Protectionism is as dangerous a policy as there is. It has often and can at any time lead to trade wars.  No one wins a trade war – everyone loses. The case for free trade has never been refuted.  Since the days of Adam Smith, most economists have understood and documented its virtues.  Yet, the world has never known unrestricted free trade.  Why?

One reason is the popular acceptance of the mythical virtues of mercantilism, better known today as protectionism.  Mercantilism is a government policy aimed at preventing individuals from purchasing goods abroad while encouraging them to sell goods abroad. Mercantilism holds that a nation which exports (loses goods) is better off than one that imports (gains goods).  It has been proven a hundred times over that it is detrimental for a nation to continuously export more than it imports.  When government prevents or “discourages” individuals from purchasing goods abroad, and “encourages” chronic exports, it limits a nation’s supply of goods and encourages a decline in its citizens’ standard of living.

Government control and regulation of international trade inevitably cause major economic distortions both domestically and internationally.  The idea that we can and should all be sellers is preposterous.  There must be consumers as well as sellers.  Equilibrium is the state where both come together.  The goal of mercantilism is to prevent this from occurring.

But mercantilism is never advocated for its own sake or as a viable economic policy.  Rather, it enters the economy through the back door as a political policy of protectionism.  Politicians are asked to “protect” the balance of trade; to “protect” the domestic market, or “protect” domestic jobs and wages to "protect” the American worker.  But when implemented, the policy of protectionism is not a defensive move by government; it is an aggressive policy designed to penalize the best of producers by reducing or eliminating the high quality and/or low-priced products they provide consumers. 

Protectionism is a policy that excludes or reduces competition.  Beneficiaries of such government aggression can only be the monopolists or quasi-monopolists that feed off government favors.  Such businesses can exist only by government’s power to force all competitors out of a given market, and this is always at the expense of consumers who are forced to accept artificially higher priced and/or lower quality goods.  Some nations actually prevent their citizens from buying particular products or taking their money outside of their country.

Such protectionist policies have gained support only because most individuals believe they are necessary and that the policies do, in fact, “protect” them.  But nothing is further from the truth.  To understand why protectionism does not protect individual’s economic interests and why it is totally unnecessary to the economic well-being of a nation, it is best to review a few basic principles of free trade.  Unfortunately these time-tested truisms have been lost to the world for many years now.

A Few Principles

Suppose Smith and Jones are the only inhabitants of an island.  Smith excels in farming and Jones excels in fishing.  Smith may choose to devote his time to farming, while Jones may choose to devote his time to fishing.  Assuming that Jones desires agricultural goods and Smith desires fish, a basis for trade exists when each produces more than sufficient goods for his own use. Thus, both gain by specializing in their own lines of production.  This is called the principle of “specialization of production,” and through such specialization the standard of living of both Smith and Jones increases.

But what happens if Smith and Jones both decide to catch fish?  Even if Jones is superior to Smith in the art of catching fish, Jones has no reason to trade his surplus fish to Smith, since Smith has nothing to trade except other fish. Obviously if they trade fish for fish (all fish remaining equal), there can be no gain to either.  Clearly, it would benefit Smith to return to farming where he could have his fruits and vegetables plus fish.  This is called the principle of “division of labor.”  

But suppose Jones is superior to Smith in both farming and fishing.  Will trade cease to exist?  Not at all.  It will pay Jones to specialize in the line of production in which he has the greatest “comparative advantage.”  In other words, if Jones can catch ten fish per day compared to Smith’s five fish and produce ten baskets of berries compared to Smith’s eight baskets, it will pay Jones to catch fish.  Thus, Jones is free to devote himself exclusively to what he is relatively superior (competitive) at doing.  In this way, part of his ten fish can be exchanged for part of Smith’s eight baskets of berries.  Thus, Smith and Jones jointly are producing ten fish and eight baskets of berries rather than five fish and ten baskets of berries.  Production is maximized, trade is increased, and the standard of living of both Smith and Jones is higher.

Enter Protectionism

Now, add two policemen to the island.  Each will supply the service of protection – one protecting Smith; the other Jones.  But as a part of Smith’s police “protection,” suppose that the Smith “government” imposes a restriction on Jones’s  fish, i.e., a limitation on the amount of fish that Smith can consume (import); or suppose a tariff is levied on Jones’s fish, i.e., the price (the amount of berries exchanged for fish) is increased to discourage Smith from consuming Jones’s fish.  Will such “protection” improve Smith’s living conditions?  The “justification” for this “protection” is that it will allegedly stimulate Smith’s employment and production.  Think about it.

While it is true that Smith will have to work longer in order to produce the fish once supplied by Jones, this will not raise Smith’s standard of living. On the contrary, Smith’s standard of living will be lowered.  Smith must suffer either a reduction of fish, or increase his labor to obtain the same amount of fish he would otherwise receive in trade from Jones.

The above example is extremely simplistic; yet, the principles, when applied to more complex economic conditions, hold true for all levels of trade – from the level of our “gross island product” example to international dealings.  While the concrete specifics and the motives of “protectors” may vary, the result remains the same.

Specialization of production, the division of labor, and the principles of comparative advantage, are undisputed economic laws which will always and everywhere increase a nation's standard of living.  Conversely, trade restrictions, such as quotas and tariffs, only serve to reduce trade between individuals and thus to reduce their standard of living.

It is claimed that if we protect our manufacturing industry, jobs will be created here at home and employment will rise.  This is true.  But only a small percent of us work in the manufacturing industry.  While it is possible to help an individual or an industry, it must come at the expense of another individual or industry.  At the end of the day protection hurts a nation at large even though it may protect a small group of individuals for a while. Those that win are those in position to gain favor with the government. Those that lose are the rest of us.

Trade Between Nations

No nation on earth possesses all the conditions necessary for producing all goods.  Geographical conditions, climate, and resources vary widely.  For instance, some countries are more suited to produce coffee; others steel, others oil, wheat, or micro-chips.  As each nation specializes in the products which, given its particular conditions, are to its comparative advantage to produce, world trade will increase and all trading partners will benefit. 

Consider the reverse effect.  What would happen to trade and the standard of living of the citizens of the United States if citizens between states were prevented from trading with each other? Oregon produces lumber; Pennsylvania produces steel; Florida produces oranges.  What if each state imposed tariffs and quotas on all “imports” or prevented its industries from “importing”?  Would the standard of living of the citizens in these states rise?  Obviously not; it would fall as the volume of trade fell and as individuals were forced to reduce consumption or spend more time to produce that which they desired or needed to live – assuming they could. 

Consumption would drop as many products were eliminated from markets and/or rose in price shutting out less wealthy consumers.  The same principle would hold true for international trade; protectionism reduces world production and consumption.

In a recent pole, only 50% of Americans believe free trade is good for them while 90% of economists do.  Why?  Here are a few of the most popular arguments for protectionism.

To Protect the Balance of Trade

Nations have continuously endeavored to achieve a “favorable” balance of trade despite the fact that all the evidence suggests a “favorable” balance of trade is unfavorable.  Trade is supposed to be “favorable” when a nation is continuously exporting more goods than it imports.  This results in more money entering the domestic economy from foreign markets and less money leaving the domestic economy as the nation buys fewer goods abroad.

Without government “encouragement” (coercion), an increase of exports over imports will not last long.  When a nation sells more goods abroad, domestic prices rise as its money supply increases. When this occurs, foreigners curtail their purchases; the higher domestic prices entice citizens of the exporting nation to begin importing.  As imports increase and exports decrease, money begins to leave the economy and prices begin to fall.  This restores equilibrium to the domestic price structure and to the balance of trade. 

This was the case under the classic gold standard.  As long as nations adhered to the rules of the gold standard and allowed the free flow of capital and goods, equilibrium was always restored.

But the mercantilist government will settle for nothing less than a “favorable” balance of trade – which is not a balance at all, but an imbalanced trade “surplus.” Government steps into the economy to “protect” its citizens from foreign goods.  It institutionalizes such restrictions as tariffs and quotas that “protect” individuals from the bargain prices abroad. Government artificially reduces (devalues) the worth of its monetary unit and, through controls and regulations, creates an artificial situation which “entices” individuals to continue selling goods abroad.  As the goods (the wealth) of a nation are drained, its citizens are prevented from using the money they receive for these goods to purchase lower priced and/or better quality goods abroad.  It is then that government proudly announces the achievement of a “favorable” balance of trade.

Who is “protected” by this protectionism?  No one; there are a few who may benefit (such as those in the artificially stimulated export industry) but it will be at the expense of the consumer.  Remember, we are all consumers. All individuals will suffer – either through generally higher prices or lower quality goods.  Thus the government has succeeded in forcibly reducing everyone’s economic choices, and thus their standard of living. 

Protect Domestic Markets

One of the most popular arguments for protectionism is that, without tariffs, certain domestic industries would lose their markets to foreign competitors.  This is true, but what does it mean?  It means that some firm or industry abroad can satisfy consumer needs and desires better than the home industry.  It means that some company can produce a better product or produce the same product at a lower cost.  When an industry asks for “protection,” it is not asking for the defensive powers of government – it is asking for the aggressive powers of government to force taxpayers to subsidize its inability to compete.  It is asking the government to subsidize inefficiency. This must always be at the expense of the consumer; for it means imposing tariffs (taxes) on foreign products that enable the home industry to charge relatively lower prices and appear competitive; but competitive only because the prices on foreign products have been artificially increased by tariffs.

“But if we don’t protect our home industry, imports will flood our markets and we’ll surely have mass unemployment.”  This would be an alarming fact if it were true – but it is not. What is not seen is that the import industry will increase their employment.  Why is employment in the import industry bad and the employment in the export industry good?  Who’s “protected” by “protecting” domestic markets?  Usually it is the export industry at the expense of the import industry.  Do you ever wonder why the export industry is always in the news and the import industry is rarely mentioned?  Perhaps it depends on the size of the gang you have to gain political favors.

“Protect" Domestic Wages

It is often argued that lower wage countries are a competitive threat to higher wage nations.  If higher wages are not “protected” by tariffs and quotas on foreign goods, it is argued, wages will surely fall, lowering the standard of living of millions of workers. But why are wages higher in some countries than in others? The reason is productivity.  For example, U.S. workers are paid the highest wages in the world.  This is because the U.S. worker produces more per hour, and more per day than the average worker in other nations.  Suppose a foreign worker’s wage is three dollars per hour while a U.S. worker’s wage is twenty dollars per hour.  It would seem that this high wage rate would increase the final price of the product. But this is not so if the American worker is producing three times more than his foreign competitor.  And the fact is, the American worker is far more productive than workers in other nations.

Protectionists would have you believe that cheap labor is a threat to high wage nations.  The fact is that cheap labor is cheap because it produces so much less. Given U.S. efficiency, capital, machinery, technology, and mass production techniques, the “cost per unit of output” is lower in the U.S. than in other countries.Thus, higher U.S. wages merely reflect greater U.S. productivity; they do not necessarily result in higher prices. And lower wages usually reflect less productivity, but will not necessarily result in lower prices.  Any tourist can tell you it costs less to eat at a fast food restaurant in the US than in Mexico.

Once again, protectionism penalizes the efficient and competent foreign producers (and therefore the American consumer) while rewarding incompetent or inefficient domestic producers. Protectionism does not protect domestic wages; it simply allows incompetence to grow and thrive where it could never exist without government “protection.”  And once again, such “protection” is paid for by consumers as they are forced to pay higher prices and accept lower quality goods.

Protectionism: The Greatest Threat to Prosperity

Trade wars pose the most devastating economic threat there is to the economies of the world.  They come disguised as protection for workers and consumers. Grab your wallet and run every time you hear they may be imposed.  Here are a few of the more common forms of Protectionism:

 Licensing restrictions force individuals to apply for permission to export or import.  They are an effective way to curtail trade.  They are a blatant use of government force intended to control free people who peacefully want to trade with one another.  They are many times associated with what is called an industrial policy.  This is where the government tells us all what is best for us.  They take over trade as a tool of foreign and economic policy rather than allowing the free market to operate.  This policy is usually accompanied by slogans claiming that the free market has failed; or the policy is cloaked in nationalism, appealing to the patriotism of producers and consumers.

Import quotas prevent individuals from purchasing goods from abroad.  The government decrees that no goods (or only so much of a particular good) may be purchased from one or more nations.  What do import quotas cost?  They cost economic variety. Individual’s economic choices are reduced since import quotas amount to blockades against consumer demands.  This contracts world trade which further reduces people’s standard of living. 

Tariffs are artificially higher prices paid for international goods.  Government imposes tariffs to discourage imports and sometimes to increase revenues. Tariffs are taxes.  When individuals purchase foreign goods at their neighborhood stores, they pay additional money for these goods equaling the government-imposed tax.  This costs economic variety as foreign goods are unable to mount the government’s tariff wall.  This leads to a contraction of world trade and to higher prices.

Import surcharges are usually across-the-board tariffs on all imports. In 1971 a temporary twenty percent import surcharge was imposed on American citizens.  This twenty percent tax was hailed by government as a diplomatic coup and cheered patriotically by citizens.  “Protective” tariffs seem to be the only taxes people cheer. The amazing sight of individuals cheering their own taxation indicates how blindly they have accepted the myths of protectionism.

 
There is one other protectionist measure that should be mentioned.  Our “Protectors” believe it represents a “threat” to individuals.  The word used to designate this ‘threat” brings fear into the hearts of government officials at its mere mention; it is “dumping.

Since just about every government in the world accepts the “favorable” balance of trade theory as gospel, politicians fear that some other nation may try to flood their nation with cheap goods.  “Dumping” occurs when an industry sells its product below the market price to a foreign nation.  This, of course, results in individuals purchasing these goods at bargain prices (poor devils!) and “hurts” that nation’s trade position.  It is as if charging less than market prices is an act of aggression.  To guard against it we have established treaties between nations to prevent such "crises.” Government prevents us from taking advantage of "bargain basement sales".

The U.S. Balance of Payments Problem in Perspective

Today, we all know that the US has been running large trade deficits for years.  Most believe that trade deficits are inherently bad.  The fact is that if there is a gain to a nation it is on the deficit side. Consider it:  we give the world our dollars; they give us their goods.  More goods at cheaper prices increases our living standard. 

Normally, under the rules of a gold standard and free trade, the money foreigners receive would be used to purchase American goods.  That is what the money is for!  But because their governments prevent some producers of wealth from trading with other producers of wealth, they are forced to live on only what they and their countrymen produce for themselves. 

Like Smith and Jones on the Island, they are confined by their limited ability to trade.  And at the end of the day they are poorer for it.  The best way to resolve our trade problems and the distortions that accompany them is to go directly to the people of protectionist nations and explain to them why they are not being protected by protectionism.  Perhaps then they will kick their "protectors" out of office in favor of a more free trade policy and the world can return to equilibrium.

The Protection Racket

One fact should be crystal clear at this point: it is not “protection” that protectionism offers – it is aggression.  The government violates individual rights for the sake of providing illegitimate gains for certain special interest groups.  While government offers the above myths as “proof” of why individuals would be “defenseless” without policies of protectionism, it goes coercively on its way violating the very rights it is supposed to preserve.  In no ways does protectionism protect the lives, the property or the liberty of individuals.  It is a government policy that can exist only by government initiated force against most individuals. 

Protectionism has always existed to some degree, and so long as individuals hold the above myths as indisputable facts, the “protection” racket is safe.

The most common justification given for calls for protectionism is to “save American jobs.” Yet in most of Europe – which has thrived on protectionism in the name of the “worker” for decades – the unemployment rate is double that of America. And it is America that is told that it must change its free trade policies and pursue “fair” trade policies like those who are much worse off than us because of them. Free trade IS fair trade. It protects all of us, not just the few.

The “protection” racket breeds on ignorance and thrives on the tactics of pressure group warfare. It is a disease that spreads with every collectivist slogan advocating the “right” of some individuals to be “defended” at the expense of other individuals.  It is clothed in fashionable phrases and trimmed with patriotic jargon, but underneath this superficial disguise there lives the decayed body of “doctrine” that can exist only by virtue of government force. It is the enemy of the gold standard, capitalism, freedom, and world prosperity. As such, it is the enemy of all individuals.

(This article can not be republished. All rights are the property of Wiley Publishing. It is republished from The "New Gold Standard", by Paul Nathan.)

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