By Dominic Pino
Thursday, March 27, 2025
Every free trader has heard it: Sure, we’d all love for
there to be free trade, sounds nice in theory, but in the real world it can’t
happen. Supposedly free trade is a utopian position, and protectionism is the
pragmatic, realistic alternative.
This common framing of the issue of international trade
is exactly backward. Protectionism is a utopian theory based on the assumptions
that individuals and businesses will act contrary to their self-interest,
government will act in the national interest, and special interests will stay
on the sidelines. Free trade is how you live your everyday life.
In The Wealth of Nations, Adam Smith endeavored to
show how people acting in their self-interest could benefit others. The
mechanism by which that happens is the division of labor. When people
specialize in what they do best and trade for the rest, they make themselves
and the people they trade with richer than they would otherwise be.
This insight lies at the heart of economics. It is not
obvious in the abstract, but experience has shown it to be true. Countries
where people don’t specialize and trade — countries where people grow their own
food, make their own clothes, build their own houses — are the world’s poorest.
The country that elevated self-sufficiency to a foundational national principle
and has almost completely isolated itself from international trade — North
Korea, with its Juche ideology — is a communist police state.
North Korea has to be repressive to prevent trade,
because trade is natural to human beings. “In almost every other race of
animals each individual, when it is grown up to maturity, is entirely
independent, and in its natural state has occasion for the assistance of no
other living creature,” Smith wrote in The Wealth of Nations. He
imagines the absurdity of dogs deliberating over trade in bones.
“But man has almost constant occasion for the help of his
brethren, and it is in vain for him to expect it from their benevolence only,”
Smith wrote. “He will be more likely to prevail if he can interest their
self-love in his favour, and shew them that it is for their own advantage to do
for him what he requires of them.”
This is the first area where protectionism’s utopianism
shows. Protectionism says that the natural human regard for self-interest that
undergirds trade is actually a disease in need of treatment. It posits that
people need to act contrary to human nature to really thrive and that therefore
their desires and preferences must be reformed.
The agent of that reformation is the government.
Protectionists must hold a very idealistic view of government and must place an
extraordinary amount of trust in government to execute their plans. If the
government is not as competent or as beneficent as they believe, their plans
won’t work.
The protectionist believes that government is the right
agent to cure the supposed disease of self-interest because it can take the
entire country’s interests into view. Government transcends the concerns of
individual people and businesses and looks out for the good of everyone. It
lacks self-interest and holds national security and prosperity as its aims.
This is a very romantic view of government. It’s hard
enough to get the government to focus on the national interest in military
matters, which is the most fundamental purpose of government, and military
members have sworn oaths to renounce their self-interest and serve the country.
Citizens at large have sworn no such oath, nor in a free country should they be
expected to, and government is very unlikely to be able to redirect their
economic activity for their benefit.
It is not an unfortunate side effect of tariffs and other
trade restrictions that they benefit some people and industries over others;
that is their purpose and goal. Tariffs are, by their nature, redistributive.
They redistribute between industries by reshaping patterns of trade and their
associated flows of money. Because they are a tax, they also redistribute money
from the private sector to the public sector.
The protectionist must have faith that government will
pick the “right” industries to benefit for the good of everyone. This is
supposedly based on careful analysis of national security needs, the benefits
of job creation, the balance of trade, the trade practices of other countries,
the government’s revenue needs, and other factors.
Even if this analysis is done competently and fairly,
these goals will conflict, and the analysis will not recommend a clear course
of action. For example, the only reason the U.S. has a trade deficit with
Canada is the large amount of energy we import from our northern neighbor.
Excluding energy trade, the U.S. has a trade surplus with Canada. Crude oil
from western Canada trades at a steep discount on global markets, in part
because it is relatively difficult to refine and transport. Several major U.S.
refineries are specially built to process western Canadian oil.
Though Canadian oil imports are largely responsible for
the U.S. trade deficit with Canada, they probably reduce the U.S. trade deficit
with the rest of the world, because the refined products that we export are
more valuable than crude oil. Canadian oil imports are widely viewed as good
for national security, since they have largely supplanted imports from the
Middle East, but they are still outside the United States’ jurisdiction and
could be cut off in a war. Restricting Canadian oil imports would cost jobs at
the U.S. refineries designed for them, but those businesses exist only because
the Canadian oil is allowed to come into the U.S. at a discount and undercut
American crude oil producers.
So what’s in the national interest with respect to
Canadian oil imports, from the protectionists’ point of view? Their
superficially sophisticated view of trade and the national interest can be used
to talk people into just about anything. And if people can be talked into just
about anything, then some people will be willing to spend lots of money to talk
government officials into the thing that benefits them.
The word for this practice is “lobbying,” and it is an
integral part of protectionism, not an unfortunate side effect. Trade
restrictions by the U.S. government are usually legally required to take into
account comments from the public, which includes businesses and trade
associations. Even if they weren’t, the First Amendment guarantees the right to
petition the government for a redress of grievances. Protectionism in a
democracy will always involve special interests.
There’s also the simple fact that trade associations
often have the best information about the industries they represent. When the
government is doing its analysis as protectionists want, it will be reliant on
potential beneficiaries of the policies it is crafting. This obvious conflict
of interest is ripe for exploitation.
The protectionist case rests on the belief that people in
government will ignore these special interest groups when they are arguing
against the national interest. But of course, when making its case before the
government, every group will argue that its interests are in the
national interest, so politicians will have cover to decide however they want.
Politicians also have a way of arguing that the national
interest coincides with their own political considerations. And so it’s
probably not such a mystery why domestic steel firms are the top beneficiaries
of protectionism in recent years. (It’s not national security: The secretary of
defense said in 2018 that the military needs only 3 percent of domestic steel
production, and during the wars in Iraq and Afghanistan, the Pentagon procured
specialty steel from foreign producers to build vehicles to protect soldiers
from roadside bombs.) Both major-party candidates in 2024 were basically
running to be president of Pennsylvania, known for its steel industry and
powerful steelworkers’ union. The candidates knew that whoever won that highly
competitive state and its 19 electors would be very likely to win the Electoral
College, and they acted accordingly.
Political decision-making is the rule, not the exception,
for politicians — that’s their job. It’s naïve to pretend otherwise. But
protectionists must pretend otherwise, or else their plans have little chance
of working.
It’s possible to design an academic case for tariffs.
Economics textbooks often mention an “optimum tariff,” with supply–demand
graphs to illustrate. It posits a scenario where a country has monopoly power
over a particular good, so other countries will not retaliate with their own
tariffs, and the tariff is set at a low rate, calculated to improve the terms
of trade with the rest of the world without raising prices too much
domestically. It works on paper, and it’s important to note as a theoretical exception,
but it hardly resembles any real-world tariff and certainly doesn’t justify
blanket tariffs on all goods from entire countries.
Economist Stephen Miran has created an academic case for
tariffs in a paper titled “A User’s Guide to Restructuring the Global Trading
System.” He argues that the U.S. dollar is overvalued because of its status as
the world’s reserve currency, which makes U.S. exports unduly expensive for
others to buy. He devises a scheme of tariffs, deregulation, and currency
actions to rectify this perceived wrong.
It might work on paper, and Miran’s advocacy for tariffs
earned him a spot in the government as the chairman of the Council of Economic
Advisers. But even putting Miran in the government has not led to Miran’s ideas
being executed as he described.
Miran in his paper says that because Trump has “a history
of caring deeply about financial markets,” a second Trump administration would
be likely to “take steps to ensure” that “large structural changes to the
international tax code occur in ways that are minimally disruptive to markets
and the economy.” He writes that, “to help minimize uncertainty and any adverse
consequences of tariffs, the Administration can use credible forward guidance,
similar to what is used by the Federal Reserve across a range of policies, to
guide expectations.”
Instead, different administration officials have said
different things at different times, leaving businesses bewildered about what
to expect. The president announces changes in tariff policy in all-caps social
media posts. The confusion has spurred large sell-offs in the stock market, and
U.S. markets have been consistently underperforming European markets since
Trump’s election.
Miran also advocates phasing in tariffs gradually,
subject to clear conditions. He suggests in his paper that Trump’s promise of a
60 percent tariff on Chinese goods be accomplished by making a list of demands
of the Chinese government and then increasing the tariff rate by two percentage
points per month until the demands are met. This is not how the administration
has acted, either.
“There is a path by which the Trump Administration can
reconfigure the global trading and financial systems to America’s benefit, but
it is narrow, and will require careful planning, precise execution, and
attention to steps to minimize adverse consequences,” Miran concludes. He is
sensibly modest about the chances of following that path and states in the
paper that it is “not policy advocacy” — likely because he does not hold the
utopian view that government will act as an economic practitioner fine-tuning
the world economy for the good of the country.
Again, protectionism is the utopian view that individuals
and businesses will act contrary to their self-interest, government will act in
the national interest, and special interests will stay on the sidelines. That
doesn’t happen in real life. Free trade, on the other hand, happens all the
time.
The Constitution prohibits the states from levying
tariffs on one another, which effectively created the world’s largest free
trade zone when it came into effect in 1789, growing as the country expanded.
Internal trade barriers were common in other countries at the time of the
Founding, and they still exist in some countries today, including Canada.
If the protectionist argument is right, why is it right
only for countries? Many U.S. states are larger than many countries, so it’s
not a geographic or population issue. It’s not as though there isn’t
significant variation in wealth between states: Massachusetts has roughly
double the GDP per capita of Mississippi and an average hourly wage over $14
higher.
If anything, the case for protectionism between the
states should be stronger than between countries because it’s much
easier to move production to another place under the same laws where the people
speak the same language and have access to many of the same public goods than
it is to train new workers on a different continent. The manufacturing center
of the U.S. has in fact moved: historically, from the Northeast to the Midwest,
and now, from the Midwest to the South.
If the Constitution didn’t prohibit it, should
Massachusetts have tariffs to protect its workers from Mississippians? Maybe
some protectionists would be consistent, but it’s doubtful. When the level of
analysis is changed from international to interstate — or, even more absurdly,
intercity — it’s clear that free trade is superior, even though it will also
result in job losses for some people as production moves from place to place.
Trump gives away the game on this when he talks about how
tariffs would disappear if Canada became a state. He’s right, they would, but
that would mean that the same people would be buying and selling the same
stuff, so the basic economic picture wouldn’t change at all. The biggest
difference would be that around 30 million Canadians would be voting in U.S.
elections, swinging our politics sharply leftward. It seems better to have the
economic gains without the political consequences by having a free trade deal
with Canada, which is exactly what the U.S. has done, starting under Reagan in
1988.
In your day-to-day life, you run up enormous trade
deficits with the grocery store, the gas station, restaurants, and Amazon. They
take your money and give you stuff, and you never give them any stuff in
return. This is a good deal for you because it means you don’t have to can
tomatoes, refine oil into gasoline, learn how to make Indian food, or build
your own toasters, televisions, and tables.
There are of course things that you think are important
that you keep “in house,” your familial “national security” exceptions, as it
were. But there are plenty of very important things — food, water, children’s
education, religious services, home security — that the vast majority of
families “outsource” to others, and it works fine because that’s a normal human
thing to do. You probably outsource more in your day-to-day life than the U.S.
does at a national level. For all the talk about how “we don’t make things here
anymore,” imports of goods and services equaled only 14 percent of U.S. GDP in
2024, one of the lowest rates of any developed country.
Rather than make more stuff on your own, you specialize
in the job you want to do and get money for it. When you take that money into a
furniture store, it functions as a certificate that says, “I did the work
required to have this couch, but I did it doing something else I’m better at
than couch-making, and other people paid for my work, so you should let me buy
this couch in exchange.” You exchange the money for the couch, and both you and
the furniture store are better off, with your labor magically transformed into
something you didn’t make.
That’s free trade. You were free to go to that store or
to a different one. If you weren’t, that lack of competition would be
considered a problem, and it might be against the law. The government doesn’t
tax you at a higher rate in one store than it does in another, regardless of
whether anyone feels bad for the store’s workers or because the store’s owner
donated to a certain politician’s campaign. Nobody seriously believes that the
government could “restructure the furniture store system” in such a way that
everyone would be better off.
The argument for free trade doesn’t require a suspension
of disbelief, which protectionists need to make their arguments. You can accept
human nature as it is, and you don’t have to believe that the government is a
benevolent planner that can make the country richer, safer, and fairer by
taxing imports. In other words: Sure, we’d all love for there to be
protectionism, sounds nice in theory, but in the real world it can’t happen.
