In the real world, the government doesn't micromanage trade. Of course, certain interventions violate the ideals of free trade, e.g., embargoes, economic sanctions, quotas, product restrictions/approvals, and high protective tariffs. To give a simple example: when I download Oracle software, I usually have to acknowledge that I will not make it available to certain foreign adversaries like Cuba, Iran, Sudan, Libya, North Korea, or Syria..Another recent example was the 2022 baby formula shortage involving the shutdown of a major Abbott facility. The FDA has multiple standards, including labeling, safety, and nutrition. Infant formula is also included in USMCA dairy quotas. Via Google:
The United States subjects infant formula to tariffs up to 17.5 percent and tariff-rate quotas (TRQs); for TRQs some level imported are subject to a tariff with the excess subject to a tariff and additional duties...[T]he FDA requires specific ingredients, labeling requirements, and mandates retailers wait at least 90 days before marketing a new infant formula. ..[NOTE: This doesn't include any recent changes under Trump.]
In the context of American history, we see the primary foundation of free trade through Constitutional constraints against interstate tariffs. We need to recall the context of British mercantilism. The British viewed their colonies as primarily a captive market for their manufactured goods and a source of raw materials and other resources. It had no interest in developing competing industries, which did not bear the tax burdens of sustaining an empire. Americans broke the captive monopolies with smuggling activities. Hamilton, in the Washington Administration, moved towards a national versus federal strategy, advocating for the protection of infant industries. The rationalization for protectionist tariffs was that domestic infant industries may lack the scale to compete against large foreign producers. [Note that other trade barriers are also relevant; for example, quotas or product regulation can establish artificial shortages, bolstering prices.] There, of course, was opposition to protectionist policies; Southerners feared retaliatory tariffs that would harm their exports, not to mention they felt they were a captive market for the more industrialized northern states, which would increase their cost of living. There are other arguments for and against industrial policy and other aspects of nationalized economic policy (see the Google AIO extract below).
Free market (via Google AI)
This economic system, also called laissez-faire capitalism, operates on the belief that economic decisions by individuals and private firms lead to the most efficient allocation of resources.
Principles:
- Minimal government intervention: The role of the state is limited to protecting property rights, enforcing contracts, and providing public goods.
- Supply and demand: Market prices are determined solely by voluntary exchanges between consumers and producers.
- Competition and innovation: Competition among businesses incentivizes innovation, efficiency, and lower prices, which benefits consumers.
- Individual choice: The market is driven by consumer sovereignty, meaning consumer preferences dictate what goods and services are produced.
Arguments for:
- Promotes economic growth, innovation, and greater prosperity.
- Allows for efficient resource allocation.
- Encourages entrepreneurship and individual liberty.
Arguments against:
- Market failures: The free market can fail to provide sufficient public and merit goods like healthcare and education.
- Inequality: Can lead to vast disparities in income and wealth, as resources concentrate among a few.
- Monopolies: A lack of regulation can allow powerful corporations to dominate markets, stifle competition, and raise prices.
- Negative externalities: Unrestricted markets may ignore harmful side effects, such as environmental degradation.
- Economic instability: The market may experience erratic boom and bust cycles.
Industrial policy
In this approach, the government actively assists specific domestic industries to achieve public goals that the market alone would not accomplish. These measures have seen a notable resurgence in recent years due to geopolitical and supply-chain vulnerabilities.
Tools and methods:
- Targeted subsidies and incentives: Providing financial aid or tax breaks to specific sectors, such as green energy or semiconductors, to influence investment.
- Tariffs and protectionism: Imposing trade barriers to shelter nascent or essential domestic industries from foreign competition.
- Government-funded R&D: Supporting research and development in strategic technologies to drive innovation.
- Public investment: Directly investing in infrastructure or industries deemed critical for national interests.
Arguments for:
- Correcting market failures: Addresses issues like insufficient investment in sectors with high societal benefits, such as clean energy.
- National security: Reduces dependence on foreign supply chains for critical goods, a concern amplified by the COVID-19 pandemic and geopolitical tensions.
- Strategic competitiveness: Allows a country to foster specific high-tech industries and compete with other nations that use similar policies.
- Coordinating complex challenges: Helps coordinate efforts to tackle large-scale challenges like climate change.
Arguments against:
- Government picking winners: Governments may not be able to identify which industries will be successful, leading to wasted resources on "picking losers".
- Political capture: Policies can be distorted by politically influential firms seeking to manipulate rules for their own gain rather than for the public good.
- Economic distortion: Interventions can misallocate resources away from more productive uses, harming overall economic efficiency.
- Trade tensions: Unilateral policies can provoke retaliatory measures from other countries, potentially undermining the global trading system.
- Implementation difficulties: Executing these policies can be challenging, and they can often be difficult to end once the initial need has passed.
Key difference: underlying philosophy
The fundamental distinction is rooted in the respective beliefs about the efficiency of markets versus the necessity of government action.
- The free market perspective holds that markets are inherently efficient and self-correcting, with government intervention causing distortions.
- The industrial policy perspective argues that markets are not always optimal and that targeted government intervention is necessary to address specific failures, promote strategic industries, and achieve national goals.
The current economic climate, with its geopolitical tensions and focus on climate and technological transitions, has led to a major revival of industrial policy in many countries, including the U.S., making this debate increasingly relevant.
For example, government actions exacerbate economic uncertainty impairing investment. Consumers, not government elites, should determine winners and losers in the economy. The government can distort economic efficiencies and misallocate resources, e.g., by reinforcing the misallocation of resources away from businesses without comparative advantages. The lack of true competition not only hurts consumers but is also less of an incentive to innovate and contain costs necessary for global competitiveness. Not to mention that industries often have competing interests. For example, auto and appliance companies have an implicit goal of minimizing costs for materials like steel and aluminum; domestic steel and aluminum companies benefit from reduced price competition from foreign producers. Thus, we have seen consumer industries lose money and jobs at the expense of steel and aluminum tariffs. We free traders think the government choosing a winner between industries is arbitrary and likely corrupt. Via Google AI:
At the risk of oversimplification, Hamilton's nationalist protectionist perspective was later behind the nineteenth century's American System:
Clay's American System was at the core of the Whig Party, embraced by a young Abe Lincoln. The Whigs folded over the issue of slavery in the territories, but the Republican Party of Lincoln inherited the American system's national economic agenda:
Tariffs (lower) and, to a lesser extent, excise taxes were the primary funding sources for early US history: Via Wikipedia:
The evolution of U.S. tariff policy from 1790 to 2019 can be divided into three distinct periods, each characterized by a different primary objective: revenue generation (1790–1860), import restriction (1861–1933), and reciprocity through trade agreements (1934–present).
After the War of 1812, the British in the blockades of Europe (re: Napoleon) tried to divert low-cost textile exports to the US. We then saw a series of protectionist tariffs leading to the 1828 "Tariff of Abominations", an early challenge inherited by Andrew Jackson, particularly by the primarily agrarian economy southern states, notably South Carolina. Southern Democrats were successful in lowering tariff rates. The nationalist Lincoln Administration, as the above era partition indicates, swung back to protectionism, the GOP dominating most of the next 7 decades except for the Cleveland and Wilson Administrations. Cleveland generally favored lower revenue-only tariffs, and he lost his first reelection to Harrison, as pro-protectionist money made a difference. Wilson had a new, powerful revenue tool, the income tax, and used the offset to lower tariffs. The next 3 GOP Presidential terms returned momentum. most infamously protectionist Smoot-Hawley signed into law after the start of the Great Depression by Hoover. This led to a global trade war, which exacerbated economic recovery. FDR sought to mitigate the damage of the tariffs by getting the authority to negotiate bilateral trade agreements, focusing on the mutual reduction of trade barriers. including tariff rates
Interestingly, the two parties swapped traditional positions on trade post-WWII. The US had escaped serious wartime damage, and it was in a strong position to export goods and services to rebuilding economies. and lowered trade barriers made them more globally competitive. They had learned a hard lesson from Smoot-Hawley. In addition, free trade and free markets were a compelling alternative to authoritarian communism. As one of the largest economies, the US was a desirable gateway to a large market og middle or upper-income consumers, a strong bargaining chip to negotiate favorable terms The development of international trade platforms like GATT and WTO provides a rule-based context for resolving trade disputes.
Whereas some businesses might prefer high tariff protections upstream, even more businesses and their customers prefer a more competitive supply chain. It's a natural extension of our heritage of individual liberty [For example, I have literally lived with a couple of miles of the Mexican border within 3 Texas or Arizona cities/suburbs. While I was a UTEP business professor, I could see the Juarez slums across the Rio Grande outside the building with my office. I didn't need a passport to accompany my colleagues to lunch across the border. When I lived in Yuma, a work colleague had his car fixed in Mexico.] In Yuma, I was also within a couple of miles of the California border. We libertarians don't think governments should meddle in my visiting Los Algodones rather than California. We still know, of course. I recall driving through a BP checkpoint, my U-Haul towing my car on the way back to Maryland, praying they wouldn't stop me and have me unhook everything to check for migrants in the packed truck.] I don't like political whores like Trump corruptly meddling in my business decisions to pay off Pennsylvania steelworkers or company managers for their 2024 election support. Of course, the post-WWII pro-trade GOP coalition broadened to attract pro-trade conservative southern Dems like me, who had been abandoned by progressive Dems. You might think that Dems would support lower/middle-income Americans who benefit from price-competitive imported goods. But the FDR coalition included organized labor, which opposed the competition from foreign workers, whether in a race-to-the-bottom-wage immigrants or from imports.
Multiple factors drove the Republican Party's shift toward favoring free trade after World War II, a dramatic reversal of its historical support for protectionism. The primary motivations were the devastating economic consequences of protectionism in the 1930s, the Cold War geopolitical climate, and the evolving interests of American businesses.The failures of pre-war protectionism• Worsening the Great Depression: The infamous Smoot-Hawley Tariff Act of 1930, passed by a Republican-led Congress and signed by Republican President Herbert Hoover, severely raised tariffs on imports. The bill provoked retaliatory tariffs from other countries, causing a collapse in world trade and deepening the economic crisis of the Great Depression. This was a powerful lesson that protectionism could destabilize global economies and harm American interests.• The Democratic shift: Following the Smoot-Hawley disaster, Democratic President Franklin D. Roosevelt championed a new, more open approach to trade. In 1934, his administration passed the Reciprocal Trade Agreements Act, which laid the foundation for post-war liberalization by allowing the President to negotiate tariff reductions.Cold War geopolitical strategy• Strengthening allies against communism: After World War II, the United States assumed a new role as a global leader. Policymakers from both parties, including Republicans, saw open trade as a key foreign policy tool. Integrating the economies of Western Europe and Japan with the U.S. was viewed as a way to promote stability, rebuild war-torn economies, and prevent them from falling under the influence of the Soviet Union.• Building a global trading system: The U.S. championed international trade institutions like the General Agreement on Tariffs and Trade (GATT), the precursor to the World Trade Organization (WTO). Creating a more predictable, rules-based global trading system was considered essential for securing international peace and U.S. power.Changing economic interests of businesses• Rise of American exporters: With its manufacturing sector largely undamaged by the war, the U.S. became an export powerhouse. American manufacturers and corporations became increasingly interested in expanding their access to overseas markets and supported trade agreements to lower foreign tariffs.• Institutional incentives: The Reciprocal Trade Agreements Act changed the political calculus for businesses. By tying domestic tariff reductions to reciprocal foreign cuts, the law incentivized American exporters to advocate politically for lower tariffs, counteracting the traditional pro-tariff influence of import-competing firms.The realignment of party platformsBy the 1970s, the parties had largely reversed their traditional stances on trade.• Republicans increasingly aligned with pro-business, free-market principles, with figures like Ronald Reagan advocating for open trade as an extension of economic freedom.• Democrats, whose base of support was increasingly defined by organized labor, grew more concerned with the impact of imports on American workers and moved toward a more protectionist position.
It's no mystery why Biden promoted "buy American" policies (see below).
Note that we were seeing a modern, highly automated plant that required different skill sets and fewer personnel to operate. In addition, sugar production has been highly protected by the US from the get-go, with prices above the global price, making American-produced sugar-based bakery products globally uncompetitive. In addition, Mondelēz distributes its products in 150 countries and has an operational presence in 80 countries. There are logistics advantages to geological and supplier diversity. Consider, for instance, the Abbott infant formula plant closure discussed above: what if Abbott had the capacity elsewhere to shift production to an alternate plant? Trump, of course, had a provably incompetent, superficial analysis of the situation and was willing to abuse his authority as POTUS to co-opt blue-collar support by co-opting labor protectionism from a key Dem constituency.
So the Dems weren't happy that jobs were, in their view, shifting away because of higher production costs like union labor and environmental compliance, and generally opposed, e.g., George W. Bush's attempts to establish new trade pacts. This isn't to say they always opposed trade pacts. Clinton followed up on earlier GOP attempts to establish NAFTA, and VP Gore notably jawboned anti-trade Perot on the topic. Southern Dems like Carter and Clinton provided a moderate alternative to progressives on economic nationalism. Even Obama opened the door to a possible TTP (Pacific) and TTIP (Europe) membership, which Trump immediately killed.
Finally, we get to Trump. I have been a persistent critic of Trump's economically illiterate policies on X/Twitter and the blog (e.g., here and here). He has been a persistent critic at least the 80's of the trade deficit, we've run trade deficits since the mid-70's. In essence, this is an accounting construct; it's offset by a capital/finance surplus, which includes investing public debt, our private economy, etc. This is particularly healthy when Americans have a historically low savings rate.
So for a long time, Trump has been going on, saying that prior Presidents and trade representatives had given away the store to their trade counterparts. This never made an ounce of sense to me. US trade representatives weren't dealing as import middlemen, deciding prices for foreign stuff; consumers/retailers did that; suppliers and consumers decided what each side thought was a fair price, Things like lower tariff rates are negotiated to mutual benefit.
It's not clear what Trump means, except I think he sees access to the large, desirable American consumer market as a politically fungible good. I think he thinks he can use protectionist tactics like tariffs and quotas to protect American businesses from "unfair" trading tactics like alleged dumping, posing an existential threat to domestic producers. Notice, for instance, Trump charges a tariff surcharge on Canadian infant formula after annual imports exceed a certain threshold. He also wants to protect American exporter interests by ensuring against discrimination against American products.
Trump has also expressed the possibility that he could use protectionist tariffs to transition from fair trade to free trade, sort of like the Communist promise that the State would wither away after achieving the status of paradise for the proletariat. No, in fact, Trump's aggressive, illegal, unconstitutional tariffs which violate GATT/WTO tules, ratified into law, undermine global trade and result in adversarial reciprocal trade actions. For example, the Chinese responded to Trump's first-term tariffs by switching soybean sales from the US largely to Brazil. So it's not unusual that China would respond similarly to Trump's aggression, rumored this time to Argentina. And oddly, the trade deficit has actually grown worse under Trump.
We libertarians generally advocateuniversal free trade. It's not good for foreign partners to discriminate against American goods at the expense of its citizens, but it's unfair for the government to deprive American companies and consumers of the liberty to choose on their own: "2 wrongs don't make a right"' . There are existing frameworks to appeal unjust treatment of exported goods without a POTUS becoming jury and judge. We don't trust political elites like Trump to decide winners and losers in the economy. Trump does not have the collective wisdom of over 330 million consumers. For the interested reader. I encourage you to research relevant articles and talks of George Mason economist/professor Donald Boudreaux, also of Cafe Hayek..
Note: unless otherwise stated, quoted excerpts came from Google AI..
