GLOBE

A New Perspective on the Choice
Between Free Trade and Protectionism


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by Steve Suranovic
April 1996

A 7 year old boy asked his mother for candy one morning. The mother refused saying it was much too early in the day for candy. A half an hour later the boy asked again, and again his mother denied him. A short time later the mother disappeared to the basement leaving the boy temporarily alone. The boy knew there was candy on top of the refrigerator and he desperately wanted some. So very quietly but quickly the boy moved a chair next to the refrigerator and reached way up to a jar containing the candy. As he reached his foot slipped, his fingers bumped the jar which fell with a crash breaking on the floor. The boy, knowing he was in trouble, quickly moved the chair back to the table, ran into the family room, and sat quietly in front of the television. When the boy's mother returned and saw the broken jar on the floor, she turned to the boy and said, "What on earth happened in here!!!?" The boy matter of factly said, "The candy jar just fell down and broke!"

Now the boy knows he's in trouble, that he did something wrong. But he's also old enough to know that he shouldn't lie to his mother. So when his mother confronts him, he doesn't tell a lie ... the cookie jar did fall down and break. But, he also is not completely up-front about all of the details either. He purposely avoids those details which are not especially favorable to his case. If his mother were to ask whether he had something to do with it, the boy might respond with more factual statements such as, "Well I was on my way into the living room when the crash occurred!!" Again technically this is not a lie since the thought of retreating to the living room may well have occurred to the boy as the jar was falling and before it actually hit the ground. Once again, although truthful, the boy's story is not a complete description of what happened.

I tell this story because it is characteristic of the type of statements we hear again and again in public policy discussions. When Pat Buchanan talks about the trend towards economic globalization embodied in agreements such as NAFTA or the Uruguay round, he emphasizes the threats that free trade will cause for working-class individuals in the economy. When Bob Dole or Bill Clinton discuss the merits of globalization they emphasize the opportunities that will accrue to businesses and individuals in export industries who will have enlarged markets in the rest of the world. Rarely does either side offer much credence to the views of their opponents.

If proponents of protection are asked to comment on the increased opportunities in export industries, they will likely reply that those opportunities will only accrue to the wealthy or otherwise advantaged classes. If free trade proponents are asked about the potential threat of free trade to those in import-competing industries they will argue that such losses are temporary and likely to be reversed in the long-run. Each side invariably exaggerates the merits of their own evidence while simultaneously minimizing the significance of their opponent's evidence.

One question often posed is whether economic globalization represents an opportunity or a threat. The correct answer is that globalization is both an opportunity AND a threat. Any change in international trade policy, such as the establishment of regional free trade agreements, will cause changes in the domestic prices of many goods and services. Some prices will rise, others will fall. Any price change , regardless of direction, will benefit some groups and hurt others within the country. The decreasing prices of importable goods will harm individuals who earn income in the import-competing industries, like textiles and footwear, but will benefit the consumers of those products. The increasing prices of exportable goods will benefit individuals who earn income in those industries, like aircraft and computer software, but will harm domestic consumers who purchase exportable goods. Whether freer trade is an opportunity or threat depends on the source of your income and the type of goods that you purchase.

In addition, the greater is the change in trade policy, the greater will be the change in prices, and the greater will be the opportunities and threats to certain groups in the economy. In other words, to maximize the economic opportunities for some groups we must increase the threat to the economic well-being of other groups. If we wish to minimize the threats, we must also reduce the opportunities. Unfortunately we can't have it both ways. So how do we decide which path is best?

The economic answer has always been to choose policies on the basis of aggregate economic efficiency. This means we should choose policies which cause more benefits, in total, than losses. In most instances this will occur if a country pursues free trade. However, this argument supporting free trade has been used so often by so many that it too is often misrepresented or incompletely described. The popular notion that economic competition and free trade is best for everyone is simply not what economics tells us. Although the net effect may be positive, benefits will not necessarily be positive for every individual involved even in the long-run.

In light of this information about the effects of free trade it is reasonable to ask if a case can be made to support free international competition, a free global economy, without using the economic efficiency argument. The answer is yes. Besides being the policy most likely to maximize the size of our economic pie, free trade also affects the determinants of economic success in a fundamental way. In the remainder of this article I will argue that free trade is likely to generate more satisfactory determinants of economic success than could be realized under any system of protectionism.

I'll proceed by suggesting that there are four prime determinants of economic success: talent, effort, luck and influence. It is a combination of these four factors that determine success for individuals, for businesses, and for countries.

Talent is that which determines the productivity of workers, businesses and countries. For an individual, talent is the skills and knowledge that are acquired either naturally or through education. For businesses, talent is the ability to organize a group of individuals and a stock of capital to accomplish the goals of the company. For countries, talent is the physical and human capital acquired through investment and education as well as the natural resource endowments that are available for use in production. Talent is perhaps the predominant determinant of success especially in a market economy. But it is not the only determinant.

Effort represents the time that one devotes to economic activity. One could have all the talent in the world, but if not devoted sufficiently to production it is unlikely to generate much success. All else equal, countries whose labor force works longer hours would produce more output and be judged a greater success. In addition, success can be further enhanced if effort is applied to the acquisition of talent. For this reason we teach our children to work hard in school and to do their homework.

This determinant of success is often over-emphasized. Many times I have heard speakers at high school and college commencements say that if only you apply yourself diligently in pursuit of your goal, then you can achieve anything you set you mind to. Unfortunately this is not entirely true. Maximum effort applied in an area where an individual has no talent is unlikely to generate much success. Ah, but you might say that if effort is devoted to the acquisition of talent, and if the further application of effort and talent is applied to productive activity, then surely it will guarantee success. But alas, not necessarily. ... Because there are two additional determinants of success.

The next determinant is luck. Good luck arises when unforseen events work to your advantage. The most obvious example occurs when someone wins a lottery. Here success is based solely on luck. Another example is when someone buys a stock shortly before a sharp ascent in price. Although the buyer would probably attribute this to talent, in most cases it's just luck. Similarly buying land for one purpose only to discover oil on the property at some later date, again is just luck. Bad luck sometimes affects us as well. Opening a new business just before a recession begins can be a recipe for disaster. In any case, if you are fortunate enough to get a more than the average share of good luck, then success may arise even without much talent or effort. Get less than an average amount of luck then substantial talent and effort may not be enough to guarantee success. However, since the nature of luck is that it cannot be anticipated or affected, there is not much anyone can do about this determinant of success except to understand that it does sometimes play a decisive role.

The final determinant of success is influence. Influence represents actions taken on behalf of others by those who can affect outcomes. The use of influence is varied. Influence is wielded on the basis of family connections, as when a father helps land a summer job for his son at his company. Influence is wielded on the basis of affiliations; as when a consulting firm concentrates its hires from Ivy league institutions or when a company hires a white person over a black. Influence is wielded on the basis of money as is the case of recent allegations that the University of California accepted wealthy alumni's children who were unacceptable on academic criteria. Influence is wielded on a basis of threats as when the US government admonished Iraq to withdraw from Kuwait. Influence is wielded on the basis of votes or campaign contributions which is one reason for the current drive for campaign reform. Finally, influence is wielded on the basis of legislated government procedures as when a firm manages to win an antidumping petition.

The first thing to note about influence is that it is only useful to the extent that it is wielded disproportionately. If every job applicant has someone of equal stature put in a good word for them then nobody gains any advantage. If every country has equal military power then no one country can take advantage of its strength. If legislated government procedures gave everyone affected an equal say in determining the outcome then the outcome would assuredly be quite different. One of the features that makes democracy attractive in political arenas is that by giving every person one vote, it reduces disproportionate influence over political outcomes.

The second important point about influence is that the government is the primary target of influence wielders because the government has enormous power to affect economic outcomes. In the area of trade, government could easily create thousands of jobs for workers in the textile industry, the steel industry and the auto industry. A 100% tariff would do the trick. Using directed subsidies the government could assure US success in computers and electronics, in biotechnology and aircraft, in telecommunications and construction. The government's ability to tax and spend gives it the power to determine which industries or which individuals will succeed. Thus anyone who can affect these decisions can use influence to direct benefits in their direction. This is one reason why lobbying is a big business in Washington.

The third and most important point about influence is that the more that influence determines economic outcomes, the less that talent, effort and luck determine outcomes. The more "who you know" matters, the less "what you know" will matter. When someone lands a job because of influence it must be that someone better qualified did not get the job. If not, then the influence was immaterial. Similarly, when the US auto industry convinced its government to negotiate voluntary export restraints with Japan, its influence was larger than that wielded by US consumers of autos who ultimately paid higher prices for cars.

One typical complaint about movements to free trade is that many hard-working and talented workers stand to lose out as a result of competition with foreign firms. Protection, however, is an attempt to use government influence to direct economic success to these workers. Although it may seem reasonable to use government to influence outcomes for relatively disadvantaged groups, this method also stimulates a insidious practice. Whenever, one group is successful using government influence to extract benefits, other groups will attempt the same. This can lead to an increase in individual efforts and talents devoted to influence peddling relative to efforts and talents devoted to economic production. This may be what we have seen happen in this country and others over the past half century or more. The increase in the number of lawyers, lobbyists and government officials suggests that economic success is increasingly affected by the use of influence.

The choice of international trade policy, then, can be viewed as a choice concerning how we would like economic success to be determined. If we focus on the threats to individuals that are likely to arise in the global economy of the 21st century, one way to minimize these negative effects is with the use of federal government control over international trade (i.e. selected protectionism). However, this solution will also raise the extent to which influence affects economic outcomes. Firms that are wealthier, those with political connections, those with friends in Washington, those who hire an influential lobbying firm, etc. will be relatively more successful economically. Meanwhile the relative influence of the other factors of economic success, namely, talent, effort and luck devoted to economic production will be reduced. Thus, although selected protection can reduce the threats to some groups it will simultaneously reduce the opportunities of others in the economy. In particular it will reduce opportunities of those without influence or whose economic success is based proportionately more on talent and effort (devoted to productive economic activities) and perhaps luck.

Alternatively we could choose to maximize the opportunities of individuals and businesses in the global economy of the next century. In this case the appropriate international policy is free trade. This solution would increase the extent to which economic outcomes are determined by talent, effort and luck and reduce the extent to which influence affects outcomes. But to choose this policy means simultaneously raising the threats to individuals and businesses that are relatively less talented, less hard-working or less lucky.

The choice between policies is not an easy one since neither free trade nor selected protectionism is demonstrably better for all individuals. But the choice is made even more difficult since advocates of both positions are reluctant to discuss the full consequences of their proposed policies. Free trade advocates continually ignore or minimize the threats that free trade will cause to some groups in the economy. Advocates of selected protectionism also ignore or minimize the lost opportunities to other groups that their policies would induce. So just as we expect that mom in the story above is going to demand a complete and accurate portrayal of how the candy jar broke in order to decide the proper punishment, we too need a complete and accurate portrayal of the economic effects of proposed policies in order to make the appropriate policy choices.

If we choose selected protectionism, then we need to address the concerns of those whose opportunities will be limited. On what basis can we justify losses to some groups as a necessary consequence of the removal of threats to others? And how will we minimize the potential growth of influence peddling that could turn "selected" protectionism into "blanket" protectionism. If we choose free trade, then we need to address the concerns of those who will be most threatened by the economic adjustments that will ensue. What should society do for those individuals whose talents are limited or are incapable of sustained effort? What should be done about those who suffer losses because of the transition to free trade? Until these questions are addressed, we have little hope of making a smooth transition to a global economy in the 21st century.


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©1996-1998 Steven M. Suranovic, ALL RIGHTS RESERVED
Last Updated on 1/12/98