Trade policy: Who should it protect?

Published on 24th May 2005

The misnamed Free Trade Agreements (FTA) challenges the basic principle of specialization and exchange, partly, because the governments negotiate from a country position - FTA: Costa Rica-Canada, El Salvador-Mexico or Costa Rica-Chile - as if each country was a monolithic unit, with a single position and interest. This behaviour is absolutely erroneous, because such a unit doesn\'t exist. In each country and for each good or service there are two opposing groups: the net producers of the good and the net consumers. Any negotiation that increases the price of the good will benefit the producers and harm the consumers; and any negotiation that reduces the price, will have the opposite effect; therefore, no negotiation can favour the two antagonistic groups at the same time.  

That is to say, in each case, the negotiator will be able to represent only one of the two antagonistic groups: the producer or the consumer, although both are citizens of the country. At this point, the following question arises: If the government is forced to celebrate a negotiation of this type and can only represent, in all cases, one of the two antagonistic groups, which of the two (the producer or the consumer) should it represent, if its concern is the well-being of the society at large?

Frédéric Bastiat points out that as economic agents, individuals constantly change hats. When we use the hat of the producer, our interests are antisocial; we want scarcity. The producers of sugar, milk and rice demand trade barriers to prevent flooding of the country with those products; they promote scarcity. By prohibiting the participation of other suppliers, the state monopolies create scarcity. On the contrary, when we go to the market wearing consumer\'s hat, we want abundance; we wish excellent harvests for everyone; we want a world free of frost, floods and attack by insects or other pests; we want plentiful telephone lines, automobiles, insurance, food, medicine, cinemas, connection to Internet  just to name a few.  

We see, then, that the producer wants scarcity and high prices; the consumer, abundance and low prices. Since the two interests are mutually incompatible, one of them should coincide with the interest of the society at large, and the other should be hostile to its interest. If man\'s secret desires in his producer role were granted, there would be scarcity of everything, widespread poverty and famine. The world would quickly regress towards barbarism. On the other hand, if man\'s secret desires in his consumer role were granted, there would be abundance of everything, and more wealth and prosperity for all. Evidently, the consumers interest is in complete harmony with the general interest of the society, and this is what trade policy should protect. Our governments, however, prefer to protect, at any cost, the producers interests and to scorn those of the consumers.

The assertion that society prospers much more when trade policy protects the individual wearing the consumers hat, instead of the producers, can easily be proven. Let’s assume that in a given country only 50 goods are produced and consumed, and that, for each, few inhabitants are net producers, and all others are net consumers; a portion of the goods consumed is imported, and each tariff (the import tax that raises the price of a good) benefit the producers with the same intensity with which it harms the consumers.  

When we protect the producer the initial situation is absolute, 100 percent, free trade. Then, one day, the government imposes a tariff on the import of Good 1 with the purpose of “protecting” its producers. This harms the producers of the other 49 goods (net consumers of Good 1). Because of the damage to these groups, the government imposes a tariff on Good 2 with the purpose of compensating those producers. Now, these are compensated for the damage of the first tariff, but the producers of the other 48 items are harmed, again. The producers of Good 1 break even. To continue protecting, the government imposes a tariff on Good 3. The effect is: gain for these producers, who had already lost with the first two tariffs. They continue to be net losers. The producers of Good 1 are now net losers too, because they benefited from the first tariff, but they lost from the tariffs on Goods 2 and 3. The producers of Good 2 lose also, because they benefited from the tariff on this good, but they lost with the tariffs on Goods 1 and 3. Then there are the producers of Good 4 through 50, who have lost because of the three tariffs. At this point, everyone has lost (producers and consumers). And if the government was to continue providing protection to Goods 4, 5, etc., all will lose even more.  

Let us now protect the consumer and maintain the same assumptions, only that now all the goods are protected. The government is then illuminated and begins to reverse the process. First, it removes the tariffs on Good 50: the producers of that good lose and the consumers (the producers of Goods 1 through 49) win. Second, it eliminates the tariffs on Good 49: the producers of that good lose; the producers of Goods 1 through 48 win. The producers of Good 50 also win and now break even. Third, it removes the tariffs on Good 48: the producers of that good lose, and all the others win. At this point, all the producers of goods 48, 49 and 50 have lost once and won twice; they are net winners. And the producers of goods 1 through 47 have won three times and have not lost even once. All the producers are net winners. From this point on, every tariff elimination means a net gain for all. 

This proof has its logic. It doesn\'t work this way just because the objective of all economic activities is consumption, but because of a numeric logic. Each individual consumes 100 or more goods and services, but he produces very few, one or two. Therefore, when the producer is protected as a general rule, the individual benefits from the protection of the good or two that he produces, but he is harmed by the \"protection\" (the tariff) of the 100 goods he consumes. On the contrary, when the consumer is protected as a general rule, the individual benefits from the protection (elimination of tariffs) of the 100 goods he consumes, and is harmed by the non protection of the good or two that he produces.



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