What is Free Trade

Author: Fredric Bastiat

What is Free Trade

Author: Frederic Bastiat

Tags: #Book #Economics #Bastiat #Libertarian #FreeTrade

Table of Contents

Review

  • “What is Free Trade” is an excellent primer to understand the obvious merits of Free Trade and a liberal world order. Fredric Bastiat takes apart, piece by piece, the arguments that impede free trade and promote protective tariffs. He explored multiple arguments and reasoning that are employed to justify the illiberal practices.
  • Using extensive examples, he educates us about the harm that we do to ourselves when we decide to isolate ourselves from the world and create artificial barriers to trade. The argument is simple, and one that I find echoed by many classical economists in general – If an economic idea seems to magically solve a problem, you’re not looking at the bigger picture. Expand the people you’re focusing on and/or look at the long-term effects.
  • For example, we are told that we should save our industries by impeding foreign trade, but when we are faced with the same tariffs abroad, we should subsidize our industries. Reasoning like this, as you can see, focuses solely on the industry at the cost of everyone else.
  • If helping industries is the mission, a better idea is to let go of all restrictions and as other nations to do the same – which is what the free trade agreements around the world intend to do. The same effect can in fact be achieved if no nation impedes trade, then there would be no need for lengthy negotiations, compromises, excessive bureaucracy. But alas!
  • The compact book is filled with insights like these and the language is very simple to grasp. Modern readers might find some of the examples a bit archaic and I do feel that at times the author is playing the role more suited to an advocate and a cheerleader of a particular though and this makes you suspicious of the near perfect assumptions that according to Bastiat would spread were we to whole heartedly accept his arguments.
  • But having said this, I can’t disagree with the author on almost any of his facts or logic behind them. This book is not necessarily a culmination or a final stop in exploring the liberal economics, in fact it has served more like a ticket to further adventures. I hope to encounter more guides like Fredric Bastiat and read more books like this one.

Chapter 01 - Plenty & Scarcity

  • Bastiat argues that for any goods in a society there are two states of existence – Plenty & Scarcity. Plenty fetches a great price for the consumers while Scarcity aids the producers as it drives the cost. But while countries may be tempted to impede free trade and cause artificial scarcity to help their producers, they should ideally stay neutral. At the very least consumers outnumber the producers and even if that is not a sufficiently convincing, one can’t deny the fact that even producers consume raw material.
  • On the loss of foreign exchange Bastiat argues that one doesn’t feed on coins, rather on food. So, it’s better to have more food than money. On the concern that dependence during war may be a source of vulnerability, he points out that war is a distant possibility and in case of a war, at least we’ll have the desired commodity till it’s available and when it’s not we shall produce it, even at great pain, which we would have otherwise avoided.
  • We can’t manufacture our own bolts because we may someday or the other have a quarrel with our iron monger.

Chapter 02 – Obstacles to wealth and causes of wealth

  • All trade is based on the fact that humans are destitute by nature and want happiness. The path from destitute to happiness is filled with obstacles and each obstacle is a potential profession.
  • Now Government may be tempted to create obstacles to create more “jobs”, but this is a very negative view of the world. Government and societies should try to remove these easier and unnecessary obstacles so that men may be freed to solve greater obstacles as the obstacles are endless.
  • “Labor is never without [[employment]]. If one obstacle is removed, it seizes another, and mankind is delivered from two obstacles by the same effort which was at first necessary for one.”

Chapter 03 – Effort – Result

  • Bastiat wishes to question the prosperity and riches of a society using the variables of production – “Effort” and “Results”.
  • He proposes that there are two thoughts: Sisyphusism which aims to maximize efforts needed for some result (Sysyphus was condemned to push a rolling stone uphill, so as to render his efforts result less), and the normal pragmatic approach of a human to reduce the effort and boost the result.
  • He argues that trade barriers make an economy less productive needing more efforts to produce a result that can be produced with lesser effort (if imported), freeing up the labor to focus on other strengths of the economy. He maintains that no man tries to increase his work needed to get a certain result and that the politician who votes to increase the effort needed for a certain nature is going against his personal nature of reducing work, when he advocates the opposite of his personal values for the nation.

Chapter 04 – Equalizing of the Facilities of Production

  • Next Bastiat takes up a number of arguments in favor of protectionism and starts busting them He explain that even if a hypothetical state A exports most of its produce (due to better labor, capital etc.) and B ends up consuming most of it, A would eventually lose the advantage as the excess money coming in as result of the trade would lead to inflation in A taking away it’s comparative advantage, while the scarcity of cash in B, due to flow of funds to pay for exports would reduce its inflation and also its demand for goods until eventually an equilibrium is established.
  • He also insists that protectionism does not level the playing field by helping the producer, rather it hurts the consumer and is a tax on sale. If an orange produced in India for a cent, competing against an American Orange costing one dollar, is subject to import tax leveling it to one dollar for the consumers of new York, the result is that the Indian orange is being produced at the same rate (1 cent for 1 orange) while the consumer is paying for 100 oranges, to get one Orange. The Import Duty thus hurts, the consumer and helps no one. One the other hand, free trade ensures that consumer, who is the center piece of the Industrial economy (which is based on consumption) enjoys the benefits of a product produced in the warm sun of India and hence is better off.
  • Free Trade also helps us shake off the disadvantages that nature may have bestowed upon or, the disadvantage that our producers may be enduring in face of innovation led commerce. When Gutenberg invented the printed press the prices for Books fell, first in his hometown and country and subsequently, all around the world. “Everyone is better off when you trade” and “Competition is a great Equalizer”
  • Moreover, when we pay for a commodity, we are not really paying for what the nature has contributed to it, but for the human effort (labor). The nature benefits everyone (in a geography) equally, so if someone is able to produce more with less, they get paid for their effort not for their advantage, as their advantage can always be undercut by someone else.
  • Moreover, when someone innovates to reduce effort, he makes money in the short run, for his innovation, which by the way is again a result of his effort; but in the long run, everyone benefits from his innovation and people again get paid for their efforts and not their tools. Thus, innovation and higher productivity always help the consumer and should help the consumer.
  • By imposition protectionist measures we are revolting against the nature, as we aim to reward everyone equally irrespective of their efforts or advantages. Apples are grown in cold climate with less effort and thus should be grown there only. By dreaming of equalizing production of apples in cold and warm climates we are going against the nature as well as the logic of economics.

Chapter 05 – Our Productions are Overloaded with Internal Taxes

  • IN this chapter Bastiat takes up the argument that Protectionist measures are necessary for a nation if its internal industries are burdened by taxes and hence cannot sell its produce as cheaply as the foreign producer.
  • Bastiat argues that this is a circular logic, because we are taxing people for the administrative costs of running a state (i.e. maintaining its army, navy etc.) and then when some industries cannot stay bear the burden of the taxes, we tax others to compensate for them.
  • If we were to take this analogy further, every industry would start demanding protectionist premium to save itself from the taxes. This premium comes in the form of taxes on others (including, most importantly, the consumer) and hence eventually, we will have to tax everyone more to help an ever-increasing list of industries who can’t afford to stay competitive at the given tax rate.
  • Also, eventually, all taxes are to be paid by the consumer who has to take up the burden, that the state has imposed on its citizens and industries. We would thus be better off, if rather than imposing [[tariffs]] the state opens up the borders and allows foreign goods in, which would have to pay taxes and hence contribute to our taxes, thereby reducing the burden on our citizen.

Chapter 06 – Balance of Trade

  • Looking at [[Trade]] purely in terms of Balance of Trade by factoring in imports and exports is deeply troubling. When looked at from an account’s perspective, the theory does not hold water. Imagine for example that a person exports goods worth a million (1,000,000) to another nation, makes a profit of 10%, (100,000), buys goods worth 1,100,000 and returns to the country. In this case the imports were 100,000 more than the exports and this, if one goes by balance of trade theory, means that the nation lost 100,000 of wealth due to trade imbalance.
  • However, as we see that the nation actually gained 100,000 rather than losing it. Looking at balance of trade in these terms as something highly desirable over imbalance is not just incorrect it is not even factually incorrect.

Chapter 07 – A Petition

  • Written with a satirical bent, the candle makers association pray that the Londoners have a prosperous candle and oil industry but US lacks the same since sun provides the energy to the consumers of US. Therefore, the sun may be banned, by closing all windows and doors, so that the American candle makers have the same conditions as the Britishers.
  • If the consumer can duty for the Portuguese oranges to equalize the amount required for buying the orange from American/Portuguese source, the same help should be provided for candle producers that is extended to the orange or iron producers.

Chapter 08 – Discriminating Duties

  • A farmer has an option to sell his produce to a fellow countryman who offers him 15 units of lace as payment while a foreigner offers him 20 units lace as payment as they can produce it cheaper. But due to the duties involved, the price of foreign lace is jacked up and the farmer is forced to take as payment just 15 units of lace, when he could instead have had 20.
  • The duties thus hurt the consumer and have a real human cost.

Chapter 09 – A Wonderful Discovery

  • Prices of an object transported from a source to the destination involve its intrinsic cost, the cost of transporting it and the customs that we levy on the movement of goods. The price thus involves three components, the cost of producing it (the basic price), the cost of overcoming the obstacle between source and destination (the cost of transportation) and the artificial obstacle (the duty imposed).
  • Next what we do is to invest money in building better modes of transportation between the source and destination. This means that if the earlier breakdown of a unit of goods was $20 (original price), $10 (transportation charges) and $10 (duties). We then invest millions of dollars to improve transportation so that the transportation costs are reduced by $5 and we have now successfully reduced the total prices from $40 to $35.
  • But what if rather than investing money in improving transportation, we had simply reduced the duty by $5. We would have had same effect and without investing a single dollar.

    • Note:

    • But what about the benefits that the road would bring. If duties were reduced the costs of goods might have been the same but there would be no better roadways. The roadways that might now be used by others, common people for instance. So, while the consumers of the products on which duty was levied bore the brunt of the increased prices, the benefits of better roads are enjoyed by all.
    • Although this a counter point could be made that this ‘improvement’ comes at an environmental cost and is thus not necessarily something to be cheered for.

Chapter 10 – Reciprocity

  • The chapter deals with the topic of Free Trade Agreements. The author points our that once protectionists have their way, the society notices that it is incurring a loss and then efforts are made to get rid of the obstacles mutually and yet partially.
  • An argument can be made that even if the other party has put up restrictions to hurt our exports, we should get rid of the barriers because in doing so we are going to ease the burden on our consumers.
  • But jingoistic sentiments take our and this might be seen as helping the other party, so we continue, to build better roads and then to put obstacles in the path.

Chapter 11 – Absolute Prices

  • “If we wish to judge between freedom of trade and protection, to calculate the probable effect of any political phenomenon, we should notice how far its influence tends to the production of abundance or scarcity, and not simply of cheapness or dearness of price.”
  • The idea being debated here is that it is argue that because protectionism raises prices, this should benefit everyone in the society since increased prices would lead to inflation and hence everyone will need more money to buy the same things and we’ll be prosperous.
  • A similar argument is that if we have fifty million worth of a commodity and we need all of it in a country, by exporting fifteen million of it we would have created a shortage and the prices of remaining thirty-five million worth of goods will increase to fifty million due to the scarcity. Thus, the nation would be richer by fifteen million
  • The author however proposes that looking at nominal prices and patting your back on that is extremely stupid. By augmenting the same logic, if we burn half of our produce and then the remaining half is dearer, does this mean that we have not lost anything?
  • A nation is rich when it is abundant, not when it has to pay a higher price for commodities. Besides, an increase in prices hurts the poor more because now they either have to consume less or consume inferior.

Chapter 12 – Does Protection raise the Rate of Wages?

  • Argument is made that since protectionism raises the costs, it will also increase wages. Since goods produced involves people in the society, the benefit that producers get due to production will be passed on to everyone since everyone is part of the production supply chain somehow.
  • This is a very badly thought of argument because it aims to increase prices and then compensate the worker from the increased prices, which by the way affect them as well.
  • Secondly, when we try to ignore competitive advantage and instead try to do everything on our own rather than trading, we are not better off because rather than focusing on a few things and excelling at them, we focus on a greater number of things and our effort and resources are dividing, thereby leading us to do a larger number of things badly.
  • A more profound impact of this is on the workers and on the poorer sections of the society. Rather than enjoy the fruits of others’ expertise, they have to make do with less and the inferior. They don’t get a globally competitive product, they get the best of what could be produced in the country.
  • Thus, protectionism is not a benevolent move aimed at helping the poor, it’s a dangerous experiment that hurts the poor the most while giving an illusion of working for them.

Chapter 13 – Theory and Practice

  • Protectionists make an argument that despite Free Trade being theoretically sound and logical, it need not be implemented since Protectionist policies have been working since a long time and systems based on it seem to be working.
  • The argument is that even though logically inconsistent, protectionism is acceptable (at governmental and state level). The accept the theoretical superiority of the Free Trade argument but rely on the limited experience to justify the protectionism.
  • They refer to the mercantile system that came up in the past and is limping along. The take its labored existence as sufficient proof for justifying its existence.

Chapter 14 – Conflict of Principles

  • Here the author raises the point that protectionism is at odds with the moral principles that we as society espouse and cherish. Protectionism, under the theory of “Balance of Trade” assumes that imports hurt and impoverish the nation, while exports enrich us.
  • However, this would mean that if a citizen of our nation wants and needs something that we can’t produce, we have to deny him the right to get that object. Nation trumps over utility and liberty.
  • Similarly, if we wish to enrich ourselves, we have to force the people of other countries to accept our products even when we don’t accept theirs. This colonial logic ensures that world peace and our desire for enriching ourselves are at odds.
  • Therefore, advocates of protectionism are effectually saying that the liberal ideas of liberty, justice, peace that are a bedrock of modern civilization are incompatible and this a very grave charge to make.

Chapter 15 – Reciprocity Again

  • Now the concern is how would a nation manage that its imports and exports are equal, and that it imports as much from any country as it exports to it.
  • To it the author maintains that this level of micro-management is necessary. He gives an example of a hypothetical system where every individual can trade freely with anyone in the world. In this case, he produces goods worth some X dollars, which enter the global market, and on receiving the compensation for his goods, he withdraws the money from the system of equivalent value for himself (which he will use to buy later on).
  • Similarly, if all nations trade freely, it would not, and should not matter if two countries trade equally. They can have a trade imbalance (like individuals in a society do) but the system on a whole is balanced during each transaction.
  • To the concern that some party may choose to only sell and not buy anything, the author retorts that in such a case that party is effectively forcing itself into exile.

Chapter 16 – Obstructed Rivers plead for the Prohibitionists

  • Spain and Portugal were considering improving a river that flew from Portugal to Spain. Spaniards decided to impose tariffs to counter the advantage that Portuguese products would get. The Portuguese decided to do the same.
  • Then someone on the Portuguese side objected that if improvements in the river flow meant that they’d now have to pay for inspectors to check goods coming into Portugal, why invest to improve the river at all.
  • [[Tariffs]] imported by one country, help protectionists (read “enemies of our exports”) in other countries.

Chapter 17 – A Negative Railroad

  • If unnecessary stops are added to a rail route so that business in those places improves (thereby helping laborer's and other producers of goods and services) while hurting the consumers (for whom the travel slows down), the argument can be extended to say that what we intend to build are a series of stops and hence the consumers’ interest (of reaching the destination quickly and cheaply) are hurt.
  • The railroad therefore rather than improving the transport is ruining it with the fees and charges that each stop my charge (in terms of time/money etc.)

Chapter 18 – There are no Absolute Principles

  • It is argued that there are no absolute prices and thus steps need to be taken to regularizes the advantages that a foreigner may have. To do this office of customs are setup which take up a gigantic task to try and figure out the correct prices, since the absolute prices do not exist (and thus have to be interpreted locally).
  • The author argues that by accepting the above provision we accept that the universal principles of absolute principle are also not true. That the freedom and free will that people are bestowed with are not true and thus provisions have to be made to chalk up a system that takes into factor all the variables and calculates the prices that one should be.
  • But if this sounds absurd inside a nation, in trade between cities and states, why is it not called out as absurd and unnecessary when employed by nations. Any trade, when executed between two nations has the accompanying charges (of transportation, facilitation, packaging etc.) that internal products don’t have to and thus there is no correction to be made – it is already built in the system.

Chapter 19 – National Independence

  • It is said that trading with other nations makes us dependent on their produce and that during a war this can be a source of vulnerability. But then for nations, just like individuals, the dependence is mutual. They both depend on each other and that’s why they trade.
  • Free Trade is thus not just good for business, it is good for national security. By hampering trade, we are not just hurting out interests, we are isolating ourselves, making war more acceptable and more real.
  • Moreover, we should accept and celebrate that the world is run by Intest and to deny this is to be evil. When we acknowledge that we have interests and so do other nations, we can work todays fulfilling these interests through Trade and this can be a basis for world peace. By halting free trade, we are effectively hindering the interests of others, thereby paving the way for conflicts with them.

Chapter 20 – Human Labor – National Labor

  • If one were to examine closely the effect of Foreign products in our markets as well as the advent of Machines in our own industries is the same. It saves the Human labor and in the words of protectionists, hurts the National Labor i.e. the total employed workers.
  • This those protesting one should protest the other as well, since the effect is the same. Consumers save the money that the improved efficiency brings in and the labor gets displaced. In case both the phenomena are not equally protested by the opponents of Free Trade, they are hypocrites who intent to favor an interest group, an industrialist perhaps, and do not generally care about the bigger picture as they claim.
  • Also, when Trade is liberalized and displacement of labor occurs, the blame for the suffering falls not on the liberalization which is just restoring the normal order of displacement of labor from less productive to more productive sectors, but on the protectionists policies which had helped keep the workers in unproductive sections of the economy.

Chapter 21 – Raw Material

  • It is argued that raw materials should be taxed lower than processed goods since they represent lower human labor and the aim of duties is to punish foreign labor to aid the national labor. But the hole in the argument is that the value of a goods is derived from the labor that it represents.
  • Therefore, even though the raw materials are priced low than processed goods, it does not represent a total lack of effort or labor. Such designs to introduce differential duties are not just as harmful as the protectionist ideas, they are evil as their end goal is to contribute to monopolies.

Chapter 22 – Metaphors

  • The author warns against the use and misuse of metaphors. Metaphors like “invasion” and “tribute” are used to describe foreign products that we willingly pay for while buying and the money that we pay respectively.
  • These metaphors paint an image in our minds that’s not accurate and these tropes cloud our judgment and we fail to see past the reason.

Chapter 23 – Conclusion

  • The author recounts why he had to counter all the sophism even though most of the time he was using the same logic. The protectionists, use faulty logic and have created an entire universe out of it, consisting of national identity, wages, tariffs, balance of trade etc. The answer to these is a simple logic that emphasis the values of liberty, but it has to be applied to all the cases to demonstrate that it’s all based on the same lie.
  • He insists that the liberal values of a free world are not at odds with our security or peace. We can have progress in compensation as well as technology. We can trade will other countries and still be better off. In fact these ideas go hand in hand and not the other way.

DISCLAIMER:

These notes are based on my reading of the book and were originally for meant for my personal use only. As such there may inadvertently contain any biases or errors. I'd be grateful if you point out errors (if any) as well as discuss any point that you may not agree with.

Just to be absolutely sure, please note that I have not proof-read these notes, but simply copied them verbatim from my notes app to cut down the time taken. At the time of writing these notes were purely for personal consumption and/or further enquiry. So if you find any sentence/reference/comment to be offensive, please contact me first before "calling me out". I'll remove it if I agree with you or at the very least will try to make my case

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