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HOOVER DIGEST
1997 No. 4
Milton Friedman and Rose Friedman
THE CASE FOR FREE TRADE

In international trade, Hoover fellow Charles Wolf Jr. argues in a previous article, deficits don't much matter. Here the Friedmans discuss what does: freedom. A ringing statement of logic and principle.

http://www-hoover.stanford.edu/publications/digest/974/friedman.html

It is often said that bad economic policy reflects disagreement among the experts; that if all economists gave the same advice, economic policy would be good. Economists often do disagree, but that has not been true with respect to international trade. Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world. Yet tariffs have been the rule. The only major exceptions are nearly a century of free trade in Great Britain after the repeal of the Corn Laws in 1846, thirty years of free trade in Japan after the Meiji Restoration, and free trade in Hong Kong under British rule. The United States had tariffs throughout the nineteenth century, and they were raised still higher in the twentieth century, especially by the Smoot-Hawley tariff bill of 1930, which some scholars regard as partly responsible for the severity of the subsequent depression. Tariffs have since been reduced by repeated international agreements, but they remain high, probably higher than in the nineteenth century, though the vast changes in the kinds of items entering international trade make a precise comparison impossible.

Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world.

Excerpted and condensed from:

Adam Smith: The Wealth of Nations, Book 4, Chapter 2

Of Restraints upon the Importation from Foreign Countries
of such Goods as can be produced at Home

"There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry...

The first is, when some particular sort of industry is necessary for the defence of the country....

The second case, in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry is, when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former....

As there are two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry, so there are two others in which it may sometimes be a matter of deliberation; in the one, how far it is proper to continue the free importation of certain foreign goods; and in the other, how far, or in what manner, it may be proper to restore that free importation after it has been for some time interrupted....

The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods is, when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country. Revenge in this case naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours....

The case in which it may sometimes be a matter of deliberation, how far, or in what manner, it is proper to restore the free importation of foreign goods, after it has been for some time interrupted, is, when particular manufactures, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. Humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection. Were those high duties and prohibitions taken away all at once, cheaper foreign goods of the same kind might be poured so fast into the home market as to deprive all at once many thousands of our people of their ordinary employment and means of subsistence. The disorder which this would occasion might no doubt be very considerable....

especially by the Smoot-Hawley tariff bill of 1930, which some scholars regard as partly responsible for the severity of the subsequent depression.

The assertion that the Smoot-Hawley tariff was responsible for the Great Depression is a myth based on ignorance of historical facts in favor of pursuing economic textbook theory. The Smoot-Hawley tariff pre-dated the stock market crash, and therefore could not have caused it. There is no convincing evidence that it made the Great Depression more severe, or was responsible for significant retaliation by foreign countries.

Imports formed only 6 percent of the GNP. With average tariffs ranging from 40 to 60 percent (sources vary), this represents an effective tax of merely 2.4 to 3.6 percent. Yet the Great Depression resulted in a 31 percent drop in GNP and 25 percent unemployment. The idea that such a small tax could cause so much economic devastation is too far-fetched to be believed.

Even an effective tax of 2.4 to 3.6 percent is overstating the effects of the tariff. The tariff rates were already high to begin with. One source reveals that Smoot-Hawley raised rates from 26 to 50 percent; another source from 44 to 60 percent. In that case, we are talking about an effective tax increase of 1.4 percent at most.

The "trade war" following Smoot-Hawley did not entirely shut down trade. For the U.S., it fell from 6 to 2 percent of the GNP between 1930 and 1932. Further analysis of the economy during the depression years reveals that nearly two-thirds of the drop in imports between 1929 and 1933 occurred prior to the Smoot-Hawley tariff. The Smoot-Hawley tariff actually extended the list of imports that entered the country with no tariffs at all compared to the Fordney-McCumber tariff of 1922 (over two-thirds of the goods imported into the United States entered duty-free.) What the Smoot-Hawley tariff did do was raise tariffs on particular import sensitive goods, such as Canadian agriculture, that were already on the tariff list and increase the amount of goods to which no tariffs were applied.