No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 383 Another argument for trade restrictions is to temporarily protect “infant industries.” The basic idea is that emerging companies need temporary help to grow large enough to obtain economies of scale that would allow trade restrictions to be dropped. Often these industries are where government leaders think future consumer demand will be, and they want to posture domestic industry to capture the future market. In this case, proponents claim that future tax revenues for the industry will pay for the initial subsidization. While in theory this argument is reasonable, in practice it doesn’t seem to happen. Most infant industries never seem to grow up (such as the steel industry). Further, one must always consider the unseen. What would the resources that were used to promote an infant industry have done if allocated in the private sector? What was the opportunity cost? A third argument against free trade is so-called dumping , where a country sells its product in a foreign market below what it charges its home market, in order to capture the foreign market. The idea is that once the foreign company has put domestic production out of business it will be able to raise prices and recover its initial losses. The opponents of dumping point out that when dumping occurs, countries that don’t have a comparative advantage are producing goods that we have a comparative advantage in, so we are poorer overall as a result of dumping. This argument has some merit; however, it is very difficult to determine whether a country is being competitive or is dumping. Further, to the extent a country subsidizes its product sales to foreigners, its citizens are in effect being taxed to provide us cheap goods. Since we cannot control what other countries do, perhaps we should let their taxpayers continue to subsidize our consumption. A variant of the dumping argument is the “differing environmental/labor rules” argument. When countries have differing environmental and/or labor standards, countries with the lower standards can produce more cheaply. And to the extent that we think those standards exploit either workers or the environment, by consuming foreign products we are enabling the exploitation to continue. This is a legitimate concern. However, we must always ask, compared to what? While proponents of this concern would hope that environmental and labor standards would rise to our level, typically the alternative is worse: no production. However bad this outcome may be, by producing and becoming wealthy, the foreign country will have the resources to improve both its labor and environmental standards. It should be no surprise that it is only after people have their basic needs met that they consider luxury goods. A cleaner environment is a “luxury” good, and wealthier countries are able to afford to keep their environments clean. While environmental pollution is often viewed as a modern feature of capitalism, it is not true. Just consider how cities in earlier times handled human waste. The lesson of these arguments against free trade is not that the concerns aren’t valid. Rather, the lesson to be learned is that one must consider the “seen” as well as the “unseen” aspects of policy prescriptions. Further, one has to ask whether there may be more effective ways of dealing with the stated concern than restricting beneficial free trade. Dumping: In international trade, dumping occurs when foreign companies are subsidized by their government and therefore allowed to sell products below their costs to gain market share in foreign markets.