Reaffirming Faith in Free Trade

In chapter one of “The shorter catechism on classical liberalism” one would surely find a discussion on the merits of free trade. I suppose the entry would read somewhat as follows:

“As a matter of presumption, the freedom of trade in goods and services between nation states should be enshrined in the economic policy of every government. Only in exceptional circumstances, perhaps for a matter of national security, during times of war or for the mitigation or avoidance of dire economic consequences should any encroachment on this presumption be considered.”

It is alarming to see how many people in positions of policy and power across the ‘free’ world have simply forgotten the lessons learnt in their catechism classes. It is alarming to see how debates which were resolved in the 18th century by the economic patriarchs of Adam Smith and David Ricardo have been reignited in world legislatures. These pioneering economists of yesteryear fought against wildly protectionist trade laws including the so-called ‘Corn Laws’ of the British Isles.

How quick we are to forget the battles of days gone by. The protectionist ‘renaissance’ inaugurated by the Trump campaign and propagated by the European nationalist-right is symptomatic of this international amnesia and is offensive to economic prosperity, liberty and principle. Anyone who would wish to call themselves a classical liberal must fight this tide of ill-considered policy and must do so armed with a defence to the common objections against free trade.

The first thing to note about free trade is that at its core it exploits the comparative advantage of various countries over others in the production of goods and services. It recognises that Australia is far less competent in the production of automobiles than Japan or Germany, but that it can produce wool more efficiently – with less opportunity cost as we would say in the economics profession – than the majority of the Western world. Free trade allows for greater specialisation in goods which can be produced efficiently and then traded, meaning that each country which is party to a trading relationship enjoys a greater amount of consumption.

Whereas without free trade countries must expend resources to produce a wider array of goods, many of which it cannot produce efficiently, with free trade it can maximise its resource usage and trade with countries who are more efficient in the production of other goods.

The second thing to note about free trade is that because of this first phenomena, the volume of bilateral or multilateral trade (both imports and exports) increases. This is because countries have greater amounts of exportable goods to supply, now that they are more specialised in their production, and have greater demand for imported goods as because of increased production, the purchasing power of each country is increased. The last part of the preceding sentence should be particularly noted. Yes, the purchasing power of each country is increased, whether by a reduction in the nominal price level due to cheaper imports or by a reduction in the relative price level between two countries. Further, because of greater trade volumes, world prices should normalise and be driven by the marginal cost of production in countries with a particular comparative advantage.

The third thing to note about free trade is that it should be pursued even if it is not reciprocated by other countries. The predominant argument shouted by the left on this point is that while other countries should be petitioned to liberalise their trade, that Australia should not do the same in order to ‘protect domestic industry.’ Indeed, during a process of trade liberalisation, there will be some temporary job losses and firms or indeed whole industries may shutdown. But these are merely temporary phenomena, persisting while labour reallocates and retrains to be of greater use in other firms and industries. It is a short term pain, but a pain anaesthetised by the decreased cost of living for every Australian citizen. Moreover, such an argument is an affront to personal liberty. By imposing tariffs, local quotas and subsidies, the government in effect directs the bundle of consumption which each consumer may purchase. The government in doing so says that consumers may not purchase whatever good they wish but only those which are approved.

However, the overwhelming repudiation of this argument is to be found in the fact that by imposing protectionist trade policies such as tariffs, the government in fact raises the price of inputs for local firms. It makes their final product more costly to produce and thus less competitive on the global market. It does not protect industry but rather stunts it.

The arguments put forward against free trade are simply untenable or are outweighed by many positive factors to free trade. Those of us in the classical liberal tradition should not forget our catechism and succumb to the poor arguments and rhetoric of the Left. As Milton Friedman put it in his magnum opus On Freedom:

“We could say to the rest of the world: We believe in freedom and intend to practice it… Our market is open to you. Sell here what you can and wish to. Use the proceeds to buy what you wish. In this way co-operation among individuals can be world-wide yet free.”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s