A frequently stated justification for protectionism in the home country is that the government of a foreign country doesn’t fully practice free trade.
Let’s think this through.
Suppose the United States is the home country and China is the foreign country. An implicit premise of this argument is that if the Chinese government taxes, spends, or regulates in ways that reduce the sales of particular American producers, the losses thereby inflicted on American producers by China’s government are unjust.
By interpreting these harms as unjust or unfair, protectionists reveal their belief that these harms imply not only an economic but also an ethical case for U.S. government “retaliation” against the Chinese.
Protectionists attempt to build an unmistakably ethical case for tariffs and other trade obstructions in the home country by habitually describing foreign countries as trading “unfairly,” as “not playing by the rules,” and as creating “an uneven playing field.”
Firms that lose customers in situations in which there is universal agreement that everyone “played by the rules” are not regarded as being harmed unjustly, even if the losses suffered by these firms drive them out of business. In contrast, firms that suffer losses because of unjust behavior are perceived as indeed deserving of government redress or protection.
Right to What?
The protectionist case for retaliation therefore implies that when Beijing imposes tariffs on Chinese imports, or subsidizes Chinese exports, it takes from us Americans something to which we are entitled. Specifically, what the Chinese allegedly take from us Americans is consumer demand that, absent the Chinese interventions, would be satisfied with sales made by American producers. The protectionist case for retaliation, in other words, springs from the belief that particular producers in the United States have at least a conditional property right to some minimum volume of consumer demands for their outputs.
Do producers really have rights — property entitlements — to at least some minimum volume of consumer demand for their outputs? The answer given by Anglo-American common law has long been a clear no. Under this law, economic competition is neither tortious nor criminal. Indeed, far from being wrong for producer Smith to lower his prices or to improve his product quality in ways that result in economic losses for producer Jones, such competitive actions by producer Smith are positively praiseworthy.
Examined from the perspective of consumers, under the law consumers are free to spend their incomes as they choose, and to change how they spend their incomes. And while businesses are free to offer for sale new goods and services, and to make their existing product offerings more attractive to consumers, businesses are not presumed to be entitled to any minimum volume of consumer demand.
Quite the contrary. The recognition is widespread that each and every business is always at risk of not succeeding, of losing sales, and even of going bankrupt. Implied in this recognition is the absence of any obligation on the part of consumers to spend their money in ways that improve or protect the economic well-being of particular producers.
The summary phrase for this ethical-legal state of affairs is “consumer sovereignty.” Although this term was coined in the 20th century by the economist W.H. Hutt, the principle for which it is a label was long before explicitly championed by Adam Smith, Frédéric Bastiat, and many other economists.
Consumer sovereignty is almost universally taken by economists to be an indispensable feature of a market economy. The reason is clear: because the ultimate point — the end — of all economic activity is to improve the living standards of those who engage in such activity, production is only a means to this end. Production is to be judged, and is justified, only by how well it improves people’s living standards.
If a particular bundle of resources yesterday best improved living standards by being used to produce a certain number of typewriters, the economically “best” use of that bundle of resources was to produce that number of typewriters. Any other use of those resources would have produced outputs that raised living standards less than did using those resources to produce that quantity of typewriters.
But if today consumers, for whatever reason, experience less satisfaction than yesterday from getting new typewriters, then at least some of the resources once used to produce typewriters should be shifted away from typewriter production and toward the production of other goods and services — other goods and services that now raise living standards higher than these standards would be raised if today the same quantity of typewriters as yesterday continued to be produced.
In short, using resources to produce typewriters is justified only if, and only as long, as no other use of those resources would improve living standards by more than using those resources to produce typewriters. When getting new typewriters no longer raises living standards by as much as these standards would be raised by using the resources to produce outputs other than typewriters, the continued production of typewriters causes living standard to be lower than they would otherwise be. Such a use of resources cannot be justified.
The Standard of Judgment
But how best to determine what particular uses of resources contribute most to improved living standards? Again the answer is clear: observe how people who’ve earned their incomes spend their incomes. People spend their income in ways they believe best improve their living standards.
So if people stop buying typewriters, it must be the case that people judge the goods and services they now buy instead of typewriters to contribute more than do typewriters to an improvement in their living standards. Consumers’ freedom to shift their spending both informs and incites producers to shift production away from now-less-valued uses and toward now-more-valued uses.
This process of informing and inciting producers always to produce that mix of outputs that most improves consumers’ living standards would be severely distorted if producers were entitled to some minimum volume of consumer demand. Possessing such an entitlement, producers would have little incentive to produce those outputs most wanted by consumers. Alternative uses of resources that would raise living standards more than do existing uses of resources would never be made given existing producers’ right not to suffer any burdensome loss of consumer demand.
The Locus of Sovereignty
At best, such a “producer-sovereignty” economy would be drearily stagnant. At best, Americans would still be dialing directory assistance to learn phone numbers, still be going to record stores to buy music, and still be using typewriters. In practice, however, matters would be far worse; such an economy would suck all of its denizens into poverty.
Producer entitlement to consumer demand is wholly at odds with a market economy. Fortunately, producers possess no such entitlement. Thus when foreign governments unethically abuse their own citizens by obstructing imports into their countries or by subsidizing exports from their countries, any resulting economic losses these interventions cause here in the home country to some of “our” producers are not ethically relevant.
These foreign-government actions take from no one in the home country anything to which he or she is entitled. These foreign-government interventions, therefore, supply no good ethical excuse for “retaliation.” In fact, losing nothing to which they are entitled, home-country producers themselves act unethically when they demand that the home government inflict upon fellow citizens the same unjust depravations that foreign governments inflict upon their citizens.