One of the central paradoxes of the human condition is that, as consumers, we embrace competition, but as producers, we despise it.

Who among us when, say, shopping for a new car, doesn’t visit more than one dealership and consider more than one brand.  In the end, we choose the car that, given our specific needs, offers us the best mix of features and price – the best deal.

However, who among us relishes the challenge of competing with other companies, especially if they have a lower cost structure.  In this case, we would prefer to restrict our neighbor’s access to the best deal in order to protect our job or company.

This natural tendency is accentuated when the competitor is “foreign.”  As Nobel economist Friedrich Hayek points out in The Fatal Conceit, man’s instincts are to favor “our group” over those “not in our group.”  Cheering for the home team comes naturally.  And, restrictions on foreign competitors seem to favor the home team.

Both the desire for as wide a selection as possible, and the desire to reduce the number of competitors are valid.  But liberty favors competition, including foreign competition, over protection.

Here’s why.  Although restrictions on any competitor – foreign or domestic – may make you better off, it does so at the expense of another.  In effect, trade restrictions use the power of government to eliminate your competitor.  By so doing, they impose a one-sided exchange on others. Placing restrictions on foreign competitors is an abridgment of our liberty to exchange the fruits of our labor with whom we choose.

In addition, the claim that restricting access to foreign goods makes the community as a whole better off is demonstrably false.  If trade restrictions were good for the community as a whole, then the United States would be a richer country if each of the 50 states were permitted to restrict trade with the other states.

The gains by the benefactors of trade restrictions are offset dollar for dollar by the losses suffered by those who must now pay more for the same basket of goods and services.  In addition, trade restrictions reduce the opportunities for mutually beneficial exchanges, thereby limiting the opportunity for specialization and wealth creation.

For example, the U.S. in 2009 increased the tariffs on Chinese tire imports to 35% from about 4%.  Chinese tire imports fell by more than half.  According to a study, employment among U.S. tire makers increased by 1,200.  And, those employees earned about $48 million in income ($40,000 per job).  So far, so good.

However, consumers paid an estimated $1.1 billion more for tires, which works out to about $900,000 per job saved and raises the question:  who received the other $1,050 million that did not go to the actual workers who made the tires?

An estimated $250 million went to U.S. tire companies in the form of higher profits.  The remaining $800 million went to foreign tire companies who, no longer facing Chinese competition, increased their exports into the U.S. at the now higher prices.

The story does not stop there.  U.S. consumers also had $1.1 billion less to spend on other goods and services.  That reduced demand may have cost more than 3,000 jobs in the retail sector.

Finally, the Chinese who had sold tires to the U.S. now have fewer dollars to use to buy goods from U.S. companies, or to invest in the U.S.  Thus, foreign demand for U.S. goods and services also falls.

This example also illuminates the political and social challenge associated with free trade. While the benefits of free trade are widely shared, the costs are narrowly born.  In the case of Chinese tire imports, 1,200 Americans would be forced by competition to adjust to the loss of their high paying jobs.  The benefits were shared by millions of American who now get to pay less for tires, and therefore have more to spend on other items, thus realizing a higher standard of living.

At the end of the day, trade is always a two-way street.  We produce in order to consume.  We export in order to import.  When foreign companies sell more goods and services to the U.S. than they purchase for their own domestic consumption (trade surplus), they use the excess dollars to either invest in plant and equipment in the U.S., or in financial assets including U.S. government debt.  In other words, the trade deficit must equal the capital inflow and vice versa.  They are an accounting identity.

Imposing restrictions on foreign producers reduces opportunities for mutually beneficial exchanges – both for Americans and for those outside of our borders who would do business with us.  While trade restrictions may benefit a few on a relative basis, they reduce all of our liberty, our living standards, and opportunities for economic growth.

Questions:

1. Before reading this essay, did you favor restrictions on foreign competition? Why or why not?
2. Do nations trade with each other?
3. Are you in favor or opposed to competition?
4. Does it make sense to be FOR EXPORTS and AGAINST IMPORTS?
5. Why is China’s decision beginning in 1979 to trade with the rest of the world a source of angst for workers in the rest of the world?
6. Why is China’s decision to trade with the rest of the world a source of higher living standards?
7. Do foreign government subsidies to their exports hurt the U.S. economy?
8. Given that the benefits of free trade are widely shared, but the costs are narrowly born, what sort of government policy would make sense?
9. Is support for restrictions on foreign competitors a form of greed?
10. Can a country gain a competitive advantage by devaluing its currency?

 

Selected Readings:

1. “The Direction of Trade Policy”, Charles Kadlec, Dow 100,000:  Fact or Fiction, pp. 69-88.
2. “The Protectionist Instinct”, Paul H. Rubin, The Wall Street Journal.
3. “The Magic of Free Trade”, Arthur E. Foulkes, Freeman.
4. “Get-Tough Policy on Chinese Tires Falls Flat”, John Bussey, The Wall Street Journal.
5. “Tire Tariffs, Saving Jobs at $900,000 Apiece”, Timothy Taylor, Conversable Economist.
6. “Mitt Romney’s Glaring Economic Achilles Heal”, Charles Kadlec, Forbes.com.