But he wanted some clarification on the idea of free trade, one of the Club's basic tenets. He wrote:
- I have thought of free trade as being an agreement between two nations that allows goods made in one country to be exported to the other nation, up to the limits that no impact would be felt by either country's own businesses. In other words, if importing rice would cause economic harm to the receiving country's growers, then limits in the form of restricted goods or quotas would be mutually agreed upon.
What you describe is not free trade, but restricted trade, because there are limits on imports to protect some or all of a country's native industries from foreign competition.
As for "free trade," the phrase is generally understood to mean trade between one country and another that is not restricted by tariffs or bans, except for products that are illegal in one country or the other. The best and most familiar example of free trade is that between two states of the United States of America. That bilateral -- actually multi-lateral -- free trade is one source of the great strength of the US economy.
In the 19th and early 20th centuries, the United Kingdom practiced unilateral free trade, allowing products of any country to be sold in the UK without interference or import duty, regardless of the country of origin's trade policies. During this period, the UK's native resources of capital and labor moved to those industries where the UK industries had comparative advantage over foreign competition, and away from those industries where products could be produced in other countries and delivered to the UK more cheaply than the UK industry could produce them. This trade policy led to great economic growth in the UK.
Protectionism, free trade's opposite, protects inefficiency, enabling a country's poor competitors to keep economic resources away from its more efficient competitors who can move to other products where there are comparative advantages. Furthermore, protectionism raises costs of goods for everyone, including the poor, who are most hurt by it.
In my friend's example, growers of rice in the country imposing import restrictions would benefit but consumers in that country would suffer. The result would be a wealth transfer from consumers to rice growers. If the import restrictions were dropped and the land and labor previously kept in rice production by the restrictions were transferred to production of something for which the land was better suited, perhaps sugar cane, the price of both rice and sugar cane would drop, benefiting consumers. Thus protectionism generally benefits the better off -- producers -- at the expense of the less well off -- consumers.
These are economic facts, known to all economists and accepted by all of them. Nevertheless, some economists oppose free trade and support protectionism for various industries -- including defense industries -- because of national needs. Others support protectionism because some favored groups -- unionized manufacturing workers for example -- are benefited by the inefficiencies. Tariffs and protectionist restrictions transfer wealth from consumers to those groups. Leftist politicians and socialist economists support that transfer because union members are their constituency.
It is difficult to defend totally free trade, as nearly everyone believes that one country can attack another by dumping products on it at prices lower than cost, thus driving the importer's industry out of business. However, I don't believe dumping is a viable economic strategy for creating an international monopoly and I can't think of a single example where it has ever been successful. Even Wikipedia, which is no friend to conservatism, in its article " Dumping (Pricing Policy)" says there are few examples of dumping succeeding on an international scale, and then fails to produce even one! It is my belief that the benefit to the dumping target from accepting the low priced good in sufficient quantity to drive the native productive capacity out of business, always exceeds the cost of restarting the idled capacity.
By the way, not everyone agrees with me about this issue, including Sherry! She says dumping is at least a theoretical possibility and a nation must reserve the right to protect itself against such economic attack. She is backed in this by the World Trade Organization, which -- though it doesn't prohibit dumping -- allows certain protectionist activities in response to proven dumping.
