Gerard Jackson
BrookesNews.Com
Friday 19 September 2003

Textile manufacturers are demanding that the Government maintain current tariff levels. Some have argued that all they want is "fair trade", "not free trade at any cost". What these people are really saying, though I doubt if they realise it, is that it is fair for the Australian Government to force Australian consumers to pay more for textiles.

The idea of "free trade at any cost" is a ridiculous one. Free trade never takes place "at any cost". Trade only occurs up to that point where the cost of trading exceeds the benefits. Moreover, critics of free trade fail to see that because it is individuals that really trade, not countries, there can be nothing unfair about it. Free trade is voluntary trade.

This protectionist view is just a variation of the great mercantalist myth that has bedeviled trading nations for centuries: that imports are bad and exports are good. Therefore governments must always act to deter the former and promote the latter. The classical economists exploded this fallacious thinking by pointing out that exports are costs and imports are benefits. Put another way, exports are simply the price of imports. It follows from this chain of reasoning that 'export income' is only of use to the extent that it is used to buy imports.

If a country only exported and never imported it would be giving its goods away. The lucky recipients of the exporting country's largess would in effect be receiving huge subsidies. But a double effect would be at work here. These imported subsidies now mean that consumers' incomes will rise and that resources that were once used in exporting those goods that have now been denied their foreign market will now be used to produce goods and services for the domestic market, thus raising economic welfare.

Total consumption will therefore rise. The protectionist argument that imports, especially if they are subsidised, cause unemployment is therefore based on a fallacy.

Now it is true that the exporters will be receiving export income in the form of foreign exchange. However, this money can only be spent in the importing country and its territories. After all, the exporters have to convert their 'export income' into the domestic currency in order to spend it. As Ricardo and others pointed out, this does not add anything to total economic welfare.

The exporters are able to purchase more goods because of their export income; but these goods have to be bid away from others thus reducing their level of consumption. Moreover, exporting firms will have to bid factors away from other lines of production if they are to expand exports. What this amounts to is that the exporting country's tariff policy lowers its people's living standards while raising that of its trading partner.

Trade is always a two-way street. A simple — and invariably overlooked — example of this is the wage earner. His exports are the labour services he sells to his employer; his wages are, in fact, his export income; the goods and services he now buys are the equivalent of imports.

It should now be easy to see that by not consuming his income he is really working for nothing. That exporters spend their income conceals from the layman the fundamental truth that their spending only succeeds in reducing the consumption of the rest of the community. It does not raise general living standards.

Gerard Jackson is Brookes' Economics Editor