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Strict Enforcement of an Impoverishing Deal Assures Continuing Impoverishment

I enjoyed participating today in FEE’s “Ask Me Anything” episode.  One of the questions, posed by Sam Raptis, was this one:

How would you respond to those who argue that because other countries harm the United States through protectionist policies, it isn’t unreasonable for Trump et al. to attempt to “hit back” in order to discourage future poor behavior by such protectionist foreign countries? How does the libertarian response to ignore bad behavior by protectionists square with game theory which suggests letting such things go unpunished might encourage more of it in the future?

Here’s my response, unedited:

What is commonly called “bad behavior” by other governments is, in fact, not harmful to us but, rather, beneficial.  If a trading partner of yours insists on giving you more for your money, that’s good for you.  If then your neighbor offers to get tough with this trading partner of yours in order to prevent this trading partner of yours from continuing to offer you more for your money, the party who is harming you isn’t your trading partner, it is your officious neighbor.

Below I elaborate further.

You buy lawn-care services from company XYZ located on the other side of town.  Your neighbor, Mr. Stump, takes it upon himself to hold you up at gunpoint to the tune of $25 each time you buy services from XYZ rather than from Stump’s teenage son.  You are less powerful than Stump and, not being suicidal, you pay the “tariff” that he officiously demands.  But Stump is a magnanimous fellow, and so he agrees to a deal with XYZ: Stump drops his tariffs on your purchases from XYZ in return for XYZ agreeing to raise the price it charges you by $15.

But soon a trade dispute erupts.  Stump discovers – correctly, we can assume – that XYZ is charging you less for its lawn-care services than Stump agreed is acceptable for you to be charged and that XYZ agreed in the trade deal to charge.  Stump, being a master negotiator, threatens to reimpose the $25 tariff on you unless and until XYZ raises the price it charges you to at least the level that Stump has divined is acceptable and that is enshrined in the terms of the trade agreement between him and XYZ.  Alas, XYZ gives in and agrees to raise the price it charges you.  Stump then boasts that, by not letting XYZ get away with breaking its word in the trade deal, he is not only protecting the neighborhood from dangerously low prices but is also upholding the sacred rule of law and the sanctity of contractual agreements.

Of course, in reality, Stump’s presumptuous exercise of the power to rob you impose a tariff on you whenever you engage in commerce that he finds objectionable is a wrong inflicted on you and on your trading partner, XYZ.  The fact that the practicalities of the situation result in your and XYZ going along with the “deal” to entice Stump to stop robbing you each time you buy XYZ‘s services does not ethically oblige you to stick to the terms of the deal if you can, in secret, get better terms from XYZ.  When Stump threatens to reimpose on you the $25 tariff, he harms you.  That is, when in response to Stump’s threat to reimpose the tariff XYZ agrees to abide by the terms of its trade agreement with Stump and raise the price that it charges you, you are made worse off, not better off.

Stump’s enforcement of this agreement, in short, does not protect you from further victimization in the future; instead, that enforcement is itself an act of victimizing you.  Successful enforcement of this agreement assures you a future less prosperous than it would be were Stump instead to ignore XYZ‘s “violation” of the deal.

Note: we can all agree that, between the two options (1) $25 tariff and (2) no tariff but an enforced price-hike, under the trade agreement, of $15, that the second option is better for you than the first option.  It is in this limited sense that trade agreements in reality are beneficial.  But there’s a third option: (3) Stump does not interfere with your commerce and you pay whatever price you negotiate with XYZ without that price being artificially affected by Stump’s interference.  This third option is, for you, the best of the three – and it’s the only fully ethical one of the bunch.  (So when Dan Griswold, myself, and other free-traders defend trade agreements, we do so with the realistic recognition that option (3) is politically infeasible.  Given this unfortunate infeasibility of option (3), we endorse option (2) over option (1).)