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As Hazlitt’s example shows, one of the best ways to understand the value of foreign trade is to consider how things would play out in a counterfactual world where trade was significantly restricted. Continuing in this vein, then, here’s Matthew Yglesias providing another example of such a scenario, as proposed by protectionists:

[Wilbur] Ross and [Peter] Navarro were the co-authors of an important policy paper the Trump campaign put out during the election season that mostly focused on trade issues.

[…]

“When net exports are negative,” Ross and Navarro write, “that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.”

They believe that, therefore, we can boost growth by curtailing imports:

To score the benefits of eliminating trade deficit drag, we don’t need any complex computer model. We simply add up most (if not all) of the tax revenues and capital expenditures that would be gained if the trade deficit were eliminated. We have modeled only the impacts of implicit profits and wages, not any other economic aspect of the increased activity.

Trump proposes eliminating America’s $500 billion trade deficit through a combination of increased exports and reduced imports. Again assuming labor is 44 percent of GDP, eliminating the deficit would result in $220 billion of additional wages. This additional wage income would be taxed at an effective rate of 28 percent (including trust taxes), yielding additional tax revenues of $61.6 billion.

Reading this, you might wonder why it is that in the real world, economists actually do try to develop complex computer models of the economy. The answer is that the alternative method Ross and Navarro are proposing doesn’t even remotely work.

A simple sanity check

Here’s a quick way to tell that something has gone wrong with the Ross/Navarro argument. Last year, the United States imported $180 billion worth of petroleum products — oil and such.

According to Ross and Navarro, if the United States made it illegal to import oil, thus wiping $180 billion off the trade deficit, our GDP would rise by $180 billion. With labor constituting 44 percent of GDP, that would mean about $80 billion worth of higher wages for American workers. So why doesn’t Congress take this simple, easy step to boost growth and create jobs?

Well, because it’s ridiculous.

What would actually happen is that gasoline would become much more expensive, consumers would need to cut back spending on non-gasoline items, businesses would face a higher cost structure, and the overall economy would slow down with inflation-adjusted incomes falling. Modeling the precise impact of a total shutdown of oil imports is hard (hence the computer models). But we know from experience the directional impact of sharp disruptions in the supply of imported oil, and it’s not at all what Ross and Navarro say it would be.

And the same is true for every other kind of production that involves foreign trade. Michael Moynihan points out, for instance, that if iPhones were made exclusively in the US, using only American labor and raw materials, they’d likely cost thousands of dollars – which wouldn’t just mean that far fewer people would be able to buy iPhones; it would also mean that every other business that depended on widespread smartphone use (e.g. apps like Uber, manufacturers of iPhone cases, etc.) would suffer as well, and would have to lay off workers in droves (or simply go out of business entirely).

Aside from just these hypothetical scenarios, though, the best evidence that this is true comes from the various instances throughout history where these kinds of restrictions weren’t just considered theoretically, but were actually imposed in real life, with predictably negative consequences. Sowell gives a few examples:

During periods of high unemployment, politicians are especially likely to be under great pressure to come to the rescue of particular industries that are losing money and jobs, by restricting imports that compete with them. One of the most tragic examples of such restrictions occurred during the worldwide depression of the 1930s, when tariff barriers and other restrictions went up around the world. The net result was that world exports in 1933 were only one-third of what they had been in 1929. Just as free trade provides economic benefits to all countries simultaneously, so trade restrictions reduce the efficiency of all countries simultaneously, lowering standards of living, without producing the increased employment that was hoped for.

These trade restrictions around the world were set off by passage of the Smoot-Hawley tariffs in the United States in 1930, which raised American tariffs on imports to record high levels. Other countries retaliated with severe restrictions on their imports of American products. Moreover, the same political pressures at work in the United States were at work elsewhere, since it seems plausible to many people to protect jobs at home by reducing imports from foreign countries. The net result was that severe international trade restrictions were applied by many countries to many other countries, not just to the United States. The net economic consequences were quite different from what was expected—but were precisely what had been predicted by more than a thousand economists who signed a public appeal against the tariff increases, directed to Senator Smoot, Congressman Hawley and President Herbert Hoover. Among other things, they said:

America is now facing the problem of unemployment. The proponents of higher tariffs claim that an increase in rates will give work to the idle. This is not true. We cannot increase employment by restricting trade.

These thousand economists—including many leading professors of economics at Harvard, Columbia, and the University of Chicago—accurately predicted “retaliatory” tariffs against American goods by other countries. They also predicted that “the vast majority” of American farmers, who were among the strongest supporters of tariffs, would lose out on net balance, as other countries restricted their imports of American farm products. All these predictions were fulfilled: Unemployment grew worse and U.S. farm exports plummeted, along with a general decline in America’s international trade.

The unemployment rate in the United States was 6 percent in June 1930, when the Smoot-Hawley tariffs were passed—down from its peak of 9 percent in December 1929. A year later, unemployment was 15 percent, and a year after that it was 26 percent. All of this need not be attributed to the tariffs. But the whole point of those tariffs was to reduce unemployment.

At any given time, a protective tariff or other import restriction may provide immediate relief to a particular industry and thus gain the political and financial support of corporations and labor unions in that industry. But, like many political benefits, it comes at the expense of others who may not be as organized, as visible, or as vocal.

When the number of jobs in the American steel industry fell from 340,000 to 125,000 during the decade of the 1980s, it had a devastating impact and was big economic and political news. It also led to a variety of laws and regulations designed to reduce the amount of steel imported into the country that competed with domestically produced steel. Of course, this reduction in supply led to higher steel prices within the United States and therefore higher costs for all other American industries that were manufacturing products made of steel, which range from automobiles to oil rigs.

All these products made of steel were now at a disadvantage in competing with similar foreign-made products, both within the United States and in international markets. It has been estimated that the steel tariffs produced $240 million in additional profits to the steel companies and saved 5,000 jobs in the steel industry. At the same time, those American industries that manufacture products made from this artificially more expensive steel lost an estimated $600 million in profits and 26,000 jobs as a result of the steel tariffs. In other words, both American industry and American workers as a whole were worse off, on net balance, as a result of the import restrictions on steel.

Similarly, a study of restrictions on the importation of sugar into the United States indicated that, while it saved jobs in the sugar industry, it cost three times as many jobs in the confection industry, because of the high cost of the sugar used in making confections. Some American firms relocated to Canada and Mexico because sugar costs were lower in both these countries. In 2013 the Wall Street Journal reported, “Atkinson Candy Co. has moved 80% of its peppermint-candy production to a factory in Guatemala that opened in 2010.” From 2000 to 2012, the average price of sugar in the United States was more than double its price in the world market, according to the Wall Street Journal.

International trade restrictions provide yet another example of the fallacy of composition, the belief that what is true of a part is true of the whole. There is no question that a particular industry or occupation can be benefitted by international trade restrictions. The fallacy is in believing that this means the economy as a whole is benefitted, whether as regards jobs or profits.

To really drive this point home, let’s imagine taking the idea to its furthest possible extreme: What would it look like if a foreign industry (let’s say the Japanese auto industry), rather than merely selling its products more cheaply, decided to just start giving them away for free, and thereby rendered its American competitors completely obsolete and put them out of business altogether? Here’s Roberts:

Why would a trade deficit destroy jobs? The argument is that imports destroy jobs and exports create jobs. So if imports exceed exports, there will be net job destruction. This mechanical approach to job creation ignores the dynamic nature of the job market.

Consider a world where every American wakes up to find a free car in the driveway, a gift from the Japanese auto industry. In the glove compartment is a note explaining that this gift will be repeated every year. In some way, this is the ultimate trade deficit—a set of imports with zero counterbalancing exports.

What will be the impact from this gift on the number of jobs in America and on America’s standard of living? It will devastate employment in the auto industry. But will total employment fall by the number of jobs lost there? A lot of industries are going to be expanding because people no longer have to pay $25,000 for a car. People will now be able to buy things they couldn’t afford to buy before the gift. So the decrease in the demand for labor is going to be offset by an increase in demand for labor in industries outside of the car market. The American standard of living will rise in exactly the same way it would if American carmakers figured out a cheaper way to make cars. Both changes—innovation or free cars from the Japanese—make Americans richer.

The same thing has happened over the last century in agriculture. As farmers have become more innovative, we get more food at lower prices using fewer workers. That creates wealth, not poverty. In 1900, agriculture employed 40% of the American work force. Today, that number is under 2%. New jobs have come along to replace the lost farming jobs. And the new jobs pay well because we don’t have to pay as much as we once did for food. It has been gloriously good for America that we don’t need as many people farming as we once did.

Would it make any difference if that decrease in farm employment had come from foreigners willing to sell us food cheaply or technological change that made agriculture more efficient? Both lead to cheaper food and fewer workers necessary to grow food in the United States. Both increase the standard of living of the average American.

Is this dynamic view of the job market accurate? Look at the data. Imports have surged over the last 50 years. The trade deficit has ballooned over the last 30 years. Yet employment has grown steadily. Banning imports would eliminate the trade deficit. But the number of jobs in America wouldn’t change—we’d just find ourselves trying to make all the cars and all the steel and all the watches that we used to import. Those industries would grow. Others would shrink because there wouldn’t be enough workers to go around and our demand for many goods would fall as cars and steel and watches became more expensive leaving less money for other things. America would be starkly poorer.

Self-sufficiency is the road to poverty. Trade lets us cooperate and allows others to make things for us that we could only make for ourselves at greater expense.

It would be crazy to argue that if brand new cars suddenly appeared in all our driveways every year, this would make us worse off economically. Likewise, if (say) brand new smartphones suddenly started miraculously falling from the sky, it would be crazy to argue that this would hurt us economically. It would hurt Apple, sure, but it would be a net benefit for our society as a whole. So then why do we consider it such a danger if Japanese cars or Korean smartphones start dropping in price, so that we’re able to get more of these goods for the same amount of dollars – which is functionally the same thing?

Probably the most vivid of all the thought experiments in this vein comes from Bastiat, who points out that for some of our most valuable goods, we actually do get them falling freely from the sky. Does that mean, then, that we should try to put a stop to this in the name of creating more jobs? Andrew Beattie summarizes Bastiat’s argument:

The “Candle Maker’s Petition” is a satire of protectionist tariffs, written the by great French economist Frederic Bastiat. In many ways, it expanded on the free market argument against mercantilism set forth by Adam Smith, but Bastiat targeted government tariffs that were levied to protect domestic industries from competition.

In Bastiat’s “Petition,” all the people involved in the French lighting industry, including “the manufacturers of candles, tapers, lanterns, sticks, street lamps, snuffers, and extinguishers, and from producers of tallow, oil, resin, alcohol, and generally of everything connected with lighting” call upon the French government to take protective action against unfair competition from the sun. It argues sarcastically: “We candlemakers are suffering from the unfair competition of a foreign rival.”

They argue that forcing people to close “all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds—in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses”—will lead to a higher consumption of candles and related products. In turn, they reason, the industries that those in the lighting industry depend on for materials will have greater sales, as will their dependent suppliers, and so on—until everyone is better off without the sun.

This satirical essay suggests that forcing people to pay for something when a free alternative is available is often a waste of resources. In this case, the money people spend on additional lighting products would indeed boost the candle makers’ profit, but because this expenditure is not required, it is wasteful and diverts money from other products. Rather than producing wealth, satisfying the candle maker’s petition would lower overall disposable income by needlessly raising everyone’s costs.

Similarly, using tariffs to force people to pay more for domestic goods when cheaper foreign imports are available allows domestic producers to survive natural competition, but costs everyone as a whole. Additionally, the money put into an uncompetitive company would be more efficiently placed into an industry in which domestic companies have a competitive advantage.

Bastiat concludes with the following remark:

Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!

The truth is, restricting trade for the sake of saving jobs is ultimately an act of self-sabotage. As Wheelan sums it up:

Protectionism saves jobs in the short run and slows economic growth in the long run. We can save the jobs of those Maine shoe workers. We can protect places like Newton Falls. We can make the steel mills in Gary, Indiana, profitable. We need only get rid of their foreign competition. We can erect trade barriers that stop the creative destruction at the border. So why don’t we? The benefits of protectionism are obvious; we can point to the jobs that will be saved. Alas, the costs of protectionism are more subtle; it is difficult to point to jobs that are never created or higher incomes that are never earned.

To understand the costs of trade barriers, let’s ponder a strange question: Would the United States be better off if we were to forbid trade across the Mississippi River? The logic of protectionism suggests that we would. For those of us on the east side of the Mississippi, new jobs would be created, since we would no longer have access to things like Boeing airplanes or Northern California wines. But nearly every skilled worker east of the Mississippi is already working, and we are doing things that we are better at than making airplanes or wine. Meanwhile, workers in the West, who are now very good at making airplanes or wine, would have to quit their jobs in order to make the goods normally produced in the East. They would not be as good at those jobs as the people who are doing them now. Preventing trade across the Mississippi would turn the specialization clock backward. We would be denied superior products and forced to do jobs that we’re not particularly good at. In short, we would be poorer because we would be collectively less productive. This is why economists favor trade not just across the Mississippi, but also across the Atlantic and the Pacific. Global trade turns the specialization clock forward; protectionism stops that from happening.

America punishes rogue nations by imposing economic sanctions. In the case of severe sanctions, we forbid nearly all imports and exports. A recent New York Times article commented on the devastating impact of sanctions in Gaza. Since Hamas came to power and refused to renounce violence, Israel has limited what can go in and out of the territory, leaving Gaza “almost entirely shut off from normal trade and travel with the world.” Prior to the Iraq War, our (unsuccessful) sanctions on Iraq were responsible for the deaths of somewhere between 100,000 and 500,000 children, depending on whom you believe. More recently, the United Nations has imposed several rounds of increasingly harsh sanctions on Iran for not suspending its clandestine nuclear program. The Christian Science Monitor explained the economic logic: Tougher sanctions “would hit the ruling mullahs hard by raising Iran’s already high unemployment, and perhaps force trickle-up regime change.”

Civil War buffs should remember that one key strategy of the North was imposing a naval blockade on the South. Why? Because then the South couldn’t trade what it produced well (cotton) to Europe for what it needed most (manufactured goods).

So here’s a question: Why would we want to impose trade sanctions on ourselves—which is exactly what any kind of protectionism does? Can the antiglobalization protesters explain how poor countries will get richer if they trade less with rest of the world—like Gaza? Cutting off trade leaves a country poorer and less productive—which is why we tend to do it to our enemies.

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Trade lowers the cost of goods for consumers, which is the same as raising their incomes. Forget about shoe workers for a moment and think about shoes. Why does Nike make shoes in Vietnam? Because it is cheaper than making them in the United States, and that means less expensive shoes for the rest of us. One paradox of the trade debate is that individuals who claim to have the downtrodden at heart neglect the fact that cheap imports are good for low-income consumers (and for the rest of us). Cheaper goods have the same impact on our lives as higher incomes. We can afford to buy more. The same thing is true, obviously, in other countries.

Trade barriers are a tax—albeit a hidden tax. Suppose the U.S. government tacked a 30-cent tax on every gallon of orange juice sold in America. The conservative antigovernment forces would be up in arms. So would liberals, who generally take issue with taxes on food and clothing, since such taxes are regressive, meaning that they are most costly (as a percentage of income) for the disadvantaged. Well, the government does add 30 cents to the cost of every gallon of orange juice, though not in a way that is nearly as transparent as a tax. The American government slaps tariffs on Brazilian oranges and orange juice that can be as high as 63 percent. Parts of Brazil are nearly ideal for growing citrus, which is exactly what has American growers concerned. So the government protects them. Economists reckon that the tariffs on Brazilian oranges and juice limit the supply of imports and therefore add about 30 cents to the price of a gallon of orange juice. Most consumers have no idea that the government is taking money out of their pockets and sending it to orange growers in Florida. That does not show up on the receipt.

Lowering trade barriers has the same impact on consumers as cutting taxes. The precursor to the World Trade Organization was the General Agreement on Tariffs and Trade (GATT). Following World War II, GATT was the mechanism by which countries negotiated to bring down global tariffs and open the way for more trade. In the eight rounds of GATT negotiations between 1948 and 1995, average tariffs in industrial countries fell from 40 percent to 4 percent. That is a massive reduction in the “tax” paid on all imported goods. It has also forced domestic producers to make their goods cheaper and better in order to stay competitive. If you walk into a car dealership today, you are better off than you were in 1970 for two reasons. First, there is a wider choice of excellent imports. Second, Detroit has responded (slowly, belatedly, and incompletely) by making better cars, too. The Honda Accord makes you better off, and so does the Ford Taurus, which is better than it would have been without the competition.

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