Free Trade, Managed Trade, and the State

by Richard M. Ebeling

“The principle of free trade is non-interference,” wrote the English classical economist Nassau Senior in 1828. “It is to suffer every man to employ his industry in the manner which he thinks most advantageous, without a pretense on the part of the legislator to control or direct his operations.”
       The advocates of free trade in the 19th century argued that the direction of production and the allocation of resources was best left to the private decisions of the individual members of society rather than to be entrusted to the commands of the state. They explained that each man knows his own circumstances better and can more fully appreciate profitable opportunities than any government bureaucrat assigned the task of performing these duties.
       “What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him,” said Adam Smith in The Wealth of Nations. “The statesman, who should attempt to direct private people in which manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
       And the free traders were insistent on emphasizing that whenever the state interfered with freedom of trade, the benefits that might accrue to the recipient of the protection from competition were always made at the expense of other members of society.
       “If one individual, or one class, can call in the aid of the [political] authority to ward off the effects of competition, it acquires a privilege to the prejudice and at the cost of the whole community,” insisted the French classical-liberal economist Jean-Baptiste Say in 1821. “It can then make sure of profits not altogether due to the productive services rendered, but composed in part of an actual tax upon consumers for its private profit. . . . Moreover, arbitrary regulations are extremely flattering to the vanity of men in power, as giving them an air of wisdom and foresight, and confirming their authority, which seems to derive additional importance from the frequency of its exercise.”
       Over several decades in the early 19th century, the arguments of the free-trade advocates gained more and more adherents, first in England and then slowly throughout the rest of Europe and the civilized world.
       And what did the free-trade era of the 19th century produce? A wondrous epoch of liberty and prosperity. It was the era of what the German economist Gustav Stolper referred to in his book This Age of Fable (1942) as the three freedoms:
They were: freedom of movement of men, for goods, and for money. Everyone could leave his country when he wanted and travel or migrate wherever he pleased without a passport. The only European country that demanded passports (not even visas!) was Russia.... Who wanted to travel to Russia anyway? ... There were still customs barriers on the European continent, it is true. But the vast- British Empire was free-trade territory open to all in free competition, and several other European countries, such as the Netherlands, Belgium, Scandinavia, came close to free trade.... Whether a bit higher or a bit lower, tariffs never checked the free flow of goods. All they effected was some minor price changes, presumably mirroring some vested interests.... And the most natural of all was the freedom of movement of money. Year in, year out, billions were invested by the great European Powers in foreign countries, European and non-Europeans.... These billions were regarded as safe investments with attractive yields, desirable for creditors as well as debtors, with no doubts about the eventual return of both interest and principle....The interest paid on these foreign investments became an integral part of the national income of the great industrial Powers, protected not only by their political and military might but—more strongly—by the general, unquestioned acceptance of the fundamental capitalist principles: sanctity of treaties, abidance by internal law, and restraint of governments from interference in business.
       In the euphoria of this epoch of advancing human freedom and commercial liberty, the proponents of free trade saw only an endless road of growing prosperity and peace. Said the French liberal economist Frederic Passy in the 1860s:
Some day all barriers will fall; some day mankind, constantly united by continuous transactions, will form just one work- shop, one market, and one family   ....  And this is  ...  the grandeur, the truth, the nobility, I might say the holiness of the free-trade doctrine; by the prosaic but effective pressure of [economic] interest it tends to make justice and harmony prevail in the world.
       The depoliticizing of economic intercourse among the citizens of the various nations of the world—the privatizing of trade and commerce globally—it needs recalling, was seen by the free traders not only as the path to productive efficiency and rising standards of living through an expanding internationalization of the division of labor and increasing world-wide competition. No. It was also seen as an effective avenue for minimizing the causes of conflict and war among the nations of the world. In 1850, Richard Cobden, the great leader of the English free-trade movement, explained this in a speech:
When I advocated free trade, do you suppose I did not see its relation to the present question [of war and peace], or that I advocated free trade merely because it would give us a little more occupation in this or that pursuit? No; I believed free trade would have a tendency to unite mankind in the bonds of peace, and it was that, more than any pecuniary consideration, which sustained and actuated me, as my friends know, in that struggle.
       International freedom of trade would increasingly make nations interdependent. The nations of the world would become the mutual buyers of each other’s consumer goods and purchasers of each other’s resources and raw materials. The interest income earned by the creditor nations would be the result of the capital supplied to the poorer (in savings) nations; and the productive and profitable investment of that imported capital would accelerate the debtor country’s economic development and rise out of poverty. Expanding global competition would not be a rivalry for political power and plunder, but, instead, the peaceful competition of the marketplace in which “victory” and “conquest” became a benign striving among private individuals for economic profits through a better satisfaction of the wants of consumers in comparison to the offers of one’s rivals. Success or failure in winning a greater share of the world’s business would no longer be “affairs of state,” but, instead, the private affairs of individuals pursuing their own personal and peaceful interests, receiving neither subsidy nor protection at the expense of their fellow citizens.
       How different is our world of the 20th century in comparison to that of the generations of the 19th century? In the 19th century, the guiding idea was, in the words of Wilhelm Röpke, “the [classical] liberal principle that economic affairs should be free from political direction, the principle of a thorough separation between the spheres of the government and the economy.” In our century, the exact opposite has become the dominant idea. Nothing in the 20th century has been considered outside the interests and the concerns of the state. Governments have assigned themselves the role and obligation to interfere everywhere and with everything.
       In his 1921 volume, The Fruits of Victory, Norman Angell explained:
The wearing down of the distinction between the citizen and the state, and the inroads upon the sacrosanctity of private property and individual enterprise, make every citizen much more dependent upon his state, much more a part of it. Control of foreign trade so largely by the state has made international trade less a matter of processes maintained by individuals who disregard their nationality, and more a matter of arrangements between states, in which the non-political individual activity tends to disappear.
       Neither men, money nor goods pass across the borders of the world’s nations without the inspection, approval, and control of the state. Our lives and our property have become the possessions of the state in which the accident of birth has placed us. The purchase and sale of every commodity and raw material among the citizens of different countries are, once again, affairs of state, matters of government-measured and government-manipulated national income, employment, and output. The exportation or importation of the most minute and insignificant items of consumer desire or productive application has been elevated to concerns of the highest levels of political decision-making and deliberation.
       The arrival of the smallest child or the most ordinary adult into one nation from another raises issues of national survival and economic well-being in the eyes of the state. The most innocent choice to invest one’s wealth and savings in one part of the world instead of some other generates pensive debate and political consternation for those in the higher reaches of the state’s bureaucracy who claim the right to determine how people may invest and dispose of that which is the result of their own effort and energy.
       We have been again reduced to a state of increasing servitude from which the classical-liberal revolution of ideas in the 18th and 19th century was meant to liberate us. And with the latest international-trade policy proposals of the Clinton administration, we are headed towards more bondage at the hands of the state.

Part II

       In 1836, the English classical liberal Henry Fairbairn looked into the future and this is what he saw:
Seeing then, that in the natural order of things the triumph of Free Trade principles is now inevitable, magnificent indeed are the prospects that are opening for mankind. Nations will become united in the golden bands of peace; science, liberty and abundance will reign among the inhabitants of the earth; nations will no longer be seen to descend and decline, human life will become prolonged and refined; years will become centuries in the development of the blessings of existence; and even now the eye can reach to the age when one language, one religion, and one nation alone will be existing in the world.
       One can only wonder if Mr. Fairbairn’s liberal spirit, but no doubt English prejudice, made him presume that the one language would be English, the one religion Anglican, and the one nation the British Empire. But while some of the 19th-century’s liberals may have allowed themselves to be excessively carried away with flights of fancy, it remained very much a fact that the success of free-trade ideas transformed the world of the last century.
       In 1899, the liberal economist C.F. Bastable could write in his book The Commerce of Nations:
One of the most striking features of modern times is the growth of international relations of ever-increasing complexity and influence.... This more intimate connexion is reflected in all the different sides of social activity. International law, that two hundred years ago was almost wholly confined to the discussion of war and its effects, now contains a goodly series of chapters treating of the conduct of nations during peace.... Literature, Science and Art have all been similarly affected; their followers are engaged in keenly watching the progress of their favorite pursuits in other countries....
       But, as might be expected, it is in the sphere of material relations that the increase in international solidarity has been most decisively marked.
       The barriers that in former ages impeded the free passage of men and goods from country to country have been—it cannot unfortunately be said removed, but very much diminished; and more particularly during the last fifty years the extraordinary development and improvement of transport agencies both by land and sea have gone far towards obliterating the retarding effects of legislative restraints and national prejudices.... In spite of temporary checks and drawbacks, the broad fact stands beyond dispute, that the transfer of human beings from country to country which is known as “migration,” as also the similar movement of goods described as “commerce,” is not merely expanding, but, if periods sufficiently lengthy for fair comparison are taken, expanding at an accelerated rate.
       Free trade among nations and fairly unregulated free enterprise in domestic policy had made the world of the 19th century a time of individual liberty, economic prosperity, and almost a century of relative peace in Europe from the defeat of Napoleon in 1815 to the outbreak of the First World War in 1914. At the dawn of the 20th century, Professor Bastable was concerned that “were we to confine attention to the last twenty years, it would be hardly possible to escape the impression that protection was likely to be the system of the immediate future” because of growing protectionist policies in Imperial Germany, the United States and some of the self-ruling dominions of the British Empire during the last two decades of the 19th century. But he was still confident that while “improvement may be slow, and there have been and will be periods of reaction...we can hardly doubt that. . .there will be a fresh effort to gain commercial liberty ....[T]here is no likelihood that nations will permanently endure the loss that restriction inflicts on them.”
       But all such hopes of a return to the path of free trade were killed on the battlefields of World War I. Because in the pursuit of total victory, each of the belligerent governments resorted to total war; and with total war came the total state. German economist Gustav Stolper explained the consequences:
Just as the war for the first time in history established the principle of universal military service, so for the first time in history it brought national economic life in all its branches and activities to the support and service of state policies—made it effectively subordinate to the state.... Not supply and demand, but the dictatorial fiat of the state determined economic relationships—production, consumption, wages, costs of living. ... [A]t the same time, and for the first time, the state made itself responsible for the physical welfare of its citizens; it guaranteed food and clothing not only for the army in the field but the civilian population....
       And what began in the war was continued in the years that followed. Because despite the end of the war, state control and interference into economic affairs were not reduced to their pre-war levels. To the contrary, the period between the two world wars saw state power massively increase. Indeed, by the 1930s, there was not one major country devoted to and practicing the principles of classical liberalism—the principles of individual liberty, free-market capitalism and free trade. As the Swedish economist Gustav Cassel lamented in 1927, “The whole world today is engaged in finding out all sorts of devices to restrict the free division of labor and render its application less profitable” through the imposition of various trading prohibitions, regulations, and controls.
       But these restrictions on international trade were the logical consequence of the new ideology regarding the domestic affairs of each of the world’s major nations. This ideology was the belief that the state had to become the predominate arbiter and planner of economic affairs. And once the state took on the responsibility for managing and guiding the internal economic affairs of its subjects, barriers to international trade were soon required to follow. In 1944, the Austrian economist Ludwig von Mises explained why:
A nation’s policy forms an integral whole. Foreign policy and domestic policy are closely linked together, they condition each other. Economic nationalism is the corollary of present-day domestic policies of government interference with business and of national planning, as free trade was the complement of domestic economic freedom. When the domestic market is not to some extent insulated from the foreign market, there can be no question of government control.... The trend toward [protectionism] is essentially a trend of domestic policies; it is the outcome of the endeavors to make the state paramount in economic matters.
       If governments choose a course of domestic interventionism and control, interference with international trade inevitably follows. Privileges and regulations to benefit producers within a country are constantly threatened by foreign competition under free trade; hence, to guarantee those privileges for domestic producers, the government has to impose trade barriers against foreign imports. When trade unions are allowed to use the strike threat to push wages above world-market levels, and when welfare benefits make unemployment a reasonably comfortable way of life, immigration restrictions have to be imposed to prevent those in other countries from entering the nation and offering their labor services at a lower wage and filling the jobs shunned by the domestic labor force. When governments resort to inflation to finance their domestic expenditures, the result is monetary nationalism manifested in government paper currencies and foreign-exchange controls and regulations.
       In the 20th century, the politicization of domestic economic activities, therefore, has led to the politicization of the international economic order. To secure markets and prices for domestic producers, governments are tempted to threaten or wage trade wars with other countries, with import tariffs and export subsidies being among the chief economic weapons, as well as a host of non-tariff restrictions such as quotas, prohibitions, licensing, and technical and domestic-content requirements. Manipulation of the value of their respective currencies on the foreign-exchange markets also serves as an economic weapon by which governments try to influence the amounts of imports and exports and, hence, the market shares and profits to be earned by privileged sectors of the domestic economy.
       There is only one way out of this “economic armaments race,” as the Swiss economist William Rappard once referred to it in the 1930s: a path of non-intervention in domestic affairs—the unregulated, uncontrolled free market. Otherwise, economic conflicts among nations will always threaten to degenerate into global economic warfare. “Government control of business engenders conflicts for which no peaceful solution can be found,” Ludwig von Mises emphasized long ago. “All the oratory of the advocates of government omnipotence cannot annul the fact that there is but one system that makes for durable peace: a free market economy. Government control leads to economic nationalism and this results in conflict.”
       Unfortunately, this path to economic peace and prosperity is not the one that the Clinton administration is bent upon following. Rather, its stated intentions in both domestic and international trade point in the direction of an increasing economic armaments race, with economic warfare on the horizon.

Part III

       American economist Francis Walker observed in 1887:
Protectionism is purely and highly socialistic. Its purpose is so to operate upon individual choices and aims, so to influence private enterprise and the investments of capital, as to secure the building up, within the country concerned, of certain branches of production which could not be carried on, or would grow but slowly, under the rule of competition and individual initiative. With this object in view, government begins by preventing the citizen from buying where he can buy cheapest; it compels him to pay ten, thirty or fifty percent advance, it may be upon the prices at which he could otherwise purchase; it even assumes to make existing industries support the industries which are thus called into being. Not incidentally, but primarily and of purpose, it affects vitally every man’s industrial conditions and relations.
       The proponents of managed trade in the Clinton administration would surely balk at Professor Walker’s accusation that what they advocate is a form of socialism. After all, they might respond, when speaking of the changes in post-Soviet Russia and in the former Soviet-bloc countries in Eastern Europe, they constantly say they advocate the establishment of a free market. And in the controversy over the North American Free Trade Agreement, spokesmen for the administration are equally adamant that they desire to see a greater openness for trading opportunities among these three economies on our continent.
       Yet, in spite of their rhetoric and lip service of advocacy for open doors for world trade, their goal is not free trade. Their view of trade among nations is guided by the following ideas:
1) International trade is not between private individuals searching out advantageous gains from exchange, but rather an economic war among nation-states in which the victories for one country require the defeat of another;
2) It is in the power of governments to forecast the world economic trends of the future and devise systems of import restrictions and technological and production subsidies for the artificial creation of patterns of comparative advantage that will assure that America gains a permanent edge in the manufacturing and sale of certain desirable lines of production;
3) If other governments restrict the importation of American goods into their countries, it is the duty of the United States government to use various weapons of economic warfare to force those foreign markets to open to American competition. 

       Let us look at each of these ideas and evaluate their validity and consequences.
       The view that international trade is economic warfare among nations:
Contrary to the Clinton view, international trade is merely an extension of the idea of the division of labor within a country to the residents of different geographical locations separated from each other by the drawing of political boundaries on the face of a map. By expanding the arena of trade to encompass more people around the world, all participants are made better off. The enlarged market enables an intensification of specialization to take advantage of the various and sundry skills and capabilities of a greater number of potential producers and traders in more parts of the globe. The increased specialization in the expanded market widens the field of competitors to assure that the prices at which goods are available in the global market are the lowest at which producers are capable of offering them to the consuming public.
       In the arena of free exchange, all traders are gainers and none are losers. The decision to exchange one commodity or service for another demonstrates that both participants to the exchange view themselves as being better off because what induces them to give one thing for another is the following mutual belief: what they are giving up is of a lower value in comparison to what they obtain; otherwise, they would not voluntarily trade away what is originally in their possession.
       But in an open market, individual competitors sometimes discover that they are unable to match the better prices or product qualities of their foreign competitors . And rather than accept the loss of market share or desired profit margins to those who can provide consumers at better terms than themselves, they turn to the state for assistance. They call upon the political authority to limit the liberty of the foreign seller from offering his wares in the home country and deny the consumers in the home country the greater freedom to purchase from him who offers the preferred goods at the more attractive terms.
       The advocate of protection from the foreign competitors cloaks his special pleading in the rhetoric of the patriot who insists that his industry is essential to the national welfare or for the preservation of employment. But, in fact, the 6nly welfare that is at stake is his own. And he wishes to sacrifice the welfare of others for his own benefit, because for his market share to be preserved or his profitableness to be maintained through various protectionist restrictions, the welfare of the individual consumers in his country must be reduced by their inability to buy the cheaper or better product from the foreign seller. And the welfare of the producers in the foreign country is diminished since they are denied the opportunity to consummate trades that would have offered the more attractive return if not for the trade restrictions.
       It is the intervention of the state into the nexus of exchange that now makes international trade a battlefield upon which economic wars are fought. Victory in the arena of global trade is now partly determined by the use of weapons of taxation, coercion, and prohibition: thou shalt not sell your goods in the U.S. without first paying a toll meant to secure a minimum-guaranteed price for the domestic producers; thou shalt not sell your goods in the U.S. unless they contain a certain “domestic content” of American raw materials or have been manufactured with the assistance of a certain number of American workers; thou shalt not sell your goods at all in the U.S., because the market is to be the privileged preserve of those domestic producers with the political clout to close the market completely to foreign competition.
       War is the use of force to obtain desired ends without having to obtain the voluntary consent of those who possess that which is wanted. And in international trade, it is only the state that can transform peaceful intercourse among the occupants of the world into a violent combat of political weaponry for the “capture” of customers and the “defeat” of rivals.
       The Clinton administration is imbued with the spirit of the managed economy-socialism. The notion of leaving the market to its own development and outcomes is intolerable to its conception of social justice and belief in socially engineering economic results. The administration, therefore, must battle against the patterns the market would naturally take on if the government were not to intervene, and this necessarily results in foreign suppliers being aggressed upon in the combat, as well.
       If the state is to determine the desired direction of domestic economic development, then it is also the case that as part of the achievement of that end, the pattern of imports and exports must be managed too. Investments in certain types of technologies, methods of production, and lines of production that the government decides are necessary for national economic well-being require not only tax breaks, subsidies, and “partnerships” between the government and private firms, they also require that foreign producers and suppliers not be allowed to undermine the domestic policy goals by offering products and technologies that American consumers would rather buy instead.
       Barriers and limits to entry into the U.S. market must follow. At the same time, the sustaining of these domestic economic patterns also requires that the government support the exporting of those goods and services that are both consistent with and a part of the domestic policy plan for managed economic development.
       The government then is in an economic war with both its own citizens and those of other countries. It battles against its own citizens, because some must be taxed, regulated, or denied production and consumption opportunities so the state’s goals for a managed economy can be obtained. And foreign suppliers are aggressed against because the government denies them the right to enter peacefully the American market without molestation; coming through the door, they are mugged in the form of tariffs, quotas, and domestic-content requirements.
       International trade only becomes economic warfare when the state intervenes into the economic affairs of its own citizens and those of other countries. The economic warfare, however, is not between nation-states, but instead that of nation-states against private citizens. The confusion in clearly seeing this is due to the common use of linguistic shorthand in referring to the economic relationships between “America” and “Europe” or “Japan.”
       But it is ultimately individuals who supply and demand, who produce and consume. It is impossible for the government to institute any policy other than the one of providing equal protection of each individual’s rights to life and property without infringing on some people’s rights to bestow privileges and favors on others. And to the extent that the state goes beyond this limited role of providing equal protection of rights before the law, it declares and initiates war against its own citizens.

Part IV

       “The Protectionist creed rises like a weed in every soil,” lamented the English classical economist Walter Bagehot in the 1880s. “Every nation wishes prosperity for some conspicuous industry. At what cost to the consumer, by what hardship to less conspicuous industries, that prosperity is obtained, it does not care. Indeed, it hardly knows, it will not read, it will never apprehend the refined reasons which prove those evils and show how great they are; the visible picture of the smoking chimneys absorbs the whole mind.”
       While the imagery of the smoking chimney may be inconsistent with the environmental consciousness of the Clinton administration, Bagehot’s lament can be echoed in our own times in terms of the mind-set that dominates the thinking of the president and those who design policy options in the departments in Washington. Their conception of managed trade focuses upon the desired success of targeted industries viewed as essential to the nation’s prosperity in their conception of the global combat amongst the countries of the world. The cost to the consuming public in terms of higher taxes to subsidize preferred industries or in diminished trading opportunities because of limits on international freedom of exchange matters little to those in the Washington halls of power. What matters is that they see rise in front of them those industries and employments that they view as the most advantageous and attractive.
       If the first error behind the thinking of the Clinton administration on the issue of international trade is their view of international trade as a war between nation-states, their second error is the one that serves as the philosophical underpinning for rationalizing the ability for and desirability of managed trade. Let us look at it more closely:
       Governments can forecast world economic trends and should construct policies to create desired comparative advantages for American industry:
       In spite of the failure of socialist central planning in Eastern Europe and the former Soviet Union, the planning mentality is alive and well in Clinton’s Washington. There exists the belief that it is possible for the government to estimate reasonably the direction and form of future technological and industrial developments in the world and construct a plan of action to assure that America comes out the winner in the international game of trade.
       Actually, it is impossible to anticipate successfully the future of technological discovery or innovations for improvements in the methods of producing goods for the market. Every such judgment about the future shape of things to come is made from the standpoint of the knowledge and information in existence today.
       But as philosopher of science Karl Popper pointed out long ago, it is a contradiction to speak about tomorrow’s knowledge today. We can never speak about what we will know tomorrow but only about what we think tomorrow may be like from the perspective of what we already know today. Tomorrow’s knowledge cannot be known until tomorrow comes, because part of what we know tomorrow will be the result of the experiences we have as time passes and the creative new ideas that people come up with on the basis of those experiences.
       Thus, unless we assume that we possess perfect knowledge of the future, all judgments about the future—including new technologies, innovations, patterns of consumer demands and the strategies of competitors—are incomplete and personal estimates about what the future might hold in store from the perspective of the present.
       I remember as a teenager coming across an old copy of Popular Science published shortly after the Second World War. The issue was devoted to what life would be like in America in the 1970s. The cover showed a suburban home with a white picket fence, with mom and the children waving good-bye to dad as he went off to work—in his one-man helicopter. The articles talked about the various home conveniences and appliances that the future held in store for the average American family.
       But the one thing that was not talked about or even hinted at was the potentials of the personal computer and its revolutionizing effect on home and business life. Why? Because the microchip had not yet been invented and, therefore, all the projections about life in the late 20th century were incomplete.
       The writers of the articles wrote their stories about the future under the constraint of the knowledge they possessed at the time in the late 1940s. It was impossible for them to construct the uses of a technology that had not yet been invented in the minds of some men, and, therefore, they were not able to conceive of its applications, because they could not image possibilities that would have to wait for the creation of the microchip.
       To manage the economy requires The Planner to make the plans of a multitude of others subordinate to his own. And as Austrian economist Friedrich A. Hayek explained, this means that economic development is constrained and limited to what The Planner knows and can understand, since everyone else’s plans must conform to and be confined within the bounds of The Planner’s overarching plan. If the state taxes some in the society to subsidize the activities of others, those who are taxed are constricted in their own actions to the extent that their income has been reduced by the tax. The resources that might otherwise have been used and possibly applied in creative and unknowable ways are taken from their hands. Creativity, technological innovation, and economic progress are limited to what The Planner sees as possible and worthwhile to support and fund.
       The government-business partnerships and high-tech subsidy programs for America advocated by the Clinton administration are really proposals for a political centralization of the discovery and application of knowledge, and they channel their development according to the judgments of those who man the bureaucracies in Washington. They propose to figure out where the industrial innovations of the future are likely to be. Then, based upon their judgment about the shape of things to come, they aim to give shelter to American firms they want to be on the world market first with these new technologies and, thus, to preempt that new comer of the global market before anyone else can fill it.
       What is not discussed in these grandiose schemes for America’s industrial future are the costs of undertaking them. The costs involve more than the corruption that is likely to occur as special interests lobby for a fraction of the tax- and subsidy-plunder. The costs also involve more than the loss of economic liberty, as those individuals not on the receiving end of the government largess are restricted in their choices by both regulations and tax burdens to bolster and support the privileged sectors of the economy.
       The costs also include the loss of all the innovations and creative possibilities that will not materialize or which will be delayed from coming to fruition, because those who might have come up with them will not have the income and financial wherewithal to realize them.
       What idea equal to the microchip will we not benefit from because those in whose minds such an idea might have germinated will be denied the market opportunities that would have acted as the incentive for them to think such creative thoughts? Because the income, profits, and wealth that could have been theirs from such creative thinking will be denied them by the state’s manipulation of the market, they may turn their efforts to less original ideas. And the world will have lost a profoundly important “might have been” as a consequence.
       But precisely because it is a “might have been,” its importance will remain stillborn. It is an example of Frederic Bastiat’s famous example of “what is seen and what is unseen.” What will be seen are the industrial and technological projects subsidized into existence due to the actions of the state. What “might have been,” instead, will never be known precisely because the state assumed to know better, to see the future more clearly, rather than to allow each man to follow his own vision of a better future for himself and others through peaceful and voluntary transactions in the marketplace.
       The market niches that the government creates for American industries through managed trade will be the industrial equivalents of the hothouse in which, under artificial conditions, plants are grown in an environment naturally hostile to their development. Their maintenance and further development will depend upon the continuance of the governmental policies that have brought them into existence. They will be the 20th- and 21st-centuries’ versions of the 19th-century argument for protecting the “infant industry.”
       Protectionists in the last century would often argue that an undeveloped country could not afford free trade until it was as industrially developed as its more technologically advanced trading partners. Only then, when the underdeveloped country was sufficiently developed behind high tariff barriers to protect it from cheaper suppliers from abroad, could it afford to lower its trade walls and deal on an equal basis with its commercial neighbors. The only problem was that the infant industries never sufficiently grew up; they always clamored for continuing protection from their foreign competitors.
       Having fostered the artificial emergence and development of certain high-tech industries and employment opportunities requiring particular government-subsidized labor skills, the proponents of managed trade will always find arguments for perpetuating the “temporary” taxing and tariff privileges needed for initially establishing these strategic positions in the global market. The American taxpayer and consumer will be permanently burdened with the costs imposed by those who believe that they possess the knowledge and wisdom to know the industrial and economic structure most desirable for America’s future.

Part V

       In the 1870s, English classical economist Henry Faucett warned:
I think it cannot be doubted that protection must exert an inevitable tendency to foster...socialistic demands for State assistance. If a people are accustomed as they must be under a system of protection, to believe that the prosperity of each separate branch of industry depends not so much upon individual energy as upon the amount of protection it can obtain from the government, there can be no surer way of encouraging the growth of a belief not only that industrial prosperity but that the general social well-being of the country is chiefly to be secured not by individual effort but by State help.
       And a few years earlier, the American economist and sociologist William Graham Sumner had pointed out other political consequences that followed from a policy of protectionism:
This continual law making about industry has been prolific of industrial and political mischief. It has tainted our political life with log-rolling, presidential wire-pulling, lobbying, and cus- tom-house politics. It has been intertwined with currency errors all the way along. It has created privileged classes in the free American community, who were saved from the risks and dangers of business to which the rest of us are liable. It has controlled the election of congressmen, and put inferior men in office, whose inferiority has reacted upon the nation in worse and worse legislation.
       The Clinton administration’s declared policy of managed trade between the United States and the rest of the world will only succeed in intensifying the tendencies which Faucett and Sumner warned about more than a hundred years ago: an increased dependency upon the state by a growing number of sectors of the economy, along with a belief that such dependency is the only path to economic prosperity; and a growing corruption of the political process as more and more groups in the society turn to Washington for favors and privileges, both to gain advantages at the expense of rivals in the marketplace and as a defensive mechanism against the political lobbying efforts of others.
       Three errors dominate the Clinton administration’s case for managed trade. The first is the belief that international trade is an economic war between nation-states; the belief is that if one nation gains, some other nation must lose.
       The second error is the belief that the state has the capacity to anticipate the future direction of technological development and to design policies to assure that American industry will have a permanent edge in the battle for winning world markets against our trading partners.
       The third error serves as the pragmatic rationale for a policy of managed trade: If other governments restrict the importation of American goods into their countries, it is the duty of the U.S. government to use various weapons of economic warfare to force open those foreign markets for American competition.
       It is argued that if, in a world of free trade, another nation closes its market to some or all of American goods, while desiring to sell its own goods in the United States, the U.S. government should put retaliatory pressure on that country to open its market through the imposition of reciprocal tariffs and other trade restrictions.
       Writing in the early 19th century, the French classical-liberal economist Jean Baptiste-Say, admitted:
Undoubtedly, a nation that excludes you from all commercial intercourse with her, does you an injury;—robs you, as far as in her lies, of the benefits of external commerce .... But it must not be forgotten that retaliation hurts yourself as well as your rival; that it operates, not defensively against her selfish measures, but offensively against yourself, in the first instance, for the purpose of indirectly attacking her. The only point in question is this, what degree of vengeance you are animated by, and how much will you consent to throw away upon its gratification.
       The fact is that the use of reciprocal trade restrictions as a weapon of economic warfare to punish another country for closing its own markets to American exports results in harm to the general American consuming public; raises the cost of various commodities previously purchased from the foreign nation now experiencing American revenge and retaliation; and imposes financial burdens on the import industries in the U.S. no longer able to obtain certain foreign goods on as favorable terms as before the retaliatory trade restrictions were put into place.
       Closing a portion or all of the American market to the exports of the foreign country subjected to the wrath of the U.S. government narrows the competitive alternatives available to American consumers. Their set of choices is now limited to those offered by American sellers of various products and those foreign sellers of other countries not affected by the retaliatory trade barriers. The variety of goods, therefore, from which the U.S. consuming public may select is smaller than before. Because some American exporters have been put in a less favorable position due to the foreign country’s trade limitations, all other Americans are denied buying opportunities by their own government.
       At the same time, prices will now be higher for the particular products upon which there have now been imposed the retaliatory trade restrictions. The segment of the American consuming public that was previously buying the foreign goods in question will now find themselves having to pay higher prices for those commodities. Whether the retaliation takes the form of a tariff or a limit on the quantity of the foreign good now permitted to enter the United States, the good’s price will tend to rise. If a tariff has been imposed, the foreign seller will have to sell his good at a higher price to cover his costs (now including a higher import tax) or to retain the rate of return that makes it advantageous to sell the good in the U.S., as opposed to somewhere else. If restrictions are imposed on the quantity that may be sold in the U.S., the total quantity available in the American market will now be smaller, which will tend to result in a higher price. Because U.S. export “X” is not permitted to be sold in the foreign country in question, American consumers will now be faced with higher prices and smaller quantities of imports “Y” and “Z” purchased from that other country.
       Also, the segments of the American import industry that sell the goods now under retaliatory restriction will find themselves with the burden of having to pay more for the goods they purchase from the foreign seller and then having to try to sell those goods to American consumers under less competitive terms than before. Because an American exporter claims harm, income earners in an unrelated importing sector of the U.S. economy will have to pay for the exporter’s misfortune.
       Many of these effects remain hidden from view by governments’ arguing in terms of “our” nation being harmed by “theirs.” But once we stop thinking in this aggregative and collectivist manner and ask who is harmed or helped in terms of particular individuals or groups of individuals, the consequences are seen to be more complicated than the simplistic categories of “them” versus “US.”
       The real effect of trade retaliation is something more like the following: The government of Boobistan prohibits the sale of American bicycles in Boobistan, resulting in fewer foreign sales for American bicycle manufacturers and higher prices for bicycles in Boobistan to benefit Boobistani bicycle manufacturers at the expense of Boobistani consumers. Therefore, in retaliation, the U. S. government imposes a tariff or prohibits the sale of Boobistani dingbats in America. American consumers of Boobistani dingbats now find themselves paying more and buying a smaller quantity of this valued commodity, and the American import companies that make their living selling Boobistani dingbats find it more difficult to make a living in this line of business.
       Who gains from this retaliation against Boobistan? Not American bicycle manufacturers—they are still locked out of the Boobistani market. Not American consumers or importers of Boobistani dingbats—they bear the negative effects we have just explained. If the retaliation has taken the form of a higher import tariff on dingbats, the U.S. government may or may not gain greater tax revenues, depending on how many Boobistani dingbats are now brought into the United States at the higher tariff. The only gainers are the manufacturers of the American version of dingbats, who now face less price and quantity competition from their Boobistani rivals, and the sellers of goods that are bought by American consumers as substitutes for the now more expensive dingbats.
       But what do dingbats—and helping American dingbat manufacturers to earn higher profits—have to do with the lost sales and lower profits experienced by American bicycle manufacturers caused by Boobistani trade barriers? Nothing. They simply provide the rationale for American dingbat producers to lobby for restrictions of Boobistani imports. And they enable American politicians to “act tough” with Boobistan, thereby looking good in the eyes of American voters who have been led to believe that Boobistan is destroying American jobs because “they” won’t buy “our” bicycles.
       Might not Boobistan back down and eliminate its trade barriers against American bicycles under the threat of retaliation against their export trade in dingbats? Yes, they might. And the proponents of trade-war brinkmanship often use this as an argument to defend the use of the retaliatory threat.
       But the danger of accepting this rationale for one of the tools of economic warfare among governments is that it legitimizes the idea that the state is responsible for and has the right to intervene in the exchange relationships between their own citizens and the citizens and governments of other nations. It accepts the nationalization of international trade, because it accepts the premise that among the state’s duties is supervision of the patterns of terms of trade among the producers and consumers of the world.
       Furthermore, if the Boobistani government doesn’t blink first, the retaliatory restrictions must then be put in place—if the threatening government is not to lose credibility both at home and abroad. And this creates the risk that Boobistan might counter-retaliate, setting in motion a spiral of expanding trade barriers and the disintegration of an increasing portion of the international division of labor.
       Unfortunately, this is the path that the Clinton administration is threatening to lead us down even further than we have already come. And the further we travel down this path, the more difficult it will become to retrace our steps and return to the high road of individual liberty and free trade.

Chapter 1
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