How restricted trade hurts people

Trade is the great bringer of peace. Frederic Bastiat once said that “If goods don’t cross borders, armies will”. Restricting trade is one of the greatest acts of self-harm the state inflicts on its people.

The nature of trade is often misunderstood. Nations don’t trade with other nations. Rather, individuals in some nations trade with individuals in other nations. It may seem trifling, but it makes great deal of difference to who bears the cost of damaging trade policies.

There are many ways in which governments all over the world restrict free trade between their citizens and those of foreign countries. Most obvious is tariff barriers. These are portrayed as forcing foreign suppliers to pay a premium to supply goods locally, which consequently makes the foreign supplier more uncompetitive in the local market, saving local jobs. But this could not be further from the truth. The cost of the tariff is born by local consumers, and the government is punishing local consumers for buying goods they desire from foreign suppliers.

This is brilliantly demonstrated by the tariffs the Obama administration slapped on ‘cheap’ Chinese tyres which were “flooding the domestic market”. A study from the Peterson Institute found that employment in the tyre industry grew by 1200 jobs after the tariffs were imposed! A brilliant act of job creation! But at what cost?

These 1200 jobs cost the US consumers $1.1 billion to create. Approximately $900,000 per job. However, this money doesn’t come from nowhere. The $1.1 billion dollars now can’t be spent on other goods and services. So instead of having tyres for their cars and $1.1 billion dollars to spend on other goods, consumers now just have tyres for an inflated price.

You can expect the same result from Trump’s tariffs on steel and aluminium. Tariff increases are a great way to reduce the consumptive ability of your citizens, the perfect way to make them materially poorer and reduce their quality of life.

But what does this mean for Australia? We are trying to sign “free trade” agreements with many countries as well as the EU currently. But these agreements aren’t free trade. They are managed trade. There are carve outs for pet industries who lobby the government, eager to hold onto their privileged position. There are still tariffs and quotas. These free trade agreements are hundreds of pages long. We do want products to be up to our Australians standards of safety, but why still have a tariff on top of that? Or a limit to what can be imported? Or restrictions on dumping, which is where foreign producers sell their products at a very low price to our consumers?

Free trade agreements should be one page, and all it should say is “Trade is permitted between our citizens on any basis, in any quantity, and at any price so long as they meet safety standards”. That would be free trade.

Dumping must be the most ridiculous complaint of trade hawks. “Foreign suppliers are injuring our economy by allowing our consumers to have more for less! We must stop this great injustice! We want our citizens to be materially poorer! Stop injuring our economy!” We don’t complain when goods go on sale in Australia, when people line up madly on Boxing Day. Why do we gripe when people give us things we want at low price?

Arguments against dumping suggest that a business can gain market share by undercutting the market and putting competitors out of business. This strategy can take years to successfully hold a large market share and you are generally running at a loss. The aim would be to put competitors out of business and then raise your prices to recoup your losses. But this ignores the fact that the knowledge and capital invested in a business doesn’t just disappear when a business folds. The workers still know how to produce, and the machines are still capable of production. The former owner just couldn’t sustain the losses.

With the incentive of a new high price, some entrepreneur may purchase the equipment and rehire the labour to compete with the former business who dumped cheap goods on our consumers. I’m not saying business won’t try to sustain losses to gain market share and raise prices. It’s just that inflicting massive losses on yourself with the hope of putting some competitors out of business is not a good business model.

Where could the government go to from here? I’m no policy wonk, but a unilateral reduction in trade barriers would be my recommendation. If you want to improve the lives of your citizens, make goods cheaper. There is much talk of the cost of living increasing and of people being unable to afford their day to day expenses. So why not give them a real helping hand? If there was a big red button that would remove all trade barriers unilaterally, and I had my hand hovering over it, there wouldn’t be much in the world to stop me from pushing it.

I will admit this may cause some disruption as markets and individuals adjust to competition from products overseas, but our local producers will also benefit from reduced costs of imported components, increasing our competitiveness. It would be good to see a unilateral ratcheting down of tariff barriers, maybe over a period of 5 years. If each year we lowered total tariff barriers by 20%, this would allow our producers to adjust to the increased competition. It would reduce the cost of imported goods for our producers and consumers. It would raise our standard of living unilaterally.

We don’t accept that the government can interfere with domestic markets and regulate trade between the States and Territories. Queensland doesn’t place tariffs on Margaret River wines to protect their consumers, and Victoria doesn’t place tariffs on pineapples from Queensland. We accept that different regions have different advantages and by playing to these advantages, the producers in each state become better off. Comparative advantage doesn’t change because your trade partner speaks a different language or because they live on another continent.

Free trade is a vehicle for increasing prosperity at home and abroad. It lifts foreign citizens out of poverty when we buy their goods and it helps the poorest at home by reducing costs of products. Countries that don’t have massive productive resources and tracts of land who trade the most are home to some of the wealthiest citizenry on the planet. Look at Hong Kong and Singapore. Small rocks with few natural resources, but open trade. Free trade is not the only reason these places succeed, but it damn sure helps. As Benjamin Franklin said, “No nation was ever ruined by trade, even seemingly the most disadvantageous”.

Llew Cross

1 Comment on "How restricted trade hurts people"

  1. Nice explanation, Llew.

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