Skip to comments.THE CASE FOR FREE TRADE
Posted on 08/05/2003 9:34:52 AM PDT by 1rudeboy
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.
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.
Today, as always, there is much support for tariffs--euphemistically labeled "protection," a good label for a bad cause. Producers of steel and steelworkers' unions press for restrictions on steel imports from Japan. Producers of TV sets and their workers lobby for "voluntary agreements" to limit imports of TV sets or components from Japan, Taiwan, or Hong Kong. Producers of textiles, shoes, cattle, sugar--they and myriad others complain about "unfair" competition from abroad and demand that government do something to "protect" them. Of course, no group makes its claims on the basis of naked self-interest. Every group speaks of the "general interest," of the need to preserve jobs or to promote national security. The need to strengthen the dollar vis-à-vis the deutsche mark or the yen has more recently joined the traditional rationalizations for restrictions on imports.
One voice that is hardly ever raised is the consumer's. That voice is drowned out in the cacophony of the "interested sophistry of merchants and manufacturers" and their employees. The result is a serious distortion of the issue. For example, the supporters of tariffs treat it as self evident that the creation of jobs is a desirable end, in and of itself, regardless of what the persons employed do. That is clearly wrong. If all we want are jobs, we can create any number--for example, have people dig holes and then fill them up again or perform other useless tasks. Work is sometimes its own reward. Mostly, however, it is the price we pay to get the things we want. Our real objective is not just jobs but productive jobs--jobs that will mean more goods and services to consume.
Another fallacy seldom contradicted is that exports are good, imports bad. The truth is very different. We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. As Adam Smith saw so clearly, the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports or, equivalently, from exporting as little as possible to pay for its imports.
The misleading terminology we use reflects these erroneous ideas. "Protection" really means exploiting the consumer. A "favorable balance of trade" really means exporting more than we import, sending abroad goods of greater total value than the goods we get from abroad. In your private household, you would surely prefer to pay less for more rather than the other way around, yet that would be termed an "unfavorable balance of payments" in foreign trade.
The argument in favor of tariffs that has the greatest emotional appeal to the public at large is the alleged need to protect the high standard of living of American workers from the "unfair" competition of workers in Japan or Korea or Hong Kong who are willing to work for a much lower wage. What is wrong with this argument? Don't we want to protect the high standard of living of our people?
The fallacy in this argument is the loose use of the terms "high" wage and "low" wage. What do high and low wages mean? American workers are paid in dollars; Japanese workers are paid in yen. How do we compare wages in dollars with wages in yen? How many yen equal a dollar? What determines the exchange rate?
Consider an extreme case. Suppose that, to begin with, 360 yen equal a dollar. At this exchange rate, the actual rate of exchange for many years, suppose that the Japanese can produce and sell everything for fewer dollars than we can in the United States--TV sets, automobiles, steel, and even soybeans, wheat, milk, and ice cream. If we had free international trade, we would try to buy all our goods from Japan. This would seem to be the extreme horror story of the kind depicted by the defenders of tariffs--we would be flooded with Japanese goods and could sell them nothing.
Before throwing up your hands in horror, carry the analysis one step further. How would we pay the Japanese? We would offer them dollar bills. What would they do with the dollar bills? We have assumed that at 360 yen to the dollar everything is cheaper in Japan, so there is nothing in the U.S. market that they would want to buy. If the Japanese exporters were willing to burn or bury the dollar bills, that would be wonderful for us. We would get all kinds of goods for green pieces of paper that we can produce in great abundance and very cheaply. We would have the most marvelous export industry conceivable.
Of course, the Japanese would not in fact sell us useful goods in order to get useless pieces of paper to bury or burn. Like us, they want to get something real in return for their work. If all goods were cheaper in Japan than in the United States at 360 yen to the dollar, the exporters would try to get rid of their dollars, would try to sell them for 360 yen to the dollar in order to buy the cheaper Japanese goods. But who would be willing to buy the dollars? What is true for the Japanese exporter is true for everyone in Japan. No one will be willing to give 360 yen in exchange for one dollar if 360 yen will buy more of everything in Japan than one dollar will buy in the United States. The exporters, on discovering that no one will buy their dollars at 360 yen, will offer to take fewer yen for a dollar. The price of the dollar in terms of the yen will go down--to 300 yen for a dollar or 250 yen or 200 yen. Put the other way around, it will take more and more dollars to buy a given number of Japanese yen. Japanese goods are priced in yen, so their price in dollars will go up. Conversely, U.S. goods are priced in dollars, so the more dollars the Japanese get for a given number of yen, the cheaper U.S. goods become to the Japanese in terms of yen.
The price of the dollar in terms of yen would fall, until, on the average, the dollar value of goods that the Japanese buy from the United States roughly equaled the dollar value of goods that the United States buys from Japan. At that price everybody who wanted to buy yen for dollars would find someone who was willing to sell him yen for dollars.
The actual situation is, of course, more complicated than this hypothetical example. Many nations, and not merely the United States and Japan, are engaged in trade, and the trade often takes roundabout directions. The Japanese may spend some of the dollars they earn in Brazil, the Brazilians in turn may spend those dollars in Germany, the Germans in the United States, and so on in endless complexity. However, the principle is the same. People, in whatever country, want dollars primarily to buy useful items, not to hoard, and there can be no balance of payments problem so long as the price of the dollar in terms of the yen or the deutsche mark or the franc is determined in a free market by voluntary transactions.
Why then all the furor about the "weakness" of the dollar? Why the repeated foreign exchange crises? The proximate reason is because foreign exchange rates have not been determined in a free market. Government central banks have intervened on a grand scale in order to influence the price of their currencies. In the process they have lost vast sums of their citizens' money (for the United States, close to two billion dollars from 1973 to early 1979). Even more important, they have prevented this important set of prices from performing its proper function. They have not been able to prevent the basic underlying economic forces from ultimately having their effect on exchange rates but have been able to maintain artificial exchange rates for substantial intervals. The effect has been to prevent gradual adjustment to the underlying forces. Small disturbances have accumulated into large ones, and ultimately there has been a major foreign exchange "crisis."
In all the voluminous literature of the past several centuries on free trade and protectionism, only three arguments have ever been advanced in favor of tariffs that even in principle may have some validity.
First is the national security argument--the argument that a thriving domestic steel industry, for example, is needed for defense. Although that argument is more often a rationalization for particular tariffs than a valid reason for them, it cannot be denied that on occasion it might justify the maintenance of otherwise uneconomical productive facilities. To go beyond this statement of possibility and establish in a specific case that a tariff or other trade restriction is justified in order to promote national security, it would be necessary to compare the cost of achieving the specific security objective in alternative ways and establish at least a prima facie case that a tariff is the least costly way. Such cost comparisons are seldom made in practice.
The second is the "infant industry" argument advanced, for example, by Alexander Hamilton in his Report on Manufactures. There is, it is said, a potential industry that, if once established and assisted during its growing pains, could compete on equal terms in the world market. A temporary tariff is said to be justified in order to shelter the potential industry in its infancy and enable it to grow to maturity, when it can stand on its own feet. Even if the industry could compete successfully once established, that does not of itself justify an initial tariff. It is worthwhile for consumers to subsidize the industry initially--which is what they in effect do by levying a tariff--only if they will subsequently get back at least that subsidy in some other way, through prices lower than the world price or through some other advantages of having the industry. But in that case is a subsidy needed? Will it then not pay the original entrants into the industry to suffer initial losses in the expectation of being able to recoup them later? After all, most firms experience losses in their early years, when they are getting established. That is true if they enter a new industry or if they enter an existing one. Perhaps there may be some special reason why the original entrants cannot recoup their initial losses even though it may be worthwhile for the community at large to make the initial investment. But surely the presumption is the other way.
The infant industry argument is a smoke screen. The so-called infants never grow up. Once imposed, tariffs are seldom eliminated. Moreover, the argument is seldom used on behalf of true unborn infants that might conceivably be born and survive if given temporary protection; they have no spokesmen. It is used to justify tariffs for rather aged infants that can mount political pressure.
The third argument for tariffs that cannot be dismissed out of hand is the "beggar-thy-neighbor" argument. A country that is a major producer of a product, or that can join with a small number of other producers that together control a major share of production, may be able to take advantage of its monopoly position by raising the price of the product (the Organization of Petroleum Exporting Countries cartel is the obvious example). Instead of raising the price directly, the country can do so indirectly by imposing an export tax on the product--an export tariff. The benefit to itself will be less than the cost to others, but from the national point of view, there can be a gain. Similarly, a country that is the primary purchaser of a product--in economic jargon, has monopsony power--may be able to benefit by driving a hard bargain with the sellers and imposing an unduly low price on them. One way to do so is to impose a tariff on the import of the product. The net return to the seller is the price less the tariff, which is why this can be equivalent to buying at a lower price. In effect, the tariff is paid by the foreigners (we can think of no actual example). In practice this nationalistic approach is highly likely to promote retaliation by other countries. In addition, as for the infant industry argument, the actual political pressures tend to produce tariff structures that do not in fact take advantage of any monopoly or monopsony positions.
A fourth argument, one that was made by Alexander Hamilton and continues to be repeated down to the present, is that free trade would be fine if all other countries practiced free trade but that, so long as they do not, the United States cannot afford to. This argument has no validity whatsoever, either in principle or in practice. Other countries that impose restrictions on international trade do hurt us. But they also hurt themselves. Aside from the three cases just considered, if we impose restrictions in turn, we simply add to the harm to ourselves and also harm them as well. Competition in masochism and sadism is hardly a prescription for sensible international economic policy! Far from leading to a reduction in restrictions by other countries, this kind of retaliatory action simply leads to further restrictions.
We are a great nation, the leader of the world. It ill behooves us to require Hong Kong and Taiwan to impose export quotas on textiles to "protect" our textile industry at the expense of U.S. consumers and of Chinese workers in Hong Kong and Taiwan. We speak glowingly of the virtues of free trade, while we use our political and economic power to induce Japan to restrict exports of steel and TV sets. We should move unilaterally to free trade, not instantaneously but over a period of, say, five years, at a pace announced in advance.
Few measures that we could take would do more to promote the cause of freedom at home and abroad than complete free trade. Instead of making grants to foreign governments in the name of economic aid--thereby promoting socialism--while at the same time imposing restrictions on the products they produce--thereby hindering free enterprise--we could assume a consistent and principled stance. We could say to the rest of the world: We believe in freedom and intend to practice it. We cannot force you to be free. But we can offer full cooperation on equal terms to all. Our market is open to you without tariffs or other restrictions. Sell here what you can and wish to. Buy whatever you can and wish to. In that way cooperation among individuals can be worldwide and free.
Adapted from "The Tyranny of Controls" in Free to Choose: A Personal Statement, by Milton Friedman and Rose Friedman, published by Harcourt Brace Jovanovich, © 1980. To order, call 800-543-1918. Available from the Hoover Press is The Essence of Friedman, edited by Kurt R. Leube. To order, call 800-935-2882.
Milton Friedman is a senior research fellow at the Hoover Institution. He was awarded the Nobel Prize in economic sciences in 1976. Rose Friedman studied economics as a graduate student at the University of Chicago and has collaborated with Milton Friedman on several books.
For a valuable dictionary of economic terminology, please refer to the Economist online (protectionists don't bother, you'll have to re-define your terms elsewhere).
Please see the Friedmans' response to the "emotional" argument that off-shoring work to countries with lower labor wage rates will result in a reduction of our standard of living, beginning on paragraph six.
Also please see the Friedmans' response to the arguments in favor of tariffs immediately after the high-lighted portion near the center of the article.
And please, refrain from making the illogical and utterly laughable argument that "Karl Marx 'approved' of free trade, therefore Milton Friedman is a Marxist." Even Pat Buchanan doesn't.
This article posted for educational purposes only.
The Friedmans make no mention of externalities such as slave labor, child labor, or the environment, and no mention of downwards harmonization which is an integral part of "free trade" not because they don't know about these factors, but because it does not benefit their argument.
Sorry, the Friedmans are a complete fraud in terms of economic analysis of free trade. (I might add, so are most of the other economists. And it's an outright LIE that all economists favor free trade. Sheesh.)
It would seem to me that the continual comparison of countries with more or less natural resources is meaningless to determine a countries wealth. Hong Kong is a great example of a country with zero natural resources, but using free trade, has become incredibly wealthy.
The natural resource argument might have been valid when the world economic system was more primitive. But in a day when so little wealth is required for "necessities" like food, and all other wealth is used for "wants", it is the generation of a "want" in the population that is the driving factor of a good economy.
If trade barriers are such a good idea, then we should have tarriffs between US states. Trade barriers between countries are just a low grade of warfare between different people for purely tribal reasons.
We're all humans on this planet. Set us free.
But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.
~Karl Marx, "On the Question of Free Trade" - January 9, 1848
And please, refrain from making the illogical and utterly laughable argument that "Karl Marx 'approved' of free trade, therefore Milton Friedman is a Marxist." Even Pat Buchanan doesn't.
But are we economically less well off?
By all accounts, we live in larger houses, have better and more feature filled cars. Have more TVs with more channels. Healthcare is the best it's ever been in the history of humanity, and every human is required to be treated under the law of the land, whether they have insurance or not.
We go on vacations to farther places. There are hundreds of cruise ships catering to the middle class, where only the ultra-rich used to travel by sea, and then only for the utilitarian purpuse of going somewhere. Now cruises are indulgences only.
So where are the small children with bloated bellies?
I simply just don't buy the woe-is-me line. I will always have a decent life. Even if I have to work at McDonalds and live in a small trailer. I've seen the shack my mother grew up in, and no one in this country is that bad off today, except for the lazy or mentally incompetent.
And we are all far more in debt..
How come none of you trade restrictionists want to answer the question about why restrictions are good around the US border. But not good around state borders?
Heard the same argument 30 years ago. So when is the end-of-the-world coming?
I had $70k of credit card debt 6 years ago as the results of trying to start a business. I've since paid it off.
People have been attempting to generate crowds of follwers for centuries with end-of-the-world predictions. The economic end-of-the-world predictions don't impress me any more than the past predictions of planetary calamity.
I've answered it many times, narby. Where've you been?
Within our domestic borders, our domestic industries compete against each other on a level playing field, all subject to a common set of laws and regulations defined by the jurisdictional boundaries of our Constitution. Industries in other nations are not bound by those same constraints. Indeed, they seek to turn those regulations against us for their own profit. Why is it that you seek to undermine our domestic industries as well?
I don't believe that I've ever claimed that Milton Friedman was a marxist.
But if you wish to make that comparison, I won't debate against it.
As for Marx's attitude toward free trade, Engels explains it quite well:
If there is anything clearly exposed in political economy, it is the fate attending the working classes under the reign of Free Trade. All those laws developed in the classical works on political economy, are strictly true under the supposition only, that trade be delivered from all fetters, that competition be perfectly free, not only within a single country, but upon the whole face of the earth. These laws, which A. Smith, Say, and Ricardo have developed, the laws under which wealth is produced and distributed these laws grow more true, more exact, then cease to be mere abstractions, in the same measure in which Free Trade is carried out. And the master of the science, when treating of any economical subject, tells us every moment that all their reasonings are founded upon the supposition that all fetters, yet existing, are to be removed from trade. They are quite right in following this method....
Thus it can justly be said, that the economists Ricardo and others know more about society as it will be, than about society as it is. They know more about the future than about the present. If you wish to read in the book of the future, open Smith, Say, Ricardo. There you will find described, as clearly as possible, the condition which awaits the working man under the reign of perfect Free Trade. Take, for instance, the authority of Ricardo, authority than which there is no better. What is the natural normal price of the labour of, economically speaking, a working man? Ricardo replies, Wages reduced to their minimum their lowest level....
Either you must disavow the whole of political economy as it exists at present, or you must allow that under the freedom of trade the whole severity of the laws of political economy will be applied to the working classes. Is that to say that we are against Free Trade? No, we are for Free Trade, because by Free Trade all economical laws, with their most astounding contradictions, will act upon a larger scale, upon a greater extent of territory, upon the territory of the whole earth; and because from the uniting of all these contradictions into a single group, where they stand face to face, will result the struggle which will itself eventuate in the emancipation of the proletarians....
~Frederick Engels, The Free Trade Congress at Brussels, October 9, 1847
Do you mean in the sense of "international commmerce" or "interstate trade"?
In no way is the US a "level playing field". Try and make money growing a crop in New York City and make money after paying billions for the land. Try and start a software company that needs employees in Guymon Oklahoma. You wouldn't be able to pay enough people enough money to live there and still compete.
So, to make "fair trade" in the US, we would have to heavily subsidise crops grown in New York City so farmers there have a chance. And we would have to place tarriffs on software written in NYC to make software written in Guymon Ok competitive.
We aren't all on the same side, though. Scorpions will sting you no matter how nice you are to them.
Empires rise and fall the US will not remain forever but I think we should try to prolong it...
And Marx and Engels were the brains behind the worst economic failure of the 20th century, communisim. Anything they might say, pro or con about the issue of free trade is no better than toilet paper. They have zero credibility.
LOL! It's really quite hilarious how Milton Friedman tries to shield his own reputation by attributing this blatant, political misinformation to "other scholars". And even then he tries to minimize the association with the use of the word "partly". He knows darn well that Smoot-Hawley had little, if any, effect on the Great Depression. International Trade constituted a negligible portion of GDP back then. And while Smoot-Hawley raised the tax of some items that were already on the tariff list, it actually expanded the number of goods that were permitted to enter our domestic market duty-free.
LOL I with you!!! They don't produce anything but hot air anyway. And it's not even hot, more like tiped.
The reason people become economists, is they don't have the personality to become accountants.
Define "same side". You mean labor and management? You mean American vs Oriental?
Sorry, I will never buy that concept that government controls ever do anything positive over the long run. No matter whether you're talking about tax regulations or trade barriers, they're all bad.
Government needs to protect our streets, protect our shores, and get the h@ll out of the way. Free economic systems are always the best, whether between US vs. Japan, or Guymon Oklahoma vs. New York City.
Rome had plenty more problems than trade.
Marx and Engels were much better at forecasting the domestic upheaval than they were at constructing a "utopian" alternative.
But what the heck, if you don't want to believe them, maybe you'll listen to Adam Smith. He warns us of the same thing:
Excerpted and condensed from:
Of Restraints upon the Importation from Foreign Countries
of such Goods as can be produced at Home
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....
There you go, narby. Or don't you think that Adam Smith has any credibility either?
The idea that somehow there is any kind of "trade imbalance" anywhere is just laughable, except to the extent that central banks monkey with stuff.
If we could get away with getting shoes from China by sending them green colored paper, GREAT! But they will want to get something of value for that green colored paper, and will spend it somewhere else. For that green colored paper to ever be redeemed, by definition, it MUST be returned to the United States by purchasing something from here.
The only other alternative is that our green colored paper continues to circulate worldwide and is never returned here for the purchase of US produced goods. In that case, GREAT! Our green colored paper becomes the currency of the world, in which case, we control the world by the actions of the Federal Reserve Bank.
As an ex-military guy, I resent that line. Any arguments I have are from my desire for a prosperous country for myself, and my grandkids to live in.
I'm sure NYC farmers (if any) are eligible for the same federal crop subsidies available to farmers in Oklahoma, Kansas or Idaho.
But it's not surprising that a marxist free trader like yourself would confuse "equal opportunity" with "equal outcome".
LOL! Say hi to Jesse Jackson for us!
Now I understand every point you've made. You didn't learn English comprehension in school. What part about "all at once" don't you understand?
To save you the time of re-reading your own post and comprehending it, Smith's point is that once you've established trade barriers, you can't remove them "all at once" without disruptions.
Smith doesn't say, but I'll opine that the trade barriers were a stupid idea in the first place, since they directed industry in places different from where it would have otherwise gone. Smith's very clear implication in your own post, is that these ill advised trade barriers must be removed gradually to avoid sudden disruptions. And I completly agree.
I am personally opposed to excessively high, protectionist, targetted tariffs. As with any policy advocated by special interests, they distort the market for the benefit of some, and to the detriment of others.
Instead, my preference is for a relatively low, flat-rate "revenue tariff" to be levied on ALL imported goods (as envisioned by our Founding Fathers). Such a tariff benefits ALL Americans by favoring development of domestic industries in our own market, while providing revenue for the federal Treasury and enabling further reduction of other forms of domestic taxation.