How Free Trade Profits a Nation

In 1824, the historian and Whig politician Thomas Babington Macaulay summarized perfectly the political challenge faced by free traders ever since Adam Smith first critiqued mercantilism in the late 1700s: “Free trade, one of the greatest blessings which a government can confer on a people, is in almost every country, unpopular.”

It’s not difficult to show how free trade has helped Western societies realize desirable economic goals such as lower prices, increased consumer choice, and a steady growth in overall living standards over the long-term. Through forcing individuals and businesses to reflect seriously upon what does—and does not—constitute their comparative advantage, free trade injects the type of discipline into a country that’s essential if its economy is going to meet consumers’ needs and wants in a creative and optimal manner.

A War of Ideas

The difficulty for free traders is that these benefits are widespread and “invisible.” We don’t, for example, generally notice how free trade steadily reduces the price of goods and services over time for millions of Americans, making them increasingly affordable to more and more of the populace. By contrast, individual industries and businesses have proved adept at focusing the attention of voters and legislators on the ways in which they believe opening America’s markets has hurt specific individuals and companies.

To this extent, the current battle being waged over free trade in most developed countries, and especially in America, illustrates once again that to be pro-market isn’t the same thing as being pro-business. One reason for Adam Smith’s barely disguised animus toward merchants was his insight that they generally didn’t like the competition facilitated by, among other things, free trade. Far too many businesses tended to prefer the type of political favors that were central to the “mercantile system” that was the target of Part IV of Smith’s Wealth of Nations (1776).

In recent decades, the arguments initiated by Smith have largely taken the form of free traders defending their views against particular protectionists and advocates for specific industries. It’s rarer for free traders to critique systematically the general case for protectionism. This, however, is precisely what the economist Pierre Lemieux undertakes in his short and very readable new book, What’s Wrong with Protectionism?

Lemieux begins by outlining what he regards as the seven most prominent protectionist arguments against free trade in America today: 1) American workers can’t compete against low-cost foreign producers. 2) Free trade harms the United States. 3) Free trade brings detrimental trade deficits. 4) America is losing its factories. 5) Free trade destroys jobs. 6) Free trade lowers wages. 7) Free trade isn’t fair, because the playing field isn’t level.

In each chapter, Lemieux outlines the protectionist position and confronts it with economic theory and counterevidence. For those looking for concise and empirically informed critiques of common protectionist economic arguments, this book is extremely helpful in accurately summarizing protectionist views and how they don’t square with the economic evidence. The author’s arguments are helped by his refusal to caricature his opponents’ reasoning. He takes them at face value.

But perhaps this book’s most important section is the two pages in which Lemieux defines precisely what he means by “free trade.” Generally speaking, he writes, free trade “means unhindered exchanges between individuals over political borders. It is the international (or interregional) equivalent of domestic free markets.” To this, however, he adds two significant glosses.

Redefining the Trade Debate

First, Lemieux clarifies that we shouldn’t assume that free trade is the same thing as trade agreements. As others have stressed, they aren’t one and the same. Being negotiated by governments, trade agreements invariably reflect the impact of extensive lobbying by groups ranging from entire industries to politically influential businesses and unions. They all want something out of the agreement which their government is hammering out with other governments. And that “something” often amounts to some form of preferential treatment, which is to say, protectionism.

Lemieux offers a complementary but slightly different take on this insight. Trade agreements, he observes, “are partly about free trade, partly about harmonizing regulation.” Yes, fewer and harmonized trade regulations may be better for marketplace competition than lots of contradictory and confusing regulations. But even harmonized regulations can still impede a nation’s ability to realize free trade’s full benefits. Such regulations are, after all, often a form of protectionism. It’s even worse if the harmonization involves stabilizing subsidies and tariffs at higher rather than lower levels.

Second, Lemieux puts a particular accent upon free trade as “the freedom to import.” This is unusual inasmuch as advocates of free trade typically accentuate the freedom to export.

Lemieux’s point is that Americans’ freedom to import (that is, the liberty to buy internationally) is the great benefit conferred by free trade. “Just as individuals sell goods or labor in order to buy something,” Lemieux writes, “countries export in order to import.” America and Americans profit from what they are receiving from abroad. The more we can import, the better off we are in terms of material prosperity.

Lemieux’s other reason for presenting free trade as the liberty to import is that he wants to associate his position with how Adam Smith and others understood the freedom to trade. When writing about trade, Smith’s focus was upon consumers rather than producers. This is consistent with Smith’s general proposition that the economy’s primary economic purpose is consumption and that increasing the possibilities for consumption by consumers equates to increasing living standards.

But, some might ask, isn’t this the mindset which has allowed foreign competition to hurt American producers, many of whom have experienced declines in the number of Americans they employ? Lemieux’s response to that critique may be found in his analysis of free trade’s effects upon American manufacturing. This is especially important because it’s this sector of the economy to which protectionists invariably point whenever highlighting what they regard as free trade’s damaging effects.

There’s no doubt that manufacturing’s share of the overall U.S. economy have been in decline for some time. But this isn’t a consequence of what’s often called deindustrialization. As Lemieux states, “Physical things continue to be produced” in the United States, “but production occurs more efficiently.” That’s the result of technological changes and the fact that America’s competitive advantage lies, Lemieux points out, in “the most advanced manufacturing activities.” Today U.S. manufacturing firms are maintaining or increasing their total manufacturing production precisely because they’ve shifted to high-end, sophisticated manufacturing.

In response to these arguments, protectionism’s supporters highlight the decline in the overall number of U.S. manufacturing jobs. Lemieux himself underscores that American manufacturing jobs decreased from about 19 million in 1979 to 12 million in 2016. But in the same period, he notes, employment in the country’s civilian sector grew from 99 million to 151 million jobs.

In short, many people who might once have worked on factory lines doing often physically draining, repetitive work are now employed in parts of the economy where the United States has strong comparative advantages: technology, services, finance, transportation, high-end manufacturing, to name just a few. Why, we might ask, would we encourage Americans to work in economic sectors in which their country has long ceased to compete efficiently with the rest of the world?

Choosing to Live Without Illusions

That’s not to suggest that free trade can’t have unsettling effects upon Americans’ lives. Lemieux acknowledges that “Shifts in competition, trade, or comparative advantage can bring disruptions that result in job losses.” Even so, he assembles a formidable amount of evidence to show that trade accounted for only 10 to 20 percent of manufacturing job losses during the period of what’s called “the China shock” (the growth of Chinese manufacturing exports between 1999 and 2011). The rest was due to technological changes.

Whether we like it or not, protectionism provides no long-term defense against this. By contrast, a commitment to free trade means you make a political choice to live in a world without economic illusions.

That raises the question of who’s promoting the illusions and why they do so. Lemieux’s answer is similar to Smith’s. According to Lemieux, “the politics of protectionism necessarily favor powerful interest groups instead of maximizing economic opportunities for most people.”

Drawing on the work of scholars such as F.W. Taussig and Douglas A. Urwin, who have studied protectionism’s history in the United States, Lemieux shows how relatively small groups of producers like the steel industry and parts of the agricultural sector have proved incredibly proficient at extracting favors from the political process at everyone else’s expense. Even worse, they have invariably used the language of the common good and the public interest to help mask what’s really going on. But the economic and political price extracted—whether in terms of what essentially amounts to unlegislated taxes on consumers, or the cronyism that protectionism helps sustain in American politics—is high not just for individual Americans but for the integrity of the American body politic.

And if there’s anything I would criticize about this valuable primer on the fallacies of protectionism, it’s that it doesn’t sufficiently emphasize protectionism’s deleterious non-economic effects. Lemieux’s analysis is primarily couched in economic terms. To explain the protectionists’ success in gaming the political system, for instance, he deploys what economists call “the theory of collective action” to show how small, concentrated interests can better engage in political action than can “large, diffuse interests.”

True enough. But it’s also an indirect reminder that many free traders are too reliant upon straight economic analysis (or derivatives of economics like public choice theory) when critiquing protectionism or promoting free trade.

Economics and public choice theory are powerful tools for understanding aspects of reality. But economics in itself can’t generate normative propositions. That isn’t its purpose. If free traders want to win more people to their cause, they need to supplement their economic critique of protectionism with a larger and deeper range of strong non-economic arguments. They do exist. The Wealth of Nations is replete with normative defenses of free trade, as are the writings of natural law thinkers ranging from Francisco de Vitoria’s De Indis et De Jure Belli (1557) to Hugo Grotius’s Mare Liberum (1608) and Francisco Suarez’s De Legibus (1612).

This points to the need for a more general reframing of how American free traders make their arguments. They should devote less time to waxing lyrical at Davos about the possibilities of global governance or indulging apolitical reveries of a borderless nation-free world, and instead seek to focus their fellow Americans’ minds on how free trade profits America economically and politically as a nation.

It isn’t a question of indulging jingoists. Rather, it’s a matter of seizing the mantle of patriotism and love of nation—something that’s quite different from raw xenophobia and which can’t be condescendingly dismissed as mere tribalism—from protectionists. It would also help to create a context in which more Americans are willing to absorb the kind of thoroughgoing economic critique of protectionism which Pierre Lemieux advances so well.