National Defense Is Not an Exception to the Case for Free Trade

Pleas for protectionism spring overwhelmingly from the desire to save businesses and jobs in industries that compete with imports. These pleas are economic ones. Those who offer them allege that free trade, by damaging these domestic industries, damages the entire domestic economy.

But pleas for protectionism often are bolstered by a subsidiary, non-economic claim — namely, that the industries for which protection is sought are vital to the national defense. If industry lobbyists can convince voters and their representatives that the shrinking of a domestic industry will impair the government’s ability to carry out its military obligations, support for protecting that industry with trade restrictions will intensify.

Economists have repeatedly exposed economic arguments for protectionism as deeply flawed. Assessing the validity of the so-called national-defense exception to the case for free trade, however, is more challenging.

The main reason for the greater difficulty of doing such an assessment is that the case for protectionism based on national-defense needs is not an economic one; it’s a military and engineering case that relies upon estimations of which industries and products are militarily vital and which are not. Because these estimations are almost always highly speculative, it’s impossible for an economist to declare with any great confidence that protecting, say, the steel industry is militarily justified while protecting the textile industry isn’t.

Nevertheless, economics does offer some guidance for thinking productively about the national-defense exception to the case for free trade.

Making the Case

First, if an industry is protected for national-defense reasons, recognize that this protection is an economic cost and not an economic benefit. This cost would be justified if such protection is the best means of achieving an enhancement of military capacity that everyone agrees is desirable. But were it not for its military effect, this protection would make the nation worse off.

Second, because protectionism protects firms that would otherwise be diminished in size, or even swept away, by what Joseph Schumpeter called the “gale of creative destruction” — that is, by innovative, entrepreneurial competition — protectionism freezes in place older, inefficient firms and thereby prevents the creation of newer, more-efficient ones. The economic damage done by hamstringing entrepreneurial innovation and competition is obvious. But it’s also clear that policies that dampen entrepreneurial innovation reduce a nation’s ability to defend itself militarily.

If, for example, the U.S. steel industry is protected on national-security grounds, the Pentagon might well gain for itself a more secure supply of steel today, but at what cost? Trapping resources in steel-making factories prevents those resources from being used, and being used with greater efficiency, in other industries, some of which almost surely produce outputs that have military value.

Further, protecting the steel industry perhaps also slows, or prevents altogether, the improvement or invention of substitutes for steel, such as carbon fiber and other materials not yet invented.

Recognizing the costs of forgoing such innovations and improved efficiencies is difficult when looking forward from the present. After all, we can’t today know what remains to be discovered tomorrow. Yet, as always, excellent guidance is available from history.

A Typewriter Analogy

Suppose that in the 1960s the U.S. government had decided on national-security grounds to protect the domestic typewriter industry. Typewriters, after all, were then a crucial tool used for military communications. To protect this industry, Uncle Sam would have thus had to obstruct the growth of newly emerging information-technology firms — firms whose growth would have prompted consumers to buy more personal computers and fewer typewriters.

Fortunately, there was no concerted effort to protect typewriter production in the United States. But had there been, we might today not even know of the possibility of laptop computing. In this counterfactual world of today — a world in which typewriter production had for the past half-century been successfully protected for reasons of national security — CEOs of American firms that produce typewriters would now boast of how protecting vital industries such as their own is necessary to ensure a strong national defense.

But of course that boast would be unjustified. America’s military might would today be weaker rather than stronger were typewriters still widely used instead of laptops, tablets, and the other innovative ways now used to communicate written words.

As Leland Yeager and David Tuerck noted in their 1966 book, Trade Policy and the Price System,

A protected, semifrozen pattern of production and resource use might well prove out of date if war came.  General economic strength and flexibility seem more important, even on narrow defense grounds, than hothouse cultivation of numerous individual industries for which the country is not especially well suited.

Innovation Inhibited

Third and more generally, a government’s military capacity depends upon the wealth of the nation. And the wealth of the nation grows only with market-tested entrepreneurial innovation.

Trade restrictions inhibit such innovation. Most obviously, if domestic producers are protected from the competition of foreign rivals, these producers have less incentive to innovate. Why spend resources building better mousetraps if mousetrap buyers have little choice but to buy from you? And by the way, innovative mousetrap ideas from foreigners, kept by trade restrictions out of the domestic market, will, when nevertheless used in foreign markets, likely raise the quality of foreign-made mousetraps ever-higher over that of domestically produced ones.

The Political Diversion

A less obvious way that trade restrictions inhibit innovation is by diverting managerial energy into politicking. To the extent that government dispenses privileges such as protection from foreign competition, business executives spend more energy seeking such privileges and less energy seeking ways to build better products and to increase the operational efficiencies of their firms. The result is less market-tested innovation.

Making matters worse is that the men and women who rise to top leadership positions in private industry are selected more and more for their skills at securing special privileges from the state and less and less for their skills at cost-effectively producing innovative products. Does anyone doubt that such a trend reduces over time the wealth of the nation?

It is important to keep in mind that the U.S. military is today the mightiest the world has ever seen not because of tariffs but because the U.S. economy is the wealthiest the world has ever seen. And this great wealth is the result of free, innovative, entrepreneurial, and competitive markets.

Trade Promotes Peace

Here’s a fourth reason to reject the national-security exception to the case for free trade. It’s the reason most important of all: trade itself promotes peace by weaving the peoples of different countries into one international economy.

Every trade restriction disunites the peoples of different countries. It makes them less invested in each other’s welfare than they would otherwise be. As trade restrictions multiply, the people of one country come to depend less on the people of another country as suppliers and as customers. The bonds of understanding created and strengthened by peaceful commerce weaken. The lost trade opportunities from a shooting war between the two countries fall while the risks of misunderstanding between the two countries rise.

The very best system of national defense, therefore, is one that reduces the prospect of war. It is one that diminishes the need to actually send into battle war machines and manpower. So anyone sincerely committed to a program of using trade policy as a means of strengthening national defense supports as an indispensable cornerstone of that policy free trade.

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Donald J. Boudreaux

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.