Trade restraint begins at home, to protect big business

U.S. Chamber of Commerce proposals in 1934 show that trade restraint begins at home[1:113-114]

Trade restraint was a response to innovators

…starting with the early 1900s and continuing through the 1920s, American business underwent quite radical changes in the development of major new industries and new methods of manufacture and product distribution.[1:16]

…Schumpeter concluded that price competition is not the most significant factor to which firms have to respond. In his view, “it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization… competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” [1:17]

Trade restraint was pilot-tested during World War I

Businessmen, recalling the managed harmony of the war years, confronted the intensely competitive 1920s with hopes of realizing a more durable and predictable setting in which to conduct business. Firms that viewed the processes of change as threats to their positions began organizing resistance.[1:18]

The systemwide benefits of maintaining openness in competition—with no legal restrictions on freedom of entry into the marketplace or on the terms and conditions for which parties could contract with one another—were being rejected by business organizations more concerned with the survival of individual firms and industries.[1:18]

As a consequence, business leaders expressed an increasing desire for the maintenance of conditions of equilibrium that would help preserve the positions of existing firms.[1:16]

Trade restraint moved big business from competing economically to competing politically

One finds industry leaders and trade groups railing constantly against the “price cutter,” the “cutthroat” competitor, and the entrepreneurial interloper who dared to “invade the territory” of an established competitor. Such efforts invariably began with voluntary methods of “self-restraint.” When voluntary approaches failed to produce the desired stability, many businessmen—mindful of the advantages experienced under the War Industries Board—sought to effectuate this spirit of “cooperation” through politically backed programs designed to fashion a greater degree of centralized business decision-making. Characterizing their proposals as “industrial self-regulation,” business spokesmen and trade associations worked to secure for themselves a diluted competitive environment that would not be threatening to their interests. Such political efforts to control trade practices led, ultimately, to the enactment of the National Industrial Recovery Act…[1:19] The purpose of such legislation… was to repress and stabilize competitive conditions-to ossify industries and restrain those influences that represented the threat of change.[1:121]

[I]ndustrial concentration is not the inevitable outgrowth of economic and technical forces, nor the product of spontaneous generation or natural selection. In this era of big government, concentration is often the result of unwise, manmade, discriminatory, privilege-creating governmental action. Defense contracts, R and D support, patent policy, tax privileges, stockpiling arrangements, tariffs and quotas, subsidies, etc., have far from a neutral effect on our industrial structure. In all these institutional arrangements, government plays a crucial, if not decisive, role. Government, working through and in alliance with “private enterprise,” becomes the keystone in an edifice of neomercantilism and industrial feudalism. In the process, the institutional fabric of society is transformed from economic capitalism to political capitalism.[1:212]

  1. Shaffer, Butler D. In Restraint of Trade: The Business Campaign Against Competition, 1918-1938. Bucknell University Press, 1997.


Trade strengthens plants, so people’s productivity increases and prices fall

Nonexporter plants and exporter plants vs. labor productivity, showing that trade strengthens plants

Figure 2A. When labor productivity is higher, plants export more.

Trade strengthens plants a few plants at a time and a few products at a time

…exporters are in the minority; they tend to be more productive and larger, yet they usually export only a small fraction of their output.

…of the roughly 200,000 plants in the Census, only 21 percent report exporting anything.

Even the plants that do export sell mostly at home. Around two-thirds of the exporters sell less than 10 percent of their output abroad. More than half of exports come from these plants.

Fewer than 5 percent of the exporting plants (which also account for about 5 percent of exporters’ total output) export more than 50 percent of their production.

Trade strengthens plants by leaving them larger and more productive

How can we reconcile the low level of export participation and export intensity by individual plants with the fact that 14 percent of gross U.S. manufacturing production is exported? The major reason… is that the plants that export are much bigger, shipping on average 5.6 times more than nonexporters. Even excluding their exports, plants that export ship 4.8 times as much to the U.S. market than their nonexporting counterparts.

…plants… differ substantially in measured productivity. A substantial number of plants have productivity either less than a fourth or more than four times the average.

Plants that export appear to be more productive.

…Figure 2A brings out the striking association between [productivity and export performance]. The exporters’ productivity distribution is a substantial shift to the right of the nonexporters’ distribution.

…exporters have a 33-percent advantage in labor productivity overall, and a 15-percent advantage relative to nonexporters within the same 4-digit industry.

When trade strengthens plants, prices get lower

…greater efficiency not only raises the probability of exporting, it will also likely result in a lower domestic price. Even though, as we showed above, more efficient plants tend to be further ahead of their rivals, so can charge a higher markup, these rivals, nonetheless, tend to be more efficient themselves, forcing the plant to set a lower price.

Although foreign markets are small in plants’ revenues, the international economy nonetheless plays an important role in determining which producers are in business and which are good enough to export.

Trade strengthens plants because people shift to high-productivity plants

Lower trade barriers… tend to nudge out low-productivity plants while enabling the highly productive to sell more abroad.

Even though the number of U.S. plants fall there is little net job destruction (but substantial job turnover).

Aggregate productivity rises as employment shifts from low-productivity plants driven out by import competition to high-productivity plants turning toward export markets.[1]

  1. Bernard, Andrew B., et al. “Plants and productivity in international trade.” The American Economic Review 93.4 (2003): 1268-1290.

Trade agreements are legalized plunder

Cartoon illustrates that trade agreements yield plunder by getting the government. involved.

The proper function of government is to protect life, liberty, property and contract rights… …the real reason why totally free and unrestricted trade is good is because it is the only trade policy that does not violate individual rights. …a proper position to take is that a trade policy should be implemented or adopted if it does not violate anyone’s rights.

When government goes beyond… basic functions of protecting life, liberty and property, it becomes a redistributive state. In order to give something to some individuals or groups, it must first take something from others because governments have no resources of their own. Frederic Bastiat… had the following view of what determines whether a law is good or bad:

“See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Then abolish this law without delay, for it is not only an evil itself, but also it is a fertile source for further evils because it invites reprisals. If such a law – which may be an isolated case – is not abolished immediately, it will spread, multiply, and develop into a system.”

Such laws constitute legal plunder for Bastiat because they allow some individuals to use the force of government to rob others.

Trade laws like NAFTA, GATT and the others do the same. NAFTA, GATT and the other trade agreements that are hundreds or even thousands of pages long are not really about free trade. They are about how the plunder gained from protectionism is to be divvied up. They go into great detail describing which special interest is protected for how long. Farmers, the steel industry, the auto industry, the textile industry and countless other special interest groups all receive special deals in many of these so-called “free” trade agreements. These free trade laws have developed into the systems that Bastiat warned us about.

NAFTA, GATT and all other trade agreements are fatally flawed…

If NAFTA were a true free trade agreement, it would only require one sentence… something like this: “As of January 1, 1994, all trade exclusively involving Mexico, the United States and/or Canada will be treated the same as trade involving New Jersey and Kansas.” But NAFTA (and the numerous other trade agreements that could be named) do not have such language.

If a trade agreement would violate anyone’s contract or property rights, the policy should not be adopted.

…if an existing trade policy violates anyone’s contract or property rights, it should be abolished immediately. [2]

  1. Hughey, Jason. “When Government Steals From Us.” DebatetheState, 14 Oct. 2013, Accessed 30 Nov. 2014.
  2. McGee, Robert W. “The Fatal Flaw in NAFTA, GATT and All Other Trade Agreements.” Northwestern Journal of International Law & Business 14.3 (1994): 549-565.