Economic Reality Is Far Too Complex to Be Improved By Trade Restrictions

My recent column on the need to theorize carefully about comparative advantage provoked several people to share with me, by email, their objections to my case for a policy of unilateral free trade.

Some of these objections miss their mark because they reflect a failure to distinguish real-world facts that are relevant to the point being made from facts that are irrelevant. To increase the clarity of one of my arguments about trade I used automobiles as a hypothetical example. I explained that, because the word “automobiles” refers to many different kinds of vehicles, producers in one country can have a comparative advantage at producing one kind of automobile (say, small sedans) while producers in another country can have a comparative advantage at producing a different kind of automobile (say, large SUVs). Therefore, each country can be both an exporter and an importer of “automobiles” without there being any doubt that this trade pattern is determined by comparative advantage. Neither the correctness nor the relevance of this point is affected by the fact that real-world governments each mandate different degrees of automobile quality, and tax automobile manufacturers at different rates.

A deeper objection lodged against my column is that I am (as one correspondent alleges) “oblivious that not all comparative advantages are created equal…. in principle tariffs can create a better comparative advantage for the country.”

I disagree.

Let’s start with “in principle.” If this term means merely “it’s logically possible,” then, yes: no principle of logic is violated by stating that “tariffs can create a better comparative advantage for the country” – that is, a pattern of comparative advantages that’s better for the country than is the pattern that would arise under free trade. But the moment we put substance onto the bare bones of logical precepts, that which is possible “in principle” becomes fantastically improbable in practice.

Tariffs are imposed by human beings. For tariffs to improve the home-country’s comparative advantages, government officials would have to predict two futures accurately and in detail. First, these officials must predict which resources, industries, skills, and consumer preferences would develop, in the home country and abroad, if the home-country government were to follow a policy of free trade. Second, these officials must predict just how their efforts to engineer into existence those comparative advantages (that they’ve somehow divined to be superior) will actually play out in complex reality.

The jobs, skills, firms, and industries that are visible to the naked eye, or that can be measured by statisticians, are only tiny tips of gigantic, amorphous, and unseen icebergs of complex interactions. Each (say) steelworker’s job exists only because he is economically connected to multitudes of strangers; connected not only to many different consumers, but more importantly here, also to countless different producers who are incited to work together in such ways as to build the likes of steel factories, blast furnaces, and input-supply networks that ensure that each steel mill is regularly equipped with the materials necessary for its workers to produce steel. And yet the vast majority of workers and firms whose efforts make possible the job of the steel worker are so very far removed, on the economic “supply web,” from the steelworker that no mortal mind can detect more than a minuscule fraction of these connections.

The accountant for a firm that produces, among other outputs, heavy-duty shock absorbers used by trucks that haul iron ore to steel mills likely has no idea that she is part of the “supply web” of steel production. Ditto for the designers of the software used by this accountant in the course of her job. And ditto also for the electricians whose efforts supply the power used by those software designers.

And so, for example, if tariffs are applied with the intention of increasing the home-country’s capacity to produce microchips (and if this increased capacity to produce microchips is believed to improve the overall performance of the home economy), government officials are predicting that such tariffs will have this intended result. But there’s no reason to believe that this prediction will pan out.

Reality’s unfathomable complexity renders foolish all attempts to make any such prediction. How can tariff-imposing officials know from which other industries, and in which specific quantities, all the resources drawn by microchip tariffs into microchip production will come? They can’t know such a thing – at least not beforehand, which is when such knowledge is necessary. Further, even if by some miracle tariff-imposing officials were able to gather this knowledge beforehand, they would still not know whether or not the gains to the home economy from its enhanced capacity to produce microchips will outweigh or fall short of the losses to the home economy from its diminished capacity to produce steel, wheat, pharmaceutical products, medical care, and other goods and services besides microchips.

In practice, then, the best any country can do is to rely upon the market. Leave consumers free to spend their money as they choose, investors free to invest as they judge best, and businesses free to meet market demands in ways they believe will be most profitable. Successes will be rewarded with profits, and failures punished with losses. Resources will shift from less-profitable to more-profitable uses. The ‘outcomes’ will always be far from perfect, but they’ll be the best that’s humanly obtainable.

Confidence that resources are allocated more productively by markets than by the conscious efforts by government officials is justified largely by the market’s reliance on prices. As F.A. Hayek explained in his most famous academic paper, “The Use of Knowledge in Society,” each market price, in its relation to other prices, informs producers not only which outputs are most urgently demanded by buyers, but also which inputs are most abundantly available for use in production. (Compared to using inputs that are less abundant, using inputs that are more abundant leaves more inputs available for the production of other outputs.) Government officials who aim to change the allocation of resources have no comparable source of information to guide them.

Politicians or administrators, therefore, might be sincerely motivated to impose tariffs in ways that improve the home-economy’s economic performance – that is, to impose tariffs that improve the home economy’s comparative advantages. But such politicians or administrators are flying blind. This point bears repeating: unlike market participants guided by prices, these officials literally have no reliable information to guide them. They will therefore be guided exclusively by their own biases and hunches.

The pattern of comparative advantages is always changing, both within each country and across countries. And this pattern changes chiefly through market forces rather than through political forces. In my next column, I’ll explain further why it’s mistaken to suppose that economically productive changes in comparative advantages are best achieved through tariffs and other trade restrictions.

The post Economic Reality Is Far Too Complex to Be Improved By Trade Restrictions was first published by the American Institute for Economic Research (AIER), and is republished here with permission. Please support their efforts.

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