In the August 4 issue of the Wall Street Journal, the CEO of a US lumber company claimed that “our trade laws exist to protect American businesses and jobs from unfair foreign trade practices, allowing our industries to grow and prosper.” His concern for American businesses and workers is commendable, but trade laws restricting our ability to do business with foreigners — even foreigners whose governments subsidize exporters — cause some industries to “grow and prosper” by causing other industries to shrink and struggle.
Let’s think about international trade restrictions on the timber industry for a minute.
Tariffs, quotas, and other restrictions on international trade make timber more expensive. With higher prices, timber companies can hire more people. It would be easy to look at the expanding timber industry and draw the conclusion that protection allows American firms to “grow and prosper.”
Higher timber prices mean higher costs for timber-using industries like construction, paper, and furniture.
That conclusion would be wrong. Just because a policy makes some American industries “grow and prosper” doesn’t mean the policy makes all American industries “grow and prosper.” In the case of restrictions on the timber trade, the higher costs and higher employment in the timber industry mean that money and labor aren’t going into other American industries. Specifically, higher timber prices mean higher costs for timber-using industries like construction, paper, and furniture. Higher costs mean lower output in these industries, which means they either don’t grow as rapidly as they otherwise would have or they contract outright.
Trade restrictions have several important effects.
First, they take money out of the pockets of consumers, who have to pay higher prices for timber and timber-using goods. Second, they draw resources into timber production. This sounds good until we realize that these resources could be used more advantageously elsewhere. Instead, they are being wasted producing timber that would have been cheaper had American companies been able to buy it at the world price without government interference. Third, there is less economic activity overall. At the world price, people would have bought more timber. When intervention raises prices, people buy less timber.
When intervention raises prices, people buy less timber.
There is a final cost associated with tariffs and other protections on international trade. Legislators have to be persuaded to vote for particular pieces of legislation, and persuasion isn’t free. Firms and trade associations dedicated exclusively to influencing the course of legislation have lobbying outfits in Washington, DC, and other seats of government. These groups produce nothing. Instead, they use their creative energies in a zero-sum struggle over the marginal increase in timber companies’ profits that results from restrictions on international trade.
This is one of the reasons the rules of social and economic order are so important. When market access and political access are limited, people can earn their incomes by getting legislators to protect them from competition. This protection allows them to cut back on output and raise prices.
It is an easy mistake to think that restrictions on international trade that help one industry “grow and prosper” will help all industries “grow and prosper.” When we look beyond the immediate beneficiaries, however, it becomes clear that we are helping some people by impoverishing others. If, instead, trade is open, our economic activities in and outside of the timber industry can make our whole society richer. Given that we impoverish one another by restricting competition, it’s important to have rules that make it hard to do this in the first place.