The Case for Unilateral Free Trade

At the present juncture, when a few years ago it was thought that the argument against the mercantilist and protectionist positions was won, and when we see a resurgence in the support for and the implementation of this positions, it is important to recognize the benefits of the free flow of goods and services into a jurisdiction, even without reciprocity. In this essay, I shall attempt to make the case for adopting Unilateral Free Trade (UFT), which I define as the absolute abolishment of all legal restrictions and tariffs to the importation of any and all goods and services into a jurisdiction, without the need for reciprocity.

As a jurisdiction is the area over which certain rules are applied to the individuals that inhabit it, the goal I shall have in mind when recommending and arguing for the adoption of a policy such as UFT in a jurisdiction, is the ultimate goal of every acting individual, i.e., the removal of felt uneasiness. In short, the purpose of UFT is to reduce poverty by generating more wealth.

Individuals trade because they are better than others at doing certain things, and other individuals are better at other things, but they don’t want to only have the things they are best at doing. The net wealth is grater if everyone does what they are relatively best at and then exchange the surplus, than if everyone tries to individually make everything they need. This is known as comparative advantage and it applies not only for individuals but also to businesses and across jurisdictions.

The protectionists argue that in order to have a robust and more successful economy, industries within a jurisdiction should not have to face the full force of external competition. It is certainly true that imposing restrictions to foreign competitors in a certain industry will benefit the domestic members of such industry. But this unfortunately does not adhere to the goal I have here outlined. The resulting effect of a protectionist policy is less overall wealth for the jurisdiction that applies it.

The actual wealth, the actual well being, does not come from a nominal amount in a bank account, but rather from the actual satisfaction of needs and wants, i.e., consumption. Let us keep in mind that for consumption to be possible, first there has to be production. When an individual works, when they produce, and they get paid, they are not really any wealthier if they do not intend to use the money for consumption at some point, that would effectively be like burning up the paycheck. The two exceptions to this are if they gain satisfaction from working or from the idea of leaving a large estate to their heirs. In any case, in a context of catallitics, purchasing power is expected in return for the effort of producing.

The same principle applies in interjurisdictional trade. Let us imagine a world with two jurisdictions: A and B. If A exports a lot to B, but does not import from B and just keeps the pieces of paper saying B owes an amount to A, while this persists, B is a lot wealthier than A because they are actually consuming the things without having to give anything real in return. This is what the mercantilists advocated for; we do have to keep in mind that when the mercantilists where strongest, the world did not deal in currency but rather in gold, i.e., real money. The difference is that gold conserved its purchasing power in the exterior, while today the units of currency lose value through inflation. But even if we are dealing in gold, the idea of keeping it inside the jurisdiction is terrible because it devalues the unit of gold within it so that the few wealth that is left is redistributed to the bearers of the incoming gold.

The protectionists are not against all imports per se, but every industry demands protection, and every protection comes at the expense of the consumer. Tariffs and regulations have the unwavering effect of taking actual and prospective wealth away from the average individual; it is not only that if the consumer wishes to continue to buy the imported product they would have to pay extra, but there is an unseen cost in that if the competition had persisted, the domestic company would find itself in a position of having to increase productivity thus driving the price further down, benefiting the average individual.

Furthermore, it has to be noted that there is a set amount of production capability in a jurisdiction at any given time. The production capability is derived from the availability of capital and may increase through a rise in productivity or the production and importation of new capital. When there is no competition, there is no incentive to be more productive or to increase the amount of capital, only to replace the used capital. As there is more protection, there is less competition, and the economy becomes more stagnant.

When there is a shift in demand from a foreign product to a domestic product because of a tariff or a regulation, this does not affect the production capability of each jurisdiction in the present. If A imposes a tariff on goods coming from B, B still has the same production capability, and even though it might have to change what it produces, it can either consume its product locally or trade it with C, depending on what is most convenient. A will have less things overall, because even though it might produce more of the product being protected, resources would have to be taken away from elsewhere. When imposing tariffs, you are not punishing the other jurisdiction, you are stabbing yourself in the leg.

There are those who might say free trade is good, but only if its reciprocal and with a Free Trade Agreement. They are wrong. A jurisdiction should not care if its goods have tariffs in other jurisdictions, the purpose of exporting is importing as the purpose of producing is consuming (ultimately). Implementing UFT also means that a jurisdiction can become so productive that it can offset the costs of the tariffs, because when you can freely import all the factors of production, it gives you a comparative advantage to face all the competition of the world.

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