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A Note to a Student on the Advisability of a Policy of Unilateral Free Trade

Here’s a letter to a student in my International Economic Policy course (ECON 385) this semester; this student wishes to remain anonymous.

Ms. C__:

Thanks for your e-mail.

You’re correct that I disagree with your global-affairs professor who told you that “a country can gain from free trade with any other country only if the other country does not limit its imports.”

To explain why I and most other economists believe that your global-affairs professor is mistaken, allow me to use a hypothetical example. Suppose that the U.S. is trading with Sweden and the government of neither the U.S. nor Sweden interferes in any way with trade. Your global-affairs professor would then correctly understand that under these conditions we Americans benefit from trading freely with Swedes.

Now suppose that a gigantic, once-in-a-millennium earthquake devastates Sweden, thus greatly reducing for decades the Swedes’ ability to produce outputs. Able to produce fewer outputs, the Swedes can now afford to buy fewer American exports. (It’s just as if you as an individual were to suffer a serious injury that reduces your ability to work and earn income: your spending power would fall.) In short, the earthquake reduces the Swedes’ willingness to import from America.

But should the U.S. government retaliate against this earthquake by now imposing punitive tariffs on Americans who chose to buy goods from Sweden? I suspect that your global-affairs professor will agree with me that any such retaliation would be foolish; it would reduce Americans’ (and the Swedes’) ability to enrich themselves through trade.

Your global-affairs professor presumably, and correctly, understands that we Americans would be made poorer if our government hampers our freedom to trade with the Swedes on the grounds that the Swedes’ ability to buy our exports is obstructed by the earthquake. And so given his correct understanding, why does your professor think that we Americans are not made poorer when our government hampers our freedom to trade with the Swedes (and with other foreigners) on the grounds that their ability to buy our exports is obstructed, not by a natural disaster, but instead by their governments’ protectionist policies?

As I mentioned in class, it’s possible to tell a logically coherent story of how temporary retaliatory tariffs at home, by persuading foreign governments to reduce their tariffs, will over the long run lead to additional net benefits from trade in the home country (and, by the way, also in the foreign country). But as I also explained, as a practical matter retaliatory tariffs are highly unlikely to work in this happy manner. As such, the best practical trade policy is one of unilateral free trade – that is, free trade at home regardless of the trade policies pursued by foreign governments.

But either way – regardless of the advisability of retaliatory tariffs – economics is clear that the people of a country unambiguously gain by trading freely with the people of other countries even when the people of other countries suffer the misfortune of living under governments that obstruct their freedom to trade. The gains from those trades that are not obstructed are made no less real by whatever obstructions prevent the carrying out of other trades.

Good luck on your final exams!

Don Boudreaux
Professor of Economics
114 James Buchanan Hall