Free Trade with Dictatorships: Could Donald Trump Be Right?
Republican presidential candidate Donald Trump is talking about penalizing companies or countries that don’t engage in what he calls ‘fair trade’. In particular he has a get-tough policy for China, a dictatorship which regularly devalues its currency to make it more difficult for its people to buy imported goods, and which also engages in dumping goods in other countries at below-market prices. I generally am a believer in free trade and like many conservatives I am concerned about his ideas. However, I see that what China is doing can cause serious economic damage to the United States, and am coming around to the more general notion that free trade only works to improve people’s lives when it’s done between people in free countries.
The virtues of free trade at lifting living standards were discovered during the Enlightenment in Europe, a period lasting roughly from 1550 until 1800. Political freedom and limited government were popular during the Enlightenment as exemplified by the ideas of that era’s two greatest thinkers, Thomas Hobbes and John Locke. Hobbes believed in an absolute monarchy whose purpose was to enforce a social compact among its subjects to prevent them from initiating force or fraud against each other. Locke believed that the purpose of this social compact was to protect the individual rights of everyone to life, liberty, property and the pursuit of happiness.
It was against this backdrop of limited government freedom at the end of the Enlightenment when Adam Smith and David Ricardo, two of the most influential advocates of free trade, wrote about its benefits at helping raise standards of living internationally and influenced the opinions of generations of free market advocates.
The Enlightenment ended around 1800. What replaced the ideas of political freedom was a tyrannical philosophy in academia throughout Europe and the United States. The leader of this trend, German philosopher Immanuel Kant, believed that people could not think for themselves and needed to be told by an authority what values to pursue, and they had to obey under penalty of law regardless of their personal desires to the contrary. Kant’s protégés, in particular Georg Hegel and Karl Marx, picked up where Kant left off, eventually causing the development of both variants of socialism: fascism and communism. The result was a string of murderous dictatorships during the twentieth century including Nazi Germany, the Soviet Union – and the People’s Republic of China.
Because free trade advocates like Smith and Ricardo lived before the advent of the Kantian dictatorship, they could not evaluate such a system or whether it would be beneficial for free countries to trade with it. Therefore the principle accepted by free market thinkers that free trade between nations is always beneficial may not be correct.
If someone trades with a dictatorship, it won’t necessarily improve the lives of people there or abroad and may even make them worse.
When people in free countries where individual rights are respected trade with each other the benefits from doing so go to the private sector participants in the trade, allowing them to improve their businesses and livelihoods. If one of these participants truly builds a better mousetrap or other product for less money, it helps elevate the standard of living of everyone he trades with. There is therefore no reason to penalize him in any way, with tariffs, import quotas or any other protectionist measures. Rather, it is up to the people in other countries to stay competitive with him or suffer from failing to do so.
In contrast, when anyone trades with a dictatorship the benefits from doing so do not necessarily go to the private sector participants in the trade, but rather to the dictator and his hand-picked cronies. That’s because whenever anyone deals with a dictatorship they do it on the dictator’s terms – and whatever the dictator wants, that’s what happens.
If a government crony does not build a better mousetrap for less money, but can still undercut market prices when he sells it abroad because the dictator gives him a subsidy or allows him to use what is essentially slave labor, then his sale of such a product will be detrimental everywhere. Abroad, the availability of the product at below market prices can drive out of business producers who don’t receive subsidies from their own governments and have to pay their labor market wages. Meanwhile domestically the sales proceeds could prop up the dictator fiscally and perpetuate human rights abuses when otherwise the dictatorship could’ve bankrupted itself and collapsed.
There are other problems. As alluded to above, dictatorships do bankrupt themselves – and sometimes in response start wars with other countries to seize their economic assets to fiscally prop themselves up. If a country trades new technology with a dictatorship it could increase the likelihood of such wars by making the dictator more powerful militarily. Nuclear technology is the best example.
In light of the fore-going, what would be sensible? It should certainly not be penalizing free countries engaging in fair trade such as Portugal, Israel, Estonia or the United Kingdom; but China is the opposite end of the spectrum. For dictatorships like China I might favor a surcharge, like a tariff, against Chinese imports to bring them up to the market price – and no higher that they can be produced and sold for in a free country.
If a dictatorship wants the surcharge lifted, it needs to do two things: first, it needs to improve its trade policy by ending protectionist measures like dumping or currency manipulation. Second, it must improve its human rights policy to respect individual rights. This means no perpetual sweatshop slave labor; instead, companies must be allowed to accumulate their profits so they can reinvest them in their businesses and improve working conditions, and labor must be allowed to price its services at market rates. This will allow wages to eventually rise, greatly reducing the dictator’s ability to undercut production costs in free countries and allowing a more level playing field.
Free trade – with free countries, only.