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Let Each Individual Manage His or Her Own Trade

Here’s a follow-up letter to a new correspondent:

Mr. John _____:

Thanks for your follow-up e-mail. You’re correct that in my previous note to you I (in your words) “proposed that trade differences can be resolved through other means.” You ask for an elaboration.

For all of their many flaws and false premises, negotiations in which each government agrees to lower its tariffs in exchange for other governments’ agreements to do the same have successfully reduced global tariff rates. The marquee agreement is the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO). Since GATT began operating in January 1948, the average global tariff rate reversed its interwar spike and has been reduced to historically low levels.

Likewise, trade has been made freer by regional trade agreements such as NAFTA. See these recent pieces – here and here – by my Mercatus Center colleague Veronique de Rugy.

But a much deeper point must be made: the inter-governmental disputes that you call “trade differences” arise only because of an utterly topsy-turvy understanding of trade. According to this complete misunderstanding of trade, trade is evaluated only by how well it enables a highly visible and politically influential subset of domestic producers to flourish. Completely ignored is the well-being of home-country consumers as well as that of the many politically invisible home-country producers who import some of their inputs.

When highly visible and politically influential producers believe themselves to lose sales because of some foreign-government’s trade practice, they complain to their home government, which then confronts the foreign government. The home government acts like a combined consigliere and hit-man for the complaining producers. But this hit-man’s immediate targets are home-country consumers and politically invisible home-country producers. That is, this hit-man – by raising tariffs – inflicts hurt on his and the complaining-producers’ fellow citizens. And this hit-man promises to ramp-up the hurt that he inflicts on his fellow citizens until the foreign government stops inflicting identical hurt on its citizens.

This entire process is crazy. Even when consideration is confined exclusively to the home country, trade should be evaluated only by how well it enables people to increase their consumption over time. It should never be evaluated by how well it enables producers to expand their sales. Any government official who acts with genuine economic understanding and sound ethics would understand not only that the principal victims of foreign-government tariffs and subsidies are consumers and taxpayers in those foreign countries, but also that it is economically counterproductive and ethically inexcusable for the home-government to ‘retaliate’ by inflicting the same damage on its own citizens. This conclusion holds even if the home-government’s abuse of its own citizens eventually spurs the foreign government to lower its tariffs or subsidies.

If our government were to follow a policy of unilateral free trade, we Americans would be even more prosperous than we currently are. And – to the point of your question – there would be no “trade differences” to resolve.

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