We Need Protectionism and Free Trade

This may seem like an odd title for a post and just as odd a position on trade policy.  But those of you who have been followng my posts or have read Five Short Blasts know that my call for tariffs – a tariff structure indexed to population density – is always qualified by the words for manufactured goods and is only applied to nations that are more densely populated than our own. 

Why the distinction?  First of all, let’s consider trade in natural resources.  Because God has chosen to concentrate resources in specific places around the world and because we’ve divided the world into many nations, no one nation is positioned to find all of the resources it needs within its own boundaries.  All are dependent on other nations for their willingness to trade away the resources they have in abundance for those that they lack.  Some nations – larger ones like the U.S., Canada, Russia, Australia, China and others are large enough to have access to most of what they need, but still come up short in some categories.  For example, none of these extend into the tropics where they can grow coffee and bananas.  So everyone is dependent upon free trade in natural resources to a greater or lesser extent.  However, no nation should expect that it can draw down the overall global supply of any one resource beyond their fair share.  Take oil, for example.  If the world’s supply of oil is insufficient for everyone in the world to use oil at the same rate as the U.S., then the U.S. should be willing to cut its consumption proportionately, whether it does that by cutting  per capita consumption or by reducing its population, allowing per capita consumption to remain the same.

Secondly, let’s consider trade in manufactured products.  Nations with population densities no higher than that of the U.S. present no long-term threat to the U.S. economy because their economies have the same potential per capita consumption rates as our own, since over-crowding plays no role in diminishing their potential per capita consumption.  True, a developing country with an equivalent population density may tend to temporarily attract jobs away from the U.S., but their rising incomes and standard of living will soon eliminate that absolute advantage.  During that time, some management of trade would be required to prevent an over-concentration of manufacturing in such a country.  That is, once incomes have equalized, the formerly poor country shouldn’t be left with a higher per capita manufacturing capacity than the country which started out with higher incomes.  Until incomes have equalized, the excess manufacturing capacity built in the poorer nation would have to be exported back to the wealthier nation but, as incomes rise in that poorer nation, that manufacturing capacity would gradually be diverted away from exports to domestic consumption.  The end result would be free trade in manufactured goods that benefited both nations, just as Ricardo’s principle of comparative advantage (the theory upon which free trade is based) would suggest.

But trade between nations that are grossly disparate in population density is an entirely different matter.  Because the market of the overpopulated nation is emaciated by over-crowding, resulting in low per capita consumption, they come to the trading table with little or nothing of benefit to the less densely populated nation.  They come to the trade table with a bloated labor force and a market incapable of absorbing any imports.  Why would anyone choose to trade freely with such a nation?  The word “trade” implies some mutually beneficial exchange.  What benefit does the U.S. realize when it buy products from another nation but is unable to sell products of an equal value back to them?  They get our jobs; we get nothing in return.  Some may counter that we get our products at a reduced price, allowing us a higher standard of living.  That’s simply not true if the downward pressure on the demand for labor reduces incomes even faster than the cost of living is reduced, and that’s exactly what happens.  In this situation, it’s absolutely critical that tariffs be employed as a mechanism for compensating the U.S. for the other nation’s inability to provide access to an equivalent market.  Otherwise, a trade deficit and loss of jobs is automatic and, in the case of attempting such a trade policy with a very large, overpopulated nation like China, is tantamount to economic suicide. 

This is why it’s possible to be both a protectionist and a free trade advocate at the same time.   Both policies have their place as part of any nation’s intelligent approach to trade.

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