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Unconditional, Unilateral Free Trade

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Here’s a letter to a correspondent who is very sympathetic to the case for unilateral free trade:

Mr. Chris G_____

Mr. G_____:

Thanks for your e-mail.

You’re absolutely correct that we Americans would be best served if our government ignored other governments’ trade restrictions and left us free to trade as each of us chooses. And so you’re also correct to reject the common refrain from your friends and acquaintances that tariffs in other countries make tariffs in the U.S. advisable. Just yesterday I offered to another correspondent this explanation [2] as to why.

I add here an additional point. The assertion that tariffs abroad ‘require’ tariffs in the U.S. typically springs from the faulty presumption that the benefits of trade are in the amounts that we export while imports are a cost of trade. If maximizing the amounts that we export relative to the amounts that we import were, contrary to fact, the ultimate purpose of trade, then retaliatory tariffs might be economically justified. But because in reality the ultimate purpose of trade – as of economic activity generally – is to enable us to increase through consumption our standard of living as much as possible, using tariffs to restrict the amounts that we are able to consume makes no sense whatsoever.

Finally, you say that some of your friends justify tariffs because they worry that foreigners “can just keep our money, or spend it in other countries.” As you suspect, this worry is silly. First, if foreigners were so foolish as to just keep dollars, that’d be especially wonderful for us, for we’d get from foreigners lots of valuable goods and services in exchange for very cheap pieces of paper smeared with green ink. Unfortunately for us, foreigners aren’t foolish in this way.

Second, it’s true that foreigners can spend dollars “in other countries,” but this fact doesn’t mean that those dollars don’t eventually return to the U.S. Your friends should ask themselves why people in those other countries willingly accept dollars in exchange for whatever it is they sell. The answer is that those people accept dollars for the same reason that your friends accept dollars – namely, because the dollars they accept can eventually be spent or invested in the U.S. And so the dollars that your friends worry will remain abroad do indeed return to the U.S., either as demand for American exports or as funds invested in the U.S. Imposing trade restraints on American consumers is not necessary to draw dollars back to America.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030