“Free Trade” vs Mercantilism

Free trade is when international trade if free from barriers as such tariffs, quotas, or other restrictions and can flourish on its natural growth. However, free trade is not part of the government so called free trade treaties. “Although we think of ourselves as a free-trading nation, it takes more than 700 pages just to list all the tariffs on imported goods, and another 400 to inventory all the non-tariff restraints, such as quotas and “orderly marketing agreements.” (Paul, 1981) As what free trade policies are trying to resolve is trade barriers only countries which complete free trade have no barriers anyway, and support free trade of goods. There is no need for these free trade policies that just get in the way, and cost the taxpayer administration costs.

Mises Academy Free Trade 1 of 4:

 Source: (Murphy, 2014).

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Also, any international trade with foreign countries involves a lot of risk as such Australia is a country with unique environmental diversity and inform us that any goods that harm the eco-system and their wildlife is a threat to Australia, therefore there must be a level of transparency in trade negotiations to ensure less problematic goods from entering certain countries. Additionally, these trade agreements also find that they are possible means to cartelize and increase intergovernmentalism.”Not only does protectionism make everyone poorer—except certain special interests—but it also increases international tensions, and can lead to war.” (Paul, 1981)

For free trade to work it requires less government regulatory power nor does it require the interstate competition of a nation-state, and the division of labour is not built on equality. “If the establishment truly wants free trade, all it has to do is to repeal our numerous tariffs, import quotas, anti-“dumping” laws, and other American-imposed restrictions on trade.” (Rothbard, 2013)

A tariff is a tax levied on a foreign good, to help a special interest at the expense of American consumers. A trade restraint or marketing agreement—on the number of inexpensive Taiwanese sneakers that Americans can buy, for example—achieves the same goal, at the same cost, in a less forthright manner. And all the trends are towards more subsidies for U.S. exporters, and more prohibitions and taxes on imports. Trade is to be subsidized or restrained, not left to the voluntary actions of consumers and producers. (Paul, 1981)

Protectionism does not always stem from trade agreement or tariffs. “A favorite method of subsidy has been the much beloved system of foreign aid, which, under the cover of “reconstructing Europe,” “stopping Communism,” or “spreading democracy,” is a racket by which the American taxpayers are forced to subsidize American export firms and industries as well as foreign governments who go along with this system.” (Rothbard, 2013) Foreign aid and it’s not so talked about negatives impacts on economies is well documented in the multi-award winning  PovertyInc., in which from social entrepreneurship to foreign aid, Michael Matheson Miller investigates the complex global industry and it’s affects on the economy, exploring the truth behind the industry from disaster relief to TOMs Shoes and international adoptions. This documentary follows the unseen consequences to our well intentioned charity, along with exposing the multi-billion dollar NGOs market, for-profit aid contractors, and the multilateral agencies. Showing the negative effects that agriculture subsidies carry, for more on this see my article on the Negative Externalities of Agriculture Industry.

Even though, foreign aid is not the same as the refugee crisis or immigration, it is a good example for considering the secondary effects on aids negative impact on the wider economy and businesses, while highlighting the underlying protectionism in which the arguments follow that ‘immigrants are stealing our jobs’. However, immigrants don’t steal our jobs as there is an infinite amount of work to be done and there are more labour force to innovate and create more goods and services for the economy and everyone’s wealth to increase. “Trade appears to raise income by spurring the accumulation of human and physical capital and by increasing output for given levels of capital.” (Mankiw, 2010)

Protection could only protect certain industries in the short run, however in the long run the benefits outweigh the costs. “But it takes away any incentive to correct government-caused productivity problems [only] diverting resources into uneconomic uses takes them away from other, more productive, areas and costs jobs.” (Paul, 1981) In the free market there would be open borders that would allow for free movement and access between countries borders. Ultimately, reducing any future refugee crisis or unnecessary struggles, costs, and paperwork regarding emigration. While, these immigrants should be allowed the liberty move to places of work and move to areas where there is more political stability and freedoms.

Whereas genuine free traders look at free markets and trade, domestic or international, from the point of view of the consumer (that is, all of us), the mercantilist, of the 16th century or today, looks at trade from the point of view of the power elite, big business in league with the government. Genuine free traders consider exports a means of paying for imports, in the same way that goods in general are produced in order to be sold to consumers. But the mercantilists want to privilege the government-business elite at the expense of all consumers, be they domestic or foreign. (Rothbard, 2013)

“An important economic principle is called the division of labor [which] states that economic efficiency, and therefore growth, is enhanced by everyone doing what he does best.” (Paul, 1981) However, free trade agreements are swayed toward mercantile/protectionist goals, in favouring politically connected producers. “This governmental drive toward regulatory hegemony is obviously the complete opposite of free trade. Indeed, free trade supposes letting consumers peacefully choose what products they want to promote rather than determining what is available through bureaucratic coercion.” (Azihari, 2015) A more unconsidered form of mercantile restrictions are ‘intellectual property’ or ‘patents’ that prohibit others on an international level from using content or innovations. To what extent must the protectionism go and “[by] what right does the U.S. government tell an American citizen he cannot buy a foreign product?” (Paul, 1981)

As Vilfredo Pareto remarked, “From the point of view of the protectionist, treaties of commerce are … what is most important for a country’s economic future.” Each time a new “free trade” treaty is enacted, what is seen is the attenuation of tariff barriers, but what is not seen is the sneaky proliferation and harmonization of non-tariff barriers impeding free enterprise and creating monopolies at an international scale at the expense of the consumer. It’s time for genuine free trade. (Azhihari, 2015)

For more on trade and the related Mundell-Fleming model read my article on the Mudell-Fleming Model Against Win-Win Trade, however the following has been cut out of the article as it covers more on mercantilism and free trade:

When you purchase a book online could you say your street traded with the bookstores street, or even your country and theirs? Here, Macroeconomics would answer in that it depends on political considerations, of their span of control over other people. However, in a free market goods move to where they are most valued, you and the bookstore benefit, as trade creates wealth. Macroeconomics is just the collective of these microeconomic actions.

Why do people in America specialise in producing corn or China specialise in producing shoes? The reason is similar to the reason a bank holds foreign currency on demand, it is precisely because they expect demand for their products and it is the cheapest way to acquire other goods that they are not specialised in producing. The further the distance one is able to trade the more wealthy people become, as their opportunity of increased specialisations allow for more products at cheaper prices. Such a prominent example is Silk Road, the ancient network of trade routes.

However, like Silk Road where stopped by increased mercantilism. Firstly, governments restrict trade when they promote the arguments ‘cheap foreign goods, foreign owned companies/land, or immigrants stealing jobs’. Though, that is not the case as trade creates wealth (labour + capital = production). However, governments often pose the argument that trade with other countries can cause a trade deficit and uses this as an excuse for forced nationalism, though firstly countries can’t trade with each other, only individuals can trade. They would have to, therefore, produce everything themselves.

Additionally, it is like the ‘buy local’ argument and would it not also be the case if Donald Has A Trade Deficit With His Grocery Store – Should He Boycott It? If one decided to produce/sell goods but not buy goods (Mercantilism – once being the dominant paradigms), they would soon experience a life like that of Robinson Crusoe. Therefore, if Donald Trump were president America would turn into a remote island with citizens that lived their lives as did Robinson Crusoe. Watch this YouTube review of this here EconPop – The Economics of Castaway.

If we refuse to buy from our neighbours we clearly hurt them, but we also hurt ourselves. There is only one way of being paid for exports and that is by receiving imports in return. So every time we make it harder for imports to come in, we automatically make it harder for our exports to go out. Trade is Australia’s lifeblood, and if we restrict the blood flow we hurt ourselves as well as our neighbours. (Kelly, 1978)

Bert Kelly in talking about the tariff wall against Australia’s Asian neighbours, meaning that for every buyer there must be a seller, likewise for every importer there must be an exporter. It does not necessarily need to be consumer goods it could also be investment in capital goods. Frederic Bastiat’s ‘Candle Makers Petition‘ used this as a metaphor to show that even if foreign competitors were banned, it would only benefit the local producers in the very short-run. And draws more people into the local candlemaking industry, negating any benefit to the candlemakers. For society overall, resources would be wasted in candlemaking that could have been used productively elsewhere.

Protectionist policies are very popular with economical uninformed voters. Producers have more lobbying powers, exporters invoke more sympathy. As such people favour Keynesian thinking, and its ability to achieve mercantile ideals, using currency debasement, see my article Money Pumping – What Malinvestments? Central bank action to devalue currency can be a form of mercantilism as (i) it makes exports cheaper in terms of foreign currency and imports more expensive (ii) it punishes importers and consumers, appearing to entice exporters, however their money could not purchase anything more, (iii) gains a short-term advantage for domestic exporters with overall disadvantage to everybody. People who are helped and people who are hurt now push for such action as producers will always lobby more than consumers, exporters and domestic manufacturers invoke more sympathy than consumers and importers. Other ways to pursue Mercantilism with protectionism policies are tariffs, quotas, subsidies, and/or outright bans.

Through the gold standard, the world’s economies maintained a system of fixed exchange rates.” (Mankiw, 2010) Whereas, under the Bretton Woods system the US Dollar is the world reserve currency. “We use the term “reserve currency” when referring to the common use of the dollar by other countries when settling their international trade accounts.” (Barron, 2013) Therefore, the dollar deviated from its original agreement and having gone off the gold standard, was able to be inflated by the Fed, decreasing its value against commodities (purchasing power), and because it is the reverse currency it is not subject to competition. If the reserve currency were abolished or changed to another currency then US Dollars would come back to the US. “[Therefore, a fixed exchange rate can be supported by a] currency board [which] is an arrangement by which the central bank holds enough foreign currency to back each unit of domestic currency.” (Mankiw, 2010) The only drawback from dollarisation is that of seigniorage revenues that the government has to give up. Even though, it is tempting to resort to this view, and inflate away debt, raise seigniorage revenues, and to stop falling prices through credit expansion, lower rates then it is confused for more real loanable funds.


Reference List

Azihari, F. (2015). No more “free trade” treaties: it’s time for genuine free trade. Mises Institute. <https://mises.org/library/no-more-free-trade-treaties-its-time-genuine-free-trade>.

Rothbard, M (2013). The nafta myth. Mises Institute. Retrieved [06/06/2016] from <https://mises.org/library/nafta-myth>.

Mankiw, G. (2010). Macroeconomics. (International 3rd ed.). New York, United States of America: Worth Publishers.

Kelly BertOne More Nail (Adelaide: Brolga Books, 1978), ch. 1, “Writing on the Wall,” pp. 1-5, Retrieved [31/05/2016] from <http://economics.org.au/2012/01/tariffs-high-prices-world-war/>.

Paul, R. The case for free trade. Mises Institute. Retrieved [06/06/2016] from <https://mises.org/library/case-free-trade>.

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Copyright © 2016 Zoë-Marie Beesley

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