Protection and International Trade


A presentation, based on the work of Henry George.

by Mike Curtis
Arden, Delaware, July 13, 1999

This is a seminar on International Trade whose purpose is ambitious: to discover beyond any doubt, whether tariffs, quotas or any other form of protection, or completely free trade is in the best interest of those who work for a living. Furthermore, this seminar will achieve its purpose through the application of simple logic -- without resorting to any jargon, exotic techniques or special knowledge.

A tariff is a tax on imported products, and a quota is a limit on the number of a specific product that comes form another country. People who advocate tariffs and quotas contend that these restrictions on foreign trade will insure a larger number of jobs at higher wages than would result if international trade were unrestricted.

What is the effect of protection on prices? What is the effect of the resulting prices on wages? So in order to keep wages from falling, we have to lower them! This is the same kind of logic that says if unions demand higher wages, so many companies will go out of business that the competition from all the unemployed workers will drive wages even lower than they are now.

Nowadays, everyone is for "Free Trade" -- no one admits to being a "Protectionist". Some are for Free Trade by way of agreements -- General Agreement on Tariffs and Trade or North American Free Trade Agreement, which boils down to "we won't tax your products, if you don't tax ours." Some are for "Fair Free Trade" which means that it's only fair if the countries which sell products to us also buy an equal value of our products in return. If they don't, we must protect ourselves from them by imposing tariffs or quotas.

From the early days of the United States, tariffs (import taxes) were a major source of Federal revenue. This continued until 1913 when emphasis began to shift to the income tax. However, as a means of protecting American industries, the tariff remained a powerful force. Tariffs were raised and lowered many times over the years, with a multitude of different rates for different products, but in 1933, following the Smoot-Hawley Tariff Act, the average tariff was all the way up to 54%. By 1963 the average tariff was only 12%. From the middle of the 1970s to the middle of the 1980s there were increases in protection, but they took the form of Quotas and Import Limitation Agreements. These were eliminated under the General Agreement on Tariffs and Trade, a treaty signed by approximately 100 nations. First the quotas were discontinued in favor of tariffs, and now the tariffs are being phased out over several years. In 1997 the tariffs on automobiles and steel were less than 3%, but the tariffs on textiles, which included clothing, were still between 25 and 30%. However, they too are on a scheduled phase-out over several years. By 1996 the average tariff was a mere 3%, with most products imported from Mexico and Canada having no tariffs or quotas at all.

While trade agreements like NAFTA (North American Free Trade Agreement) include hundreds of pages of provisions that are not free trade, the tendency continues in the spirit of freer trade. Today, many of the corporations that were in the past advocates of protection, have established facilities in other countries and are now sending goods to the United States. Others are importing component parts which are incorporated into American products. In both cases, tariffs diminish their profits, so, many of them have reversed their positions, and now favor free trade. However, the increase in freer trade coincides with the loss of many high- wage manufacturing jobs, as well as many smaller industries such as canned mushrooms and cut flowers.

Conditions of American workers, as a whole, are slightly improved in 1999. However, many of those workers who were displaced by imports are asking for tariffs and quotas to protect them from corporations which are, they believe, exporting jobs to countries where low paid labor will eventually pull US wages to the same bare subsistence.

Can the North American worker compete with the low paid workers in poor countries? For the moment, let's suppose low wages always means cheap goods -- and therefore, because if its low wages, one country could undersell another country on everything. Would they send their products to the other country, and ask for no products in exchange? No matter how cheap their products are, they always want something of greater value in exchange. So as long as countries are trading, higher wages for producing the products to be traded would be equal to higher prices for the products to be received in exchange. Therefore, it could not reduce the demand for high paid labor, and cause unemployment.

But do low paid workers actually produce things more cheaply? In which countries do we find the cheapest cost of production, The US and Japan, or Mexico and Indonesia -- low-wage, or high-wage countries?

The United States produces over three times as much per person as Mexico. There is, of course, a much larger capital investment in buildings, tools and machines per person in the United States. But the capital owner in the US doesn't get a 300% higher rate of return than the capital owner in Mexico!

It's true that without knowing how much of the total production goes to the owners of capital we don't really know whether the cost of production is cheaper. However, even without any statistics, we have a pretty good idea where land rents are higher:

TOTAL PRODUCTION
Minus
Total wages
Minus
Total return to capital (Bldgs. machines, etc.)
Minus
Total monopoly profits (patents, copyrights, franchises, etc.)
Minus
Total taxes (Federal, state and local)
-  Equals  -
TOTAL NET LAND RENT

The lower the cost of production, the higher the rental value of land. The higher the rental value of land, therefore, the cheaper the cost of production.

In which countries do we find the highest land values, those with the highest wages, or those with the lowest wages? The difference in productivity between highly paid and low paid workers is even greater than their differences in pay. Whether their higher wages result from minimum wage laws or labor unions makes no difference. People with leisure time and higher standards of living, think better, learn more and produce more.

The next question you might ask is: If the United States has a lower cost of production, why did so many American companies invest in Mexico and other countries, including China? And one answer is: While the cost of production in the US was still lower, the ratio of future profits to the price of land may have looked like a better long-term investment. Their infrastructure was evolving with new highways and communications systems, freer markets and freer trade. In the last four years Mexico has nearly doubled its per capita productivity, while the US increase is closer to 10%.

Now let's look at protection in the extreme. Real Protectionists contend that each nation should import only those products which it cannot reasonably produce for itself.

If this hypothesis is correct -- that every nation should produce for itself every thing it is reasonably capable of producing, shouldn't the same principle be extended to states? Why are we giving jobs to the farmers in New Jersey? Can't we grow corn in Pennsylvania? Why are we buying cars from Michigan - - can't people in Pennsylvania make cars? Why don't we apply the same principle to counties, cities and neighborhoods. Shouldn't each family build its own house, grow its own food, make its own clothes? You get the idea. If you insist on being a jack of all trades, you'll end up being a master of none.

Why do people want to trade? To satisfy their desires with the least exertion. Exchange is simply a part of the process of adapting natural materials to the satisfaction of human desires. In other words, production?

And, the diversity of nature impels people to trade. Everything does not grow equally well in all parts of the world; minerals are not found in equal abundance everywhere in the world.

By trading, we get a lot more of all the things we want than if we tried to produce them ourselves. When trade results in the development of different skills and industries in different countries, it increases the total production of wealth.

"...as there are differences between individuals which fit them for different branches of production, so , but to a much greater degree, are there such differences between communities. Not to speak again of the differences due to situation and natural facilities, some things can be produced with greater relative advantage where population is sparse, others where it is dense, and differences in industrial development, in habits, customs and related occupations, produce differences in relative adaptation. Such gains, moreover, as attend the division of labor between individuals, attend also the division of labor between communities, and lead to that localization of industry which causes different places to become noted for different industries. Wherever the production of some special thing becomes the leading industry, skill is more easily acquired, and is carried to a higher pitch, supplies are most readily procured, auxiliary and correlative occupations grow up, and a larger scale of production leads to the employment of more efficient methods. Thus in the natural development of society trade brings about differentiations of industry between communities as between individuals, and with similar benefits" -- Henry George, 1886

For example: The chemical Industry in Northern Delaware, or the Autos in Detroit, or Watches in Switzerland.

By trading, we enable each nation to produce that for which it is best equipped. We multiply the total body of knowledge and skill, increase the potential from economies of scale, and disperse the regional peculiarities of nature to everyone.

But suppose one country produced all things better than other countries. Would it be mutually profitable for that country and its neighbors to trade with one another? Let's pretend that the US can produce every single product more efficiently than Mexico. Could the US still benefit from trading with them? Our first reaction would be no -- but let's think about it.

Why does a Carpenter work with an apprentice, if the carpenter can do all the jobs involved in house-building faster than the apprentice can? Suppose a first-class carpenter could saw boards, hammer nails and even sweep the floor one tenth faster than a second-class carpenter, but he could figure the pitch of the roof, frame the windows and hang the doors ten times faster. By dividing the jobs, they could produce two houses more than twice as fast as either one of them could have produced one house.

If we imported from Mexico those products between which the difference of advantage was least, (clothes) and would export to Mexico in return those products between which the difference was greatest, (electronic equipment) both countries will have more than either of them could have produced on their own. By trading, Blue Jeans for computers, the Mexicans get more computers than they could have produced with the same amount of labor and time, while the Americans, by trading computers for blue jeans, get more blue jeans than they could have produced with an equal amount of labor and time. This is known as the law of comparative advantage.

Tariffs and quotas are legislative restrictions which reward people who divert labor and capital from producing the thing they produce most efficiently, to producing products in which people of other countries are more efficient. They distort free market incentives and reduce efficiency. Or to put it another way, they diminish the total production, and therefore the potential to satisfy human desires.

Do nations force their goods upon another nations when they export them? In fact the only difference between the objectives of a military blockade and a tariff is that the former we do to our enemies in war, and the later we do to ourselves in time of peace.

(Spring 1999) Two weeks ago our government was complaining that foreigners were selling oil too cheaply. It's not fair. Please raise your price. Twenty five years ago, they accused OPEC of causing starvation because they charged the Indians too much for petroleum fertilizer.

Just to show the absurdity of thought in regard to international trade: What is generally meant by "a favorable balance of trade"? When exports exceed imports. What is generally meant by "an unfavorable balance of trade"? When imports exceed exports.

Would it even be possible for every nation to export a greater value in products than it imports? In the natural exercise of trade, products are exported from places where they are low in value, like oranges in Florida, to places where they are higher in value like New York. Thus, in the natural order of trade, every country gets a greater value than they give. In order for every country give a greater value than they receive, we would have to send products from places where they are dear, like oranges in New York, to places where they are cheap, like Florida. If what is called "a favorable balance of trade" resulted in prosperity, a country would be most prosperous when it exported everything and imported nothing!

Imports and exports are correlative. Each is the cause and compliment of the other. No one trades unless it is profitable. And of course people take credits from one country and buy things from a third country. But none the less, deficits crop up.

In 1996 The US exported to Canada $133 billion worth of products, and imported from Canada 157 billion worth of products: a $24 billion trade deficit.

The US exported to Japan $68 billion worth of products, and imported from Japan $115 billion worth of products: a $47 billion trade deficit.

The US exported to China $12 billion worth of products, and imported from China $51 billion worth of products: a $39 billion trade deficit.

The US Exported a total of $764 billion worth of products, and Imported a total of $947 billion worth of products: a $183 billion Trade Deficit.

In 1999 the Trade Deficit is expected to reach $218 billion.

How do we explain it? Can you spend American money in other countries? Through a mechanism in which domestic banks maintain accounts in foreign banks, different currencies are exchanged. Although the cash money never leaves its country of issue, its purchasing power becomes available from a bank in another country -- credited in that country's respective currency. If more dollars are requested by Japanese people than yen is requested by Americans, then the rate of exchange adjusts until the requests for yen and dollars are equal.

Although the natural tendency is for every country to get a greater value than they give, there are two primary ways in which the value of exports can exceed the value of imports. The first way is for people to make foreign investments, which would certainly include the accumulation of credits in foreign banks. Or, let's say, a Japanese company sends cars to the US Instead of selling them, buying other products and taking them back to Japan, they invest the money in stocks, bonds, real estate or they buy some land and pay to have a car factory built in the United States. There was definitely an equal trade, but since they didn't take what they bought back to Japan, it doesn't count as a Japanese Import. Thus Japanese Exports could exceed Japanese Imports.

The second way is for people to take profits from previous foreign investments. The British might be a good example. They paid for building, and owned many of the early American railroads. When ever the products which go to Britain represent profits from an investment in a previous year, they increase US Exports without increasing US Imports, a so-called "Favorable Balance of trade", even though they diminish the total wealth of the country.

If we looked at the balance of trade for each year since they began keeping records -- adding the surpluses, subtracting the deficits, where would we stand today -- surplus or deficit?

For 30 years the US exported more than it imported. For 20 years the US imported more than it exported. If you're interested, you might try to figure out how much of the current "Trade Deficit" resulted from foreign investment, and how much resulted from profits on previous American investments in other countries.

The imbalances generates by trade deficits and surpluses is only one of the things that influences the value of a nation's currency. In fact, at any given moment the amount of US currency being traded on international currency markets far exceeds the amount in circulation within the country.

Sometimes business people from other countries, who have sold products in the US, will leave the money they received in a bank within the US until they are ready to buy something with it. American banks, with low rates of inflation and good rates of interest, are a good risk. And business people in most other countries will accept American money in a US bank account as payment. Again, they don't get the paper money, they get a credit which they can deposit in a US bank account.

The more foreign products are sold in the United States, with the money being deposited in US banks, the more it increases US Imports, without also increasing US Exports. And should the rest of the world adopt US currency for all their transactions, which is nearly impossible, it would correspond to an enormous increase in US Imports. In other words: US money and financial services is a huge and growing export! And it adds to the deficits, year after year, in the international trade of goods.

If a person in Japan bought a barrel of oil from a person in Kuwait, and paid for it with a check on a US bank, it would not count as an Export. However, if the person in Kuwait, buys a US made weapon with the same money, because a product leaves the country, it would be counted as a US Export.

If we stopped imports entirely, there are some exports that would continue to leave the country. They would be equal to US dollars spent by Americans in other countries -- tourists, Military personal, etc.; They would represent property passing by gift or inheritance; and the returns from bonds, stocks and real estate owned by people in other countries. (interest and land rent.)

"In the commerce which goes on between the United States and Europe there are thus other elements than the exchange of productions. The sums borrowed of Europe by the sale of railway and other bonds, the sums paid by Europeans for land in the United States or invested in industrial enterprises here, capital brought by immigrants, what is spent by Europeans traveling here, and some small amounts of the nature of gifts, legacies, and successions tend to swell our imports or reduce our exports.

On the other hand, not only do we pay in exports to Europe for our imports from Brazil, India, and such countries, but interest on bonds and other obligations, profits on capital invested here, rent for American land owned abroad, remittances from immigrants to relatives at home, property passing by will or inheritance to people abroad, payments for ocean transportation formerly carried on by our own vessels but now carried on by foreign vessels, the sums spent by American tourists who every year visit Europe, and by the increasing number of rich Americans who live in Europe, all contribute to swell our exports and reduce our imports.

The annual balance against us on these accounts is already very large and is steadily growing larger. Were we to prevent importations absolutely we should still have to export largely in order to pay our rents, to meet interest, and to provide for the increasing number of rich Americans who travel or reside abroad. But the fact that our exports must now thus exceed our imports instead of being what protectionists take it for, an evidence of increasing prosperity, is simply the evidence of a drain upon national wealth like that which has so impoverished Ireland." -- Henry George, 1886.

Some of those exports which result from previous investments, are compensation for an increase in productivity. They yield a net gain to the national economy, and some of them represent a drain. Productive investment vs. monopoly profit. Suppose the interest on bonds which built part of the Interstate Highway system amounted to $200 billion a year, but the same part of the highway system increased the Gross Domestic Product of the United States by $400 billion a year. Would this drain the national wealth? By contrast, suppose that foreigners purchased mineral land out west. Would their profits from the lease to an extracting company be anything but a drain on the national wealth? Remember, the money buys products which are taken to another country.

Under Imperialism, each empire takes far more from its subordinate countries then it gives in exchange, Although this is brought about by military force, would the result be any different if all the land in the subordinate country was simply purchased by foreigners? Does it make any difference if the person who owns the land on which you work and live is a citizen or resident of the same country? You produce and he consumes.

Wages, which is what we're really talking about, are determined by competition in the labor market, yet the aim of protection is to lessen competition in the in the goods market. Do protected industries share their increased profits with their workers? Wages in protected industries are no higher than in non-protected industries, except those with strong unions. Only lessened competition in the labor market will increase wages.

It is clear that protection reduces the results of labor, and that free trade increases the results of labor, and permits an increase of wages.

However, do people who advocate free trade, explain how "free trade" will raise wages, or how it will raise production? Think about the Clinton administration and the conservative think tank spokesman. What they explain is how it will raise production. It's assumed that increased production will naturally raise wages.

To raise the general level of wages, at what level must we begin, The highest paid, or the lowest paid workers?

What determines wages? Today there's no frontier like there was 100 and some years ago. What determines the general rate of wages now: how much the workers produce, or Minimum wage laws and labor unions etc.? Clearly, workers are much more productive now than ever before. So the determinant of wages must be the workers' bargaining power: their alternatives.

The degree to which the people of one nation are permitted to trade with the people of other nations cannot in the long run alter the number of jobs or the level of wages. The number of jobs is determined by the amount of land available for production. While the general rate of wages, in the absence of a free land alternative, is determined by the political process -- minimum wage laws, labor unions, etc., not productivity.

All right! Who Profits From Protection? So far we have seen that neither Protection or Free Trade can raise wages, but someone must benefit from tariffs and quotas.

If the tariff increases the price of cars in America, will other American companies invest in the production of cars? If they do, and therefore more cars are put on the market, what will happen to the price of cars? Of course it will fall. So, can the protected profits in any domestic industry, open to domestic competition, be any higher than any other domestic industry? Risk being equal, investment always flows in the direction of the highest return.

Although the profits from producing a protected product may be no higher, protected products may still cost more if the domestic producers are less efficient, or the cost of their materials are higher. (Higher cost of production.)

If the tariff is raised on foreign steel, what will happen to the demand for, the price and the production of, land containing iron ore? (copper, zinc etc.) The price will increase, as long as it doesn't diminish equally the demand for iron to be used in export products. But, no one can produce a natural resource. The same thing applies to any monopoly.

Let's say that we put a tariff on German steel that was exchanged for American wheat. As Americans make more steel, the rent of land that contains iron ore increases. But since they traded wheat for steel, they now grow less wheat and the rent of land that grows wheat decreases. However, since Americans grew wheat more efficiently than they made steel, the total production of the country is diminished.

The less a nation imports, the less it exports. In general, tariffs increase the domestic demand for natural resources used in protected products, and increase the profits of their owners. By also diminishing exports, they reduce the demand for natural resources embodied in exports, and reduce their respective profits. What one group of land owners gains from reducing imports, another group of land owners looses from a corresponding reduction in the demand for exports. However, by impeding trade, both countries give up some portion of the natural, cultural and scientific advantages possessed by the other country. That is to say: The total production of the country falls.

Can wages, in terms of what you can buy, go any lower without the voters demanding an increase in the Minimum Wage? Can interest go any lower without a shortage of capital -- tools, machines, inventories,-- which would reduce production?

Is there any free land? Labor and capital have no way to employ themselves, and therefore wages and interest already tend to a bare minimum, below which the least productive workers would weaken, and the superior workers would have less incentive, so productivity would fall. Of course this is superseded, to some extent, by the minimum wage and other government programs. Nonetheless, if wages and interest fall, productivity tends to falls with it.

With a fixed supply of money, if protection raises the price of necessities, and therefore wages and interest, in terms of money, something else has to fall in value. And that something is the rental value of land.

Unfortunately, even if the rental value of land falls, the selling price does not always fall with it. Those who have land for sale are not quick to lower their price. Many will even try to wait out a recession. Some people think this is what happened with the Smoot-Hawley Tariff Act in 1930.

To reiterate: wages of the least demanded workers tend toward a bare subsistence, and involuntary unemployment is created by the fact that land is withheld from production. If wages and interest are already as low as they can go, protection simply lowers productivity and, therefore, in the long run, rent. (although it may effect political decisions, Min. Wage, etc.)

Of course a country can benefit from free trade without waiting for other countries to adopt the same policy. A country that adopted free trade would simply be allowing its citizens the freedom to trade advantageously. They would thus increase their total productions, and therefore the potential to satisfy their desires.

However, in the long run, Free Trade will only increase production, and therefore the profits of land owners.

Although both NAFTA and GATT have thousands of pages of regulation and interpretation (which free trade does not require!), in 1999 the US has very minor restrictions on imports, far less than at any time in the past. And while productivity is at an all-time high, the primary beneficiaries have been corporate America -- the owners of land and other monopolies. The general increase in wages has been a very small fraction of the general increase in productivity. And some of that has undoubtedly come from the most recent increase in the minimum wage.

While tariffs and quotas diminish production without any benefit to the American workers, the principle of free trade does not in any way prohibit the restriction of imported products that are harmful to consumers, the environment or the workers who produced them.

How do we create a job for every worker, and raise their wages until they're equal to the full value that they've produced? Only after there is free land, which results from an end to land speculation, can Free Trade raise wages and interest.

When you look around at the 50% of the land in the US that's designated for private use. It is all owned by someone -- but there's an enormous amount that's unused or grossly underused. It is held because its owners expect its value to increase.

If we started by thinking of land as a natural opportunity -- a common asset -- assigned to individuals and corporations for the purpose securing the product to the producer. Of course no one would plant a crop or build a house, much less a modern factory, if they couldn't lock the door or put up a fence. But, if they paid to the community, the annual rent for the land, they held, they would be satisfying everyone else's equal right to the same piece land. To horde land that you are only renting, would be like getting a rental car for the weekend, and parking it in your back yard.

There would be nothing to gain by holding the land idle, and every incentive to work and produce. We would redevelop our cities and the surrounding suburbs. We could relieve the farm land from development pressure and the wilderness from being cleared for agriculture. At this point much of the land, though having a productive potential, would have no value because it would be in abundance.

At present, most taxes are based on domestic trade. Labor is exchanged for money; it is taxed. Money is exchanged for a product of labor, the value of the product and or the profit which results from the transaction is taxed.

With a land value tax we could eliminate all others and enjoy what Henry George called True Free Trade. All people would have free and equal access to marginal land, while the superior land would rented to those who would pay to the community its rental value.

From then on all increases in production would raise wages and interest, and would increase rent, which is the social fund, out of which all people would share in social benefits or cash dividends.