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Here’s a letter to someone who’s completing his junior year at Oregon State.
Mr. B__:
Thanks for your e-mail.
You wonder if your professor is wrong to argue that (as you put it) “the justification for free trade requires the losers be compensated when tariffs are cut.”
Yes, your professor is wrong. As I tried to show in a 2022 paper (“Should Trade’s ‘Losers’ Be Compensated?: An Exploration Of the Welfare Economics Of the Losses and Costs Of Economic Change [2]”), this argument is the product of sloppy thinking.
While I’d be honored if you were to read my paper in full, let me here summarize, with an example, its main point, which is this: While free trade has costs, it has no losers.
Free trade would have losers only if it were to deny to someone something to which he or she is entitled. But free trade does no such thing. When an American consumer, say, in 2013 bought a U.S-made automobile from G.M., that consumer did not thereby also agree to buy in the future all of his or her automobiles from G.M. So when that American buys in 2023 a new automobile from a non-American automaker rather than from G.M., that consumer doesn’t take from G.M. anything to which G.M. or its workers is entitled.
When it sold the car to this consumer in 2013, G.M. could have demanded, as a term of the sale, that this consumer contractually commit to buy all of his or her future automobiles from G.M. This consumer, though, would have agreed to this contractual term – that is, would have agreed to restrict his or her future automobile-buying options – only in exchange for some consideration from G.M. This consideration could take many forms, but would most likely take the form of a lower price on the automobile sold in 2013. This contractual term would have read along these lines: “G.M. agrees to cut the price of the automobile that it sells today to Mr. or Ms. Consumer in exchange for Mr. or Ms. Consumer’s agreement to buy all of his or her future automobiles from G.M.”
But of course in reality G.M. demands no such contractual agreement. When someone buys an automobile from an American automaker that person doesn’t also thereby commit to buy all of his or her future automobiles from that company. It follows that when an American buys a foreign-made car, American automobile producers lose nothing to which they are entitled and for which they must be compensated.
Note that by not including the above-mentioned contractual term in the sales agreement, G.M. was able in 2013 to sell the car at a higher price than it would have fetched had it insisted that the buyer agree to commit to this contractual term. This higher price can be thought of as G.M.’s ‘compensation’ for agreeing to play by the rules of the free market – which rules include the legal and moral right of consumers to spend their incomes in whatever peaceful ways they choose.
The policy, therefore, that ethically requires compensation isn’t free trade; it’s protectionism. Unlike free trade, protectionism strips people – specifically, people in their capacity as consumers – of a right to which they are entitled, namely, the right to spend their incomes in whatever peaceful ways they choose.
Protectionists squawk about free trade requiring ‘compensation’ of ‘losers’ only because, being sloppy thinkers, they implicitly presume that the incomes earned by consumers belong, not to the consumers who earn those incomes, but instead to the politically powerful producers who greedily covet it.
Intellectually, protectionists are losers.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030