad, foreigners can undersell the United States in any product, and that if American business is not protected, the very standard of living in the United States is in danger. Economists have written some simple yet effective stories to rebut this argument. One of the best and oldest is Frédéric Bastiat's "Petition of the Candlemakers."

Bastiat's petition, published in 1874 in English, is a satire arguing that France would be better off if it had a law forbidding buildings to be lit with natural light. Without windows, Bastiat tells the reader, there would be a huge demand for artificial light, and a great many people would benefit from this demand. All the processes of candlemaking, including agriculture because tallow comes from sheep and cattle, would benefit. The maritime industry would benefit because more ships would put to sea to hunt whales. Metal workers would be needed to make light fixtures. Bastiat argues that directly or indirectly, all Frenchmen would be better off because of the greater production of artificial light.

Bastiat takes a position that everyone should recognize as absurd and shows that it makes sense in terms of the arguments used to support tariffs. He carefully ignores the concept of opportunity cost, but those who support tariffs never mention this concept either. If a country rejects cheap light from the sun or cheap food from foreign nations, it will need resources to satisfy the demand for these items. Using resources to produce artificial light or domestically grown food means that these resources cannot be used for other purposes.

A fable by James Ingram also illustrates that free international trade is production efficient. In his book, International Economic Problems (John Wiley, 1970), he tells of a mysterious entrepreneur, Mr. X., who announces to the world that he has found several amazing discoveries that allow him to produce cheap televisions, automobiles, cameras, and other goods. He sets up a plant on a large tract of land along the coast of North Carolina; hires 5000 employees who are sworn to secrecy; and begins buying grain, coal, and machinery. As the trains of grain and coal roll into his factory, other trains full of televisions and automobiles roll out of his factory into showrooms across the country. Mr. X is hailed as another Edison or Bell, and his company becomes a favorite with Wall Street investors.

Consumers love Mr. X because his products are so much cheaper than what they could buy before. Of course, his competitors dislike him, but their attempts to get laws restricting his operations get nowhere. The Houses of Congress ring with speeches saying that some economic adjustment is an inevitable by-product of technological progress.

Then, one day a small boy trying out his new skin-diving gear accidentally penetrates Mr. X's security shield and learns Mr. X's secret. Nothing is produced at the factory. It is all a front for a giant import-export business. Mr. X transforms grain and coal into autos and televisions by trade. His secret revealed, Mr. X is reviled and his factory shut down. Members of Congress proclaim that the American standard of living has had a narrow escape from the threat of cheap foreign labor and urge more money for research in industrial technology.

Freer trade and technological advance have similar effects. Both increase the range of choices open to consumers, but both also disrupt established producers. Because economists have traditionally viewed production as a means to an end, while consumption is the end, they have judged the effects of both technology and trade in terms of their effects on consumers and not generally worried a great deal about producers.

The case for free international trade, told in stories above, can also be told in terms of production and consumption-possibilities frontiers.

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Copyright Robert Schenk