by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
Amid encouraging news of clearing out red tape and stifling environmental regulation, the presidency of Donald Trump has also brought protectionism (tariffs, “border taxes,” general suspicion of free trade) back to the foreground.
It’s a bad idea. Faster economic growth and greater prosperity are byproducts of free trade. Free enterprise is the most effective poverty fighter known to man.
In discussing the “faith and morality” case for over doubling the minimum wage, I’ve pointed out that the negative unintended consequences of a minimum wage is one of the issues economists agree the most about.
Here’s something else economists are firmly agreed upon: Tariffs and import quotas usually reduce general economic welfare.
In Harvard University economist Greg Mankiw’s compilation of public policy issues on which economists agree, that one gets a whopping 93 percent of economists.
Columbia University economist Jagdish Bhagwati opened his Library of Economics and Liberty entry on protectionism this way:
The fact that trade protection hurts the economy of the country that imposes it is one of the oldest but still most startling insights economics has to offer. The idea dates back to the origin of economic science itself.
It is indeed an idea going back to Adam Smith, who wrote in his Wealth of Nations (1776):
It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. … If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.
George Mason University economist Walter Williams put Smith’s insight into more graspable language:
I buy more from my grocer than he buys from me. That means I have a trade deficit with my grocer. My grocer buys more from his wholesaler than his wholesaler buys from him. But there is really no trade imbalance, whether my grocer is down the street, in Canada or, God forbid, in China.
Here is what happens: When I purchase $100 worth of groceries, my goods account (groceries) rises, but my capital account (money) falls by $100. For my grocer, it is the opposite. His goods account falls by $100, but his capital account rises by $100. Looking at only the goods account, we would see trade deficits, but if we included the capital accounts, we would see a trade balance. That is true whether we are talking about domestic trade or we are talking about foreign trade.
Consider this analogy of our trade relationship with our grocer. We oppose higher sales taxes because, among other things, they make our groceries more expensive. That makes it where we can’t buy as much stuff with the same amount of money. Our purchasing power has dropped. Across our society, our general economic welfare has fallen.
What if change in government policies makes it where we can’t afford to buy certain goods from our grocer? We would be left to go without or make or grow at home what we would otherwise have gotten from the grocery store. This means there will be more work done at home.
It also means we are all a little worse off: consumers, grocers, wholesalers, producers.