May 16, 2010

International Trade
The advantages of trade are obvious when we progress from The Robinson Crusoe situation to trade between two people. There is an immediate opportunity to benefit from specialization and trade. The advantages increase greatly as the size of the market increases, either in geographic area or population. If you divided the world in half, no matter how you placed the dividing line, each half would still have an advantage in providing certain raw materials or crops. Even on such a large scale, everyone would be more prosperous if there was trade between those two halves.
Why, then, should we want to limit trade between countries? The answers are all about politics, power, and war.
Nationalism is the religion of government. We must be loyal to our country, “give our business” (trade) to our countrymen, and live independent of those foreigners. If we let ourselves become dependent on trade, a blockade might leave us helpless in time of war, especially if the war is with our trading partners.
The reasons countries go to war are many, but too often it is for one country to gain access to raw materials or other natural advantages which that country lacks. The irony of this is that free trade gives everyone everywhere access to all that the Earth has to offer.
The fallacy of mercantilism is an attempt of the government of one country to get rich at the expense of other countries. They do this with subsidies for exports and tariffs or quotas for imports to build up reserves of money within the country. This doesn’t work, but the interference with the free market reduces trade and the welfare of all people of all countries.
With nearly every country having its own national monetary system and central bank, some countries often embark on deliberate inflation to increase exports and reduce imports. This is just another foolish version of mercantilism.
There is no economic justification for interfering with international free trade. It’s all about politics.
Recent years have seen lots of international negotiations to make free trade agreements. These negotiations take the form of, “We’ll reduce our farm subsidy on cotton by 40% if you’ll reduce your import tariff on wheat by 60%”. There are no proposals on the table for completely free trade. Why? Politics. I don’t want to lose the votes of cotton farmers unless I can gain the votes of the wheat farmers by doing it.
What would happen if one country, say the USA, would declare itself a free trade area with no subsidies, tariffs, or quotas? I believe this would quickly make us even more prosperous than we already are. Let’s think about it.
Of course, the wheat growers, cotton growers, steel smelters, and all others sheltered by trade restrictions, would lose their shelters. They would either have to drastically improve their productivity or go out of business. They would have to find some other field of business to earn a living, something in which the USA has an advantage. But there would be the means to give them employment, because the American taxpayers, relieved of the tax burdens which had protected those now unemployed, would have the extra money to spend on other goods which would provide new employment for the unemployed farmers and steelworkers.
What of trade with other countries which sheltered certain products or industries? This wouldn’t cost the American consumers any more than it had, and in many cases taxpayers in other countries would be subsidizing sales of some products to the benefit of American consumers. That’s a case where our gain and their loss.
All of the problems in international trade stem from mercantilist thinking: the fallacy that exports are good and imports are bad. All of these interventions, subsidies, protective tariffs, and import quotas, are designed to protect producers at the expense of consumers in their own country. Since the end purpose of all economic activity is consumption, and we are all consumers, these government interventions do more harm than good to their own people, and add strains to our international relations.
Perhaps if one country tried truly free international trade, the benefits would be obvious and other countries would follow suit, until we had free world trade. The whole world would be more prosperous. As a side effect, wars would be much less likely.
Totally free trade should include free movement of people to any country they cared to move to. Most cultures today, however, are not ready to extend that freedom. There would possibly be cultural friction, with people of diverse cultures and languages thronging to the most advantaged countries. Economically, though, everyone would benefit. They wouldn’t “take jobs” because their earnings when spent would increase demand and create jobs. Even when they send their earnings to family in the “old country” the balance of trade will bring it back to the USA.
As to cultural friction, I believe that would give us the advantages of the “melting pot” in America 100 years ago, and that would further reduce the likelihood of war.


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