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Trade: Key to Prosperity

Mises Daily: Monday, December 20, 1999 by

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In his recent Wall Street Journal editorial titled "Help the Third World Help Itself" (November 29, 1999), Kofi Annan advanced a statist agenda for improvement in the developing world. This is what we would expect from the acting secretary-general of the United Nations. Improvement necessarily always begins with government for people in positions such as Mr. Annan. They know little of the value of liberty and have little faith in the ability of free men.

Nonetheless, Mr. Annan advances one key point. He writes, "If industrialized countries do more to open their markets, developing countries can increase their exports by far more than they now receive in aid…In fact, the industrialized countries could be doing themselves a favor. The European Union, for instance, currently spends between 6% and 7% of its gross domestic product on various kinds of trade protection measures."

The European Union is not alone in its costly protectionism. In the United States, the average tariff is around 5%. As James Bovard has documented (see "Tariffs as Enemies of Freedom" in Freedom Daily, August 1998) these tariffs have reached truly astonishing levels. On some shoe imports tariffs are 67%. There is a 40% tariff on orange juice, 20% on yogurt, 35% on tuna, and on and on the list goes.

A tariff is a particularly insidious tax, since it is practically invisible to the general consumer. There is little anger or resentment stemming from the average American paying 30% or 40% more for everyday groceries because the average consumer simply doesn’t know the extent to which he is being robbed.

Bovard cites Henry George’s particularly blunt assessment of this invisible tax, also cited by Murray Rothbard in his writings: "Protective tariffs are as much applications of force as are blockading squadrons, and their object is the same – to prevent trade." Tariffs prevent trade and help keep the Third World in poverty.

For those whose seek to help these lesser-developed countries, free trade provides a more efficient means to fulfill that end. Moreover, the United States and Europe would benefit as well. The people of these developed nations will enjoy cheaper goods to the extent that the people in these countries freely choose imported products over ones that have been domestically produced.

In addition, American and European consumers will be in a position to choose among a wider array of goods due to their increased purchasing power. Alternatively, consumers may choose to save more and thus add to the capital pool available for investment. In any event, their range of choice is expanded and their quality of life is thereby improved.

Domestic producers who cannot compete with the imported products will have to shift their resources to the production of other goods and services valued more highly by the buying public. It is this process of adjustment that could be painful for workers in protected industries. It is why protected groups, like the steel or farm lobby, devote much of their resources in an effort to control government and gain sympathy.

In essence though, we must remember that protected industries are essentially meddlers in that they obstruct or seek to nullify the market forces working against them. Far from being the subject of sympathy, I recall Thomas Fuller’s phrase that "Meddlers are the Devil’s Body-Lice; they fetch blood from those that feed them." Protected industries essentially live off the work of others.

If consumers feel as though domestic steel workers, for example, deserve to be paid above-market wages then let them choose freely with their own dollars by buying more expensive domestic goods. Let the consumer freely donate his funds to the workers and to the capitalists of the steel industry as they would to their local church or favorite charity.

But surely, there is something wrong with forcing all of us to bear the cost of their existence against our will. It may be painful for them to find work at a wage that their skills merit, but then again, it has been painful for the general public to have to carry these parasites and be forced to pay more for goods than they otherwise might.

It should be noted that the consumers gain even if the imports are not cheaper. Consumers may enjoy an imported good for its own unique characteristics. In this case, the consumers have improved their standard of living since they now enjoy imports that they have shown a demonstrated preference for with their purchase.

The effect of free trade to the Third World is also beneficial and more intuitively obvious. By virtue of destroying barriers to trade, Third World inhabitants have markets open for their goods where before they were closed. As Annan noted, he believes they could increase their exports far more than they now receive in aid. Moreover, these people would be on the road to self-improvement. They would be well on their way to building a productive economy and raising the standard of living as the Americans and Europeans have done.

Tariffs are but one way we hinder the efforts of the Third World to improve their conditions. As Mises noted in his essay "The Plight of the Undeveloped Nations" (reprinted in Money, Method, and the Market Process "the undeveloped countries blame Europe and America for the backwardness and poverty of their own peoples. They are right, but for reasons which are very different from those they themselves have in mind."

Here Mises points out that while America and Europe did not cause the plight of these nations, they have extended the duration of their plight by stifling the market forces that work to improve conditions.

Here now we come to the issue of foreign aid. Foreign aid, while often allegedly created with the best of intentions, does not accomplish their proclaimed goals of improving life in these squalid nations. Aid to relieve the poor is at best a very temporary measure, assuming the aid even reaches those it intends to reach (as a practical matter this is more difficult than it may at first seem). Instead, foreign aid allows the governments of these nations to continue, rather than abandon, their misguided policies that brought about such poverty to begin with.

Mises saw how foreign aid provides for the continued existence of disastrous social policy. He wrote: "if we 'lend' them dollars, we virtually pay for the deficits of their nationalized transportation and communications system and their socialized mines and processing industries. The truth is that the United States is subsidizing all over the world the worst failure in history: socialism."

Antecedent to enjoying the benefits of free trade, these nations must adopt the ideology that supports a market economy. Free trade will do them no good if property rights are not secure. Mises understood this writing that the problem of the Third World "is a spiritual and intellectual problem. Prosperity is not simply a matter of capital investment. It is an ideological issue. What the undeveloped countries need first is the ideology of economic freedom and private enterprise and initiative that makes for the accumulation and maintenance of capital..."

This ideology will also allow the corrective market forces to work their magic. Resources will be deployed in a manner to satisfy the most urgent wants of the consumers, rather than the dictates of some bureaucracy or official.

This issue of having the structure in place to support the free market is more important than the issue of installing a democracy. The latter often receives most of the attention in the mainstream press.

Robert Barro, in his book Getting It Right, asks the fundamental question: "It sounds nice to try to install democracy in places like Haiti and Somalia, but does it make any sense?" Barro points out that democracies foisted upon poor countries from the outside seldom last. He also notes the "growth-retarding features of democracy."

Among these features is the tendency to support a growing welfare state, to redistribute income and the tendency of power to concentrate in the hands of various pressure groups. These factors distort the inherent economic incentives that are characteristic of market economy and slow growth. The main conclusion is that the form of government is less important than the level of government interventions in a society.

The best means to help the undeveloped nations of the world is the same as the best means to cure many of the ills that plague more developed nations: Adopt the ideology of the free market. This will lead to the breakdown of all barriers to trade. This will lead to the deployment of resources to the ends that satisfy the most urgent needs of the buying public. Inevitably, the plight of the Third World would improve.

These nations would attract capital from around the world, for here lies fallow a valuable pool of human capital and untapped human energy. The investment dollars to begin would not be hard to find if property rights are secure. Once invested, it would be up to these nations to preserve a market economy, based on private property and free of government intervention. Only then will these people peacefully take their place among the more prosperous people on earth.

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Christopher Mayer is an MBA student at the University of Maryland.