Cecil Bohanon and John Horowitz: Economies still thrive best operating under free trade

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Economists generally support free trade, advocating low or zero tariffs and opposing quotas or other restrictions on imports. However, most politicians and the public disagree with the economists’ consensus. Since the founding of the United States, international trade policy has been a persistent and contentious topic in American politics.

One common objection to free trade is that if the United States follows a free-trade policy, foreign nations can subsidize and protect their firms in the most lucrative markets. In other words, if other countries protect their producers, the United States must respond in kind or be stuck with industries “no one else wants.”

There are at least two problems with this free-trade critique. First, people’s understanding of the present and their ability to predict the future is limited and fallible. Economists call this the information problem. We don’t know what industries will become the most lucrative, promising or even strategic. What people take for granted about what is most valuable in the future is usually wrong.

A modern economy is very diverse. Knowledge and judgment about where profitable innovation will occur is typically specific to time, place and industry and is usually correctly surmised by only a few insiders. As Adam Smith pointed out in 1776: “What is the species of [domestic] industry which his capital can employ, and of which the produce is of greatest value, every individual it is evident, can, in his local situation, judge much better than any statesman or lawmaker can do for him.”

The second problem is the incentive problem. Private owners of capital have an incentive to maximize profits. Politicians have an incentive to be reelected. Politicians are more likely to be reelected by supporting special interests and playing to popular prejudices. Smith knew this when he stated, “The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could not be safely trusted, not only to no single person, but to no council and senate whatever, and which would nowhere be so dangerous as in the hands of man who had folly and presumption enough to fancy himself fit to exercise it.”

The typical response has always been: “But this time is different. This time, we must protect our national interests. This time, we must protect jobs.” Unfortunately, this time usually wasn’t different.•

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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

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