Markets

In Defense of Free Trade

Wall Street sign in the Financial District
Credit: Brendan McDermid / Reuters - stock.adobe.com

Free trade is under threat right now. That, though, is nothing new. Ever since Adam Smith published “The Wealth of Nations” in 1776 the idea that countries are better served by free trade than protective tariffs has been controversial and has frequently been challenged. The problem that the proponents of protectionism face, of course, is that other than to aide small, developing economies, it has never worked as intended. Once a nation’s economy gets beyond a certain size, competition is a good thing. That was the notion on which America was partly founded (think Boston Tea Party) and as a rule, the US has championed that idea since its inception.

However, we are in an election year in America in which the candidates representing the major parties both seem to be embracing the protectionist ideas of a century or so ago rather than the more recent consensus view that free trade between nations is a good thing. That presumably makes political sense, but economically it is a race to the bottom in which everybody eventually will lose, and which could have devastating effects if taken too far. Selective tariffs designed to keep industries with national security implications onshore can be justified, but there is an argument that suggests that anything other than that is counterproductive at best.

Economic historians don’t believe that, say the Smoot-Hawley tariffs imposed by the US in 1930 caused the depression, but the contraction in global trade that followed them certainly didn’t help and most likely made the Great Depression longer and more severe than it might otherwise have been. There is a bit of a chicken and egg situation here, however. The beginning of many recessions has roughly coincided with the imposition of tariffs and trade wars around the world, but are those measures the cause of the problems or a response to them? We cannot know for sure, but logically, vigorous exports and access to cheap imported products for consumers create a better situation than restrictions.

The problem is that although, if pressed, most people would probably agree that free trade is logically the way forward, calling for or actually imposing tariffs can better satisfy immediate concerns and expediency. People’s opinions on the subject can therefore change quite rapidly based on their own situation at any given time.

That is why someone like Elon Musk can shift in just four months from being in favor of tariffs to protect America EV manufacturers to opposed to them. Yesterday, he said, “Things that inhibit freedom of exchange or distort the market are not good" and “I’m in favor of no tariffs”, after saying of Chinese car manufacturers in January that "If there are no trade barriers established, they will pretty much demolish most other car companies in the world”. Musk’s conversion is probably to do with who is proposing the tariffs domestically and how his relationship with the Chinese leadership is fairing rather than any sense of what is or isn’t “good”, but it shows how people’s views on the subject are rarely based on any actual analysis.

Instead, it is based on the economic equivalent of nimbyism. They are represented as something that is a good idea for everybody else, but not for us and their imposition as simply self-defense against some loosely defined “other”. That is politically useful, if somewhat intellectually dishonest, and politics is what matters when it comes to most economic policies.

Both major American political parties have at various times in the past favored protectionist policies, but the most recent period when they both pursued free trade, the 1980s and 90s, was followed some of the most spectacular growth and wealth creation in history. I am sure that Donald Trump and Joe Biden would tell you that that is a coincidence, or that times are different now, or whatever, but I would rather trust the evidence and logic than the words of any politician.

It is actually quite remarkable to me, an Englishman, that I feel the need to write in defense of free trade for an American audience, but that is where we are at. Free trade is out of favor right now, and as the election draws closer, we will presumably see the candidates competing to see who can come up with the most tough-sounding protectionist policies. That, though, is a dangerous path down which to tread, and investors and others who would like to see growth should let their voices in opposition to those policies be heard. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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