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Protectionism: Following in Hoover's Footsteps


Ron Kirk, president Obama's pick for U.S. Trade Representative, is facing his confirmation hearings this week.  The administration is seeking more trade restrictions on deals made under President Bush including Columbia and South Korea.  President Obama said during his campaign that he generally supports free trade, but talked about a tougher system.  Kirk and the president agree that there should be tougher labor and environmental rules before making deals.

Kirk says, "I believe in trade and will work to expand it, but I also know that not all Americans are winning from it and that our trading partners are not always playing by the rules."  

Not only does free trade bring lower prices for all consumers, but it also opens markets for American producers to sell their goods.  That's good for everyone involved.  

Sure, some people might lose their jobs in the short term because they're out-competed by foreign workers or producers, but the prices of the goods those people used to make that the foreign company now makes will be cheaper for every consumer.  Those people that lost their jobs to foreign competition will eventually move into other industries where they have a comparative advantage.  They'll produce the goods that they're best at producing relative to everyone else.  That will drive down prices for still more consumers and the economy will grow as prices fall and consumer dollars purchase more goods than before because the prices are lower.

Tony Carilli, one of my undergraduate economics professors, used to say something like, "If you want full employment, ban all trade."  Think about that.  If no one were allowed to trade with anyone else, we would each have to make our own food, build our own houses, and so forth.  Now think about expanding the "economy" from a single individual to a family.  If two or three people can trade with one another, then they can specialize and exchange with each other based on their comparative advantages.  One might be good at farming—another at building.  It is certainly possible that the man producing his own food will "lose his job" of producing food, but he might go on to produce shelter for everyone else in the society and individually each member will gain.  The same is exactly true as economies grow larger and larger.  As Adam Smith wrote, "The division of labor is limited by the extent of the market."  Increasing the size of the economy by opening our borders to free trade expands the market, which lifts limits on the division of labor, leading to more specialization and eventually higher wages.

On June 17, 1930 the Smoot-Hawley Tariff Act was passed into law increasing tariffs on over 20,000 imported goods.  Many economists agree that it was one of the interventions that made the Great Depression as bad as it was.  Our policy makers shouldn't follow in Hoover's footsteps to restrict free trade during a recession.  We should open our borders to foreign goods at low prices to help American consumers and producers out of this recession as fast as we can.