Wednesday, November 11, 2009

Free Trade vs. Protectionism

"If Joe the American sells blankets to Mary the American for $15 each, and if an opening to trade allows Mary to buy Chinese blankets for $5 each, then three things happen:

1. Mary is better off by $10.
2. Joe is worse off by at most $10—because Joe can always match the Chinese price if he wants to, taking a $10 hit. On the other hand, he also has the option of getting out of the blanket business, which he’ll choose only if he prefers it to taking that hit.
3. Frieda, another American, who might not have been willing to pay $15 for a blanket, picks up a Chinese blanket for $5 and goes to bed warm tonight.

Of these, only the second effect is bad for Americans, and it’s got to be outweighed (or at least matched) by the first effect. The third effect is pure gravy.
" - from Steve Landsburg's website,

Using this example, the protectionist argument says we need to protect Joe. Unfortunately, protectionists only have two hammers for this nail: tariffs and "buy American".

Tariffs, as we have learned from the historic example of Smoot-Hawley, only lead to tariffs against us. In other words, we protect domestic production at the expense of exporting production. It is a classic case of cutting off one's nose to spite your face.

As for the alternative protectionist strategy of "buy American", it completely ignores Frieda, and forces Mary to spend more than she otherwise would have. Since we live in a free country, then "buy American" is a meaningless appeal to patriotism, which usually falls on deaf ears when a consumer is forced to make hard economic choices (i.e. spend $5 vs. $15) for two comparable products.

Instead, protectionists should look towards the roadblocks which our government has put in front of our manufacturing sector:

1. The Minimum Wage: Fortunately, dollar inflation is about to make the minimum wage irrelevant soon. But what purpose does it serve? No one would work for less money than they need to live. The minimum wage is a "feel good" law that only screws up the economy by artificially inflating wages.

2. Corporate Taxes: The U.S. has the second highest corporate tax rates in the world (only Japan has higher). Next time you want to complain about companies moving operations overseas, or complain about the death of American manufacturing, why don't you spend some time complaining about corporate taxes FIRST? On a related note, you do realize that corporate taxes only get passed along to consumers in higher prices?

3. Environmental Regulations: While I won't say that all environmental regulations are bad or unnecessary, can you honestly say you know and understand the environmental requirements of our corporations? Of course you don't. Like most voters, you simply assume that the government wouldn't make an environmental regulation if it wasn't necessary, or at the very least beneficial in some respect.

I won't say that any of the above three items is the only reason we can't compete, but you can't have all of them and expect to be able to compete with other countries who don't hamstring their manufacturing sectors like we do.

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