Free Trade Part 3 by Centinel

by Centinel

Since it is an election year we are hearing about free trade. In particular, one candidate bashing the Chinese over unfair trade. It is true that the Chinese manipulate their currency to give them an advantage in trade. The problem is better solved by addressing currency manipulation instead of “punishing" by tariffs. As we stated in our first article, tariffs make the consumer pay.

Free Trade has one purpose. To grow the economic pie. Keynesians and protectionists both believe that our economy is one large pie and everyone fights for a piece of it. This is a closed minded view of economics. Free trade and  free markets work to grow the pie. This is what happens when we start trading with other countries. New markets open , and the pie gets bigger allowing people to participate. One of the rallying points politicians use to mobilize people is to portray international trade as a contest between “us and them”. If we have a trade deficit America is losing points and the other side must be cheating.

Frédéric Bastiat stated that “if goods don’t cross borders, soldiers will.”  There’s a term called the Richardson process of reciprocal and increasing hostilities. Nations started trade wars. One nation would place tariffs, the other would follow. Escalation of a trade war was partly to blame for WWII.

Free trade does much more than spread democracy and peace. Free trade causes societies to promote the rule of law. Countries that take part in free trade have to have an infrastructure in place. Contracts are negotiated and enforced. Judicial systems and police protection comes along with a free society. A country that participates in free trade distributes wealth among its citizens as they participate in the system. The country needs an infrastructure to import and export goods. Airports, shipping ports for example. Don’t forget a banking system set up to loan money for all these projects.

Maybe the biggest tariff increase in history was the Smoot-Hawley Tariff, signed into law in 1930 by Herbert Hoover.  It is considered by many economists to a factor in the Great Depression. It led to massive retaliation by other countries and a trade war that destroyed international commerce and may have been a factor in WWII.