For whatever reason, we are sold the idea that when we have more trade agreements then we get more global trade. Is that idea even correct? Nope. In fact, it’s “dead wrong,” says Johan Norberg of the Free to Choose Network.
Although proponents of trade agreements are generally viewed as proponents of free trade, these pacts actually do more harm than good and can reduce trade. As a matter of fact, that is what has happened over the last few decades. The more trade agreements we’ve had, the less trade we’ve had.
Norberg explains more in the video embedded below:
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Senator Reed Smoot and Representative Willis C. Hawley probably did many things in their careers, but history only remembers them for the Smoot-Hawley tariff of 1930 which remains today as the prime example of the damage that protectionism can do. Protectionism is the progressivism of fools. Gandhi was a great statesman but a horrible economist.
Just as the ignorant in the USA argue that American workers who earn $15 per hour should not have to compete with Chinese workers who make $2 per hour, Gandhi thought that Indian workers should not have to compete with American and European workers who have the benefit of modern machines. As a result India adopted protectionism. In 1947 the per capita income of India was similar to countries such a South Korea. By 1977 the per capita income and standard of living in South Korea was many times that of India. India has since largely abandoned protectionism and has benefited immensely from free trade. Just as David Ricardo proved would be the case when he developed the concept of comparative advantage.
Many of those well versed in economics are concerned with the threat of possible protectionism in the form of tariffs and/or a border adjustment tax from the Trump Administration.
However, there is a much worse form of protectionism than tariffs and border adjustment taxes. Tariffs and similar taxes do at least raise revenue for the government which could lower the deficit.
The worst form of protectionism comes in the form of quotas. Quotas are bilateral agreements, negotiated by governments which allocate shares of the market that thus restrict exports and imports. None of the higher prices on the restricted goods are remitted to governments as is the case with tariffs and border adjustment taxes. The losses to the consumers are allocated to the favored producers under a quota system. Prices are always higher and production is always lower under a quota regime than would be the case in a free market. Higher consumer prices leads to lower standards of living. Lower production always leads to less employment.
The worst impact of quotas is that firms involved have little or no incentive to innovate. If the amount they sell is determined by quotas, then the most important and desired employees of the firm are no longer the scientists and engineers would can come up with the best innovations and inventions. Rather the most sought after and highest paid employees of the firm become the politically connected lawyers and lobbyists who can influence the quota allocations in such a way to most benefit the firm. Trump is no Reagan on trade. Trump is a protectionist. Furthermore, the prospect of the Trump administration negotiating bilateral trade agreements featuring quotas is frightening….”
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