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Saturday, February 07, 2009

Free trade, free choice

Yesterday Matthew Johnston posted an interesting article, suggesting that Canada should engage in a policy of radical free trade by unilaterally removing all import tariffs. Thereby, allowing Canadians to buy the products and services that are right for them. Specifically, the products that are the best price for them.

I think it's an excellent idea.

There is this funny assumption that runs around that, being a net importer of goods is a bad thing. That if you import more manufactured goods than you export, your economy is poorer. Therefore we must put up trade barriers to prevent trade imbalances.

Firstly, there is no such thing as a trade imbalance. There is only balance. Balance through the workings of the price system.

If China subsidizes the production of automobiles, which are exported to Canada and sold for cheaper than domestic automobiles, the price of automobiles will be pushed down. Yes, some auto manufacturers may go out of business, but there is no imbalance here. In fact, consumers are getting the benefit of buying a car below cost on the backs of the Chinese taxpayer. The price is adjusting based on supply.

As Milton Friedman said, "nobody ever speaks up for the consumer's interests". He wasn't talking about the typical "consumer's advocates" that call for more regulation and nanny-state policies. He was talking about what is really in the consumer's best interest: maximum choice.

The reality is that most people who call themselves consumer advocates are for minimizing choice through heavy regulation and licensing regimes. These people don't really stand up for the consumer (although they may think they do).

The formula for understanding why cheaper imported goods are a net positive for everyone is not really hard to understand. It's quite intuitive, but it's been distorted by an omnipresent onslaught of collectivist thinking and industry self-interest.

If the cost of a toaster is typically $100, and you need to buy a toaster, you spend $100 of your money to the exclusion of everything else on that toaster.

But if you can buy a cheaper, imported toaster for $40, then you have $60 more of disposal income to spend on other things.

It gets even better. Let's accept that, for the moment, that a massive exodus of manufacturing to other countries results in a massive reallocation of labour away from manufacturing to lower-paying service sector jobs (as opposed to high-paying unionize jobs). Let's say the average wage for one of those persons making a toaster drops from $40/hour to $25/hour as a result of the absorption of the competition.

The person--doing that particularly job--is less valuable then they were before, because someone in another country is willing to make the toaster for a lower wage. This sounds horrible, except that with economics everything has two components: an input and an output.

The input in this case is the cost of living, and the output is the productive value that person puts back into the economy, for which that person is compensated fairly.

If the cost of buying basic goods (like a toaster) have declined by 60% in this case, and this trend extended to other basic necessities, the end result would be that people can actually maintain a higher quality of life at a lower wage level then was possible before.

This is the part that people have a hard time getting their head around, because it's been filled with leftist rhetoric about false "fairness and equality". And this whole calculus is at the centre of the "Wal-Mart debate".

Wal-Mart has drastically reduced the costs of consumer goods, while at the same time reducing the value of the labour associated with producing those goods. The pricing system is sending a message. It's message is simple: shampoo is cheaper to make elsewhere, so unless you're willing to accept a drop in your quality of life, you shouldn't go into the shampoo business.

Labour unions and leftists reject the messages of the pricing system, and demand the government override those messages and push prices higher to accommodate their desire to continue making those products at prices desirable to them, the producer, not to you, the consumer.

The net result to all of this has not be a real decline in the quality of life, on average, for consumers. In fact, the net result to all of this has been a net increase in the quality of life. People in low-income brackets, contrary to popular belief, have far more access to what were considered luxuries years ago (computers, cellphones, television, etc) than they did before. The export of manufacturing to lower cost jurisdictions is what allows for the production of the $200 computer, or the $40 cellphone. If these goods were made here, they would be completely inaccessible to multitudes more people, as the extremely high labour costs associated with their production would make that $200 computer, a $1000 computer or a $2000 computer. And this is true because real wages for those people reallocated from those industries, on average, have not declined relative to the price adjustments for those goods. This truth is lost on most people.

The bottom line is that free markets provide increased choice for everyone. You are free to choose, to spend your money on a $200 computer instead of being forced to buy a $2000 computer, if you desire one. But protectionist policies demand the latter. They demand the $200 computer be blocked from the market, in order to preserve the jobs associated with building that $2000 computer, because they say that your right to spend your money as you wish, for your own betterment comes second to the rights of the computer manufacturers employees to have a high paying job.

Labour unions and leftists call for state-enforced oligarchies in industry, by artificially blocking the markets attempts to become more efficient and directing it's resources towards desirable goods. Your quality of life is secondary to their quality of life. They want to choose for you. And when governments put up trade barriers, that's exactly what they are doing.

Posted by Mike Brock on February 7, 2009 | Permalink


Mike, excellent post.

Posted by: TM | 2009-02-07 3:36:51 PM

Not a rebuttal or criticism, but an honest question: When one argues that the "benefit" of cheaper goods outweighs the "cost" of lower incomes, the inevitable response always seems to be, "but then you end up with deflation, which can be just as bad as inflation." Of course, that response never seems to be adequately backed up with any evidence, but it's always a pretty persuasive line of rhetorical attack. So, the question is, how should lovers of liberty defend the spectre of "deflation"?

Posted by: anonymous | 2009-02-10 1:19:39 PM


Rapid deflation or inflation are both extremely harmful: economic planning and calculation is disrupted and the economy is thereby tossed into disarray. However, moderate and steady deflation, as might occur if the rate of advances in technology and economic efficiency outstripped the rate of growth of the money supply is a good thing. Deflation of this sort is a boon to savers and consumers, while similarly moderate amounts of inflation destroy savings and encourage excessive consumption.

As if in direct response to your query, Jörg Guido Hülsmann has written a short piece outlining 11 myths about deflation and a longer essay called "Deflation and Liberty"

Posted by: Kalim Kassam | 2009-02-10 2:50:52 PM

The only fly in the ointment is that no matter how cheap goods become, if you no longer have a job because the well paying jobs that were once synonymous with the factories that produced these goods have all been sent to 3rd world countries, who in this country will have money to buy the products. Eventually this will bite us in the ass and that is where we are now. No jobs...no money.

Posted by: peterj | 2009-02-10 9:49:21 PM


That's typical protectionist rhetoric. The factories overseas need someone to sell to. Except of course, according to you, there will be no one to buy it because we'll have no money. But who will employ them? Will the money dissapear into oblivion?

The worlds chequebook always balances. And low and behold, even after North America has lost more than three quarters of it's manufacturing in the past 30 years, our GDP expanded massively. How can that be?

According to you there should be less money in the market, less consumer spending, less jobs. Yet, there is more of all of those things.

There is this ridiculous economic myth that only manufacturers produce value and wealth. That the service industry produces nothing and is worth nothing. Except of course, the service industry produces more wealth than manufacturers ever did.

The numbers are plain and simple. Check your assumptions.

Posted by: Mike Brock | 2009-02-10 10:48:37 PM

"The numbers are plain and simple. Check your assumptions"

I have checked my assumtions.The service industries are crashing because far too many people were living on credit, based on the presumption that held assets would continue to rise in value. China now holds more than a trillion dollars of US debt.

"The worlds chequebook always balances."
Unfortunately this is true. Our standard of living will decline to meet the countries like China and India who are on the way up. As you will see, by this time next year we will still be sliding down to meet them. Of course there are a few bright spots. We (USA) have not sold military production to other countries. All through history major recession has been followed by war. Cheerfull thought is it not?. Think of full employment in the service industry. Of course in Canada we will still be supplyers of raw materials as we now manufacture next to nothing. Since wo do not have a Army, Navy or Airforce at least we will not be involved with starting any hostilities. Mike...I sure hope YOU are right because I don't like what I am posting. Time will tell, but just for shits and giggles...stock up on dry food.

Posted by: peterj | 2009-02-11 10:13:14 PM

Living in Canada I have always looked to see where the product was made. I don't have a problem with keeping my money at home or in North America. Then China what have they laid off more then the population of Canada and India. Well this problem the whole world is in it and will take some getting out. Not only the peoples debt though greed finally has bought us to this crash, long over due and the bubble is bursting. When you over inflate housing where you have to have 2 wages earners to buy and forget about raising a family we have a problem. The days where you could buy a home on one average income and raise 7 kids are gone. We have developed a monster and still don't no how to cope. There are still professions taking there wage and whatever increases. Everyone should take a roll back then prices may come down.

Posted by: Gord | 2009-03-09 9:42:23 PM

Believers until the end. The problem with this "great idea" is that other countries need to reciprocate. They have not. A unilateral move to remove all import tariffs will do nothing for exports. You need honest and fair trade deals, not a policy based on a pipe dream. Do you think other countries have our best interests at heart? Try reading other books. Learn new concepts. Expand your horizons. There's more to life than Friedman. By the way, do you know why income taxes skyrocketed in this country? Think about it. The government needed to replace diminishing revenue from import tariffs.

Posted by: Realist | 2009-03-09 10:14:22 PM

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