In a recent Defining Ideas article, “Why Trade Should Be Free,” I made the case for free trade. Although my way of stating it is slightly original, the case for free trade is one that many economists, including Adam Smith, have made. Free trade causes people in the free trade country to produce the goods and services for which they are the least-cost producer and to import goods and services for which people in other countries are the least-cost producers. The case for free trade is no more complicated than the case for hiring someone to mow your lawn. The conclusion that free trade is good for a country’s government to adopt does not depend on other countries adopting free trade. Even if other countries’ governments impose tariffs, we are better off, on average (there could be some losers), if our government refrains from restricting trade.
Are there any exceptions to the case for free trade? There’s one main one. Adam Smith himself laid out this exception in The Wealth of Nations: restricting trade when the traded item is crucial for national security. But the case for restricting trade even in such cases is not airtight and, indeed, other ways to assure a supply of such items may be better than restrictions on trade. One such way is by stockpiling the crucial items and that may well involve more trade, not less. Whatever the measures taken to assure availability of crucial inputs to defense, we, unfortunately, depend on government officials with information and competence, two characteristics that are typically in short supply in government.
These are the opening two paragraphs of my latest Hoover article, “Does National Security Justify Trade Restrictions?” Defining Ideas, December 5, 2024.
One of the exciting studies I found while researching this article was the work on rubber during World War II by Alexander J. Field, an economic historian at Santa Clara University.
I wrote:
Because of our climate, the United States has never been a producer of rubber. This mattered during World War II. In a December 2023 paper titled “The US Rubber Famine during World War II,” Alexander J. Field, an economic historian at Santa Clara University, tells the story of US dependence on rubber imports during the war. After the Japanese government invaded Singapore, it took control, writes Field, of “almost all Southeast Asian sources of natural rubber.” Field notes that this “deprived the United States of 97 percent of its supply of the one strategic material in which it had effectively no domestic sourcing” (italics added).
The good news is that various US officials saw this coming before the US government officially entered the war. Field notes the three strategies to deal with the loss of imports: (1) domestic stockpiling of rubber before US entry into the war; (2) subsidizing “domestic production of alternative plant-based sources of latex”; and (3) developing a synthetic rubber capability.
The bad news, according to Field, is that the chief US official who controlled US policy, Jesse Jones, slowed the pursuit of the first and third strategies.
Read the whole thing.
READER COMMENTS
Monte
Dec 6 2024 at 6:16pm
Excellent piece, David. You’d make an expert witness for the prosecution.
Another exception to the case for free trade, it seems to me, is the sharing or transfer of advanced technologies. Unlike physical resources, technology can’t be stockpiled. But for purposes of national security and to maintain technological superiority, imposing restrictions on the sharing or transfer of sensitive technologies is critical for protecting our strategic interests, wouldn’t you agree? Of course, we want to balance those interests against the need to promote global collaboration and innovation in non-sensitive areas.
Monte
Dec 8 2024 at 1:54pm
FDR’s handling of the rubber crisis during WWII is a notable exception to government inefficiency usually on display. His forming of the Rubber Reserve Company “to set objectives for stockpiling rubber” and subsequent appointment of a Rubber Survey Committee “to investigate and make recommendations to solve the crisis” were highly successful to the war effort:
Jesse Jones (sarcastically referred to as “Jesus” Jones by FDR due to the amount of power and influence he exerted as Commerce secretary) attempts to slow-walk synthetic rubber development proved irrelevant.
Monte
Dec 8 2024 at 1:55pm
U.S. Synthetic Rubber Program
David Henderson
Dec 8 2024 at 8:06pm
You write:
Actually, it didn’t prove irrelevant. It’s true that they could have done worse, but the slow walk mattered. Read Field’s article.
Monte
Dec 9 2024 at 11:20am
Maybe irrelevant is too strong of a word. Jones reluctance to fully support the synthetic rubber program may have delayed the war effort, but it did not significantly undermine the broader goals of the U.S. military. FDR sidelined Jones and the War Production Board (WPB) ultimately took over full control of industrial mobilization. Fields’ article is highly critical of Jones, but he seems to downplay the role of big rubber (Goodyear, Goodrich, and Firestone) and others who were equally culpable in their resistance to the program, according to what I’ve read.
Jon Murphy
Dec 6 2024 at 6:36pm
Thank you for citing me, David. One thing to note: my thinking on national defense as a justification has recently shifted significantly. I am considerably less confident national defense remains a reasonable justification. I recently read Mancur Olson’s book The Economics of the Wartime Shortages. In it, he argues that Great Britain’s reliance on free trade for food imports actually made it resiliant to the attempted German embargo in WW1 and WW2. Britain had all this farmland that could simply be plowed up! True, there short-run issues, but they were quickly resolved. Conversely, Germany had protected their farmland and it was overextended. Germany could not ramp up production of food for the war, and when the resources started being destroyed, they had no where to turn. GB had a “reserve of fertility” they could exploit. Germany did not. GB could adjust. Germany could not. (See Chapters 4-5).
While there may still be some justification, the realm of reasonable justifications rapidly shrunk in my estimations.
Jon Murphy
Dec 7 2024 at 12:12am
Sorry for my terrible spelling
TMC
Dec 7 2024 at 9:09am
This makes no sense. If Great Britain had been producing all its own food there would be no need for reserve capacity. Add in the costs (both treasure and time) of adding additional capacity when there’s a war going on.
In the mean time, there’s always the threat of that extra capacity being diverted to other uses. Ask those pesky YIMBY people about that.
Jon Murphy
Dec 7 2024 at 10:16am
You put your finger right on the problem. Once the need for reserve capacity arises, such as with Germany, there is no reserve capacity!
TMC
Dec 7 2024 at 6:12pm
How do you leap from ‘no need for reserve capacity’ to ‘Once the need for reserve capacity arises’? Is there a sudden population boom? Reserve capacity is only required if a country is importing food and then the supply is cut off. No reserve is required if it is already supplying all its food needs.
Jon Murphy
Dec 8 2024 at 6:24am
The case of Germany proves that statement incorrect.
Anything that shifts the supply and demand curves, really: bad weather, enemy activity, draft, illness, what-have-you. The real world is dynamic, you know.
Jon Murphy
Dec 8 2024 at 6:56am
Recall the argument for tariffs in national defense:
Tariffs may be needed in order to ensure reliable supply of a necessary good.
The point of such protections is precisely to preserve reserve capacity.
Olson’s point is such tariffs often do not preserve reserve capacity, but quite the opposite: by diverting too many resources into an industry in “normal” times, the resources are overextended (ie deep into diminishing marginal returns). Thus, when the need for this reserve capacity that the tariffs were supposedly preserving arises, there’s none to be had. The tariffs work opposite their intended goals.
Leaving the experience of Germany and Britain aside, we see the same in the US. Despite the Jones Act protecting the shipbuilding industry, whenever a need for shipbuilding capacity arises (eg, sealift for Desert Storm, recovery from a hurricane), there’s none to be had. Indeed, in Desert Storm, we had to rent ships from the Soviet Union to facilitate our military needs. (If that isn’t a sign the Act is an utter failure, I don’t know what is).
Craig
Dec 6 2024 at 7:21pm
Tweak the facts, tweak the results, but I must say that more often than not I see the fact pattern in terms of international trade, but I might point out that really the issue isn’t the international boundary itself of course, but the risk the enemy will overrun the source of supply one is relying on. There’s no real theoretical limits of course, for want of a nail the war was lost, but still we can contemplate certain thought experiments to show that sourcing certain supplies in the face of a genuine threat makes sense.
Let’s say that you are the leader of France in 1938 and you are sourcing tanks. Would you want to source them from Belgium? Well, maybe not, how about we protect the French tank industry and build them in Alsace-Lorraine? Yeah, probably not the best idea either, for exactly the same reason of course. So maybe you place the tank factory west of Paris. As it turned out it didn’t matter, right? But the point remains, one needs to consider the locations the enemy can reach out, or otherwise interdict.
Thomas L Hutcheson
Dec 6 2024 at 10:52pm
#1 Made sense
#2 Could make sense but subsidies (standing offer to buy at stated price) should have been offered to both domestic and (non-hostile) foreign producers
#3 Could also make sense by the synthetic rubber to be developed could have come from any non-hostile source, not necessarily a “domestic” industry.
TMC
Dec 7 2024 at 9:18am
Your #3 is an important point to make. Tariffs that divert production to the US are usually expensive enough to hurt us, not help. Tariffs that spread the production of a good more evenly around the globe are significantly less expense and can be worth the cost to add resiliency to the supply chain. We can use stockpiling, as David mentions, but that is also expensive. The main real value to free trade is its efficiency in managing resources. We can calculate the costs and dead weight losses involved for the better solution (likely a mixed solution) but free trade is now dogma. Dogma clouds the brain.
Scott Sumner
Dec 7 2024 at 5:19pm
Very good post. I’d add that doing a lot of commerce with our adversaries makes it more costly for them to engage in a reckless foreign policy. Thus if China does a lot of trade with the US, they might fear losing that market if they invaded a neighboring country. In contrast, if we cut off trade with China during peacetime, then they have nothing to lose in an economic sense for reckless behavior.
Jon Murphy
Dec 7 2024 at 5:50pm
I generally agree with you (and I think the data support it). But I will say Edwin van de Haar makes a compelling case that there are limitations to the doux commerce thesis. His book on international affairs (I’ll link to later when I can) goes into detail.
Jim Glass
Dec 10 2024 at 3:48am
So have others. I recently saw Stephen Kotkin at Hoover field a long question detailing the many statements Angela Merkel made about how energy trade with Russia was going to tame the Russians and promote peace, the whole litany of benefits. Then he was asked, “What did she get wrong?” His answer was short: “She never realized she was dealing with mobsters. Regimes like this don’t care about economic growth, if GDP goes up that’s nice, if it goes down, that’s why they have such impressive security forces. These regimes care about what is good for the people in these regimes”.
After 2014 Putin piled up a $600 billion war chest explicitly to cover the cost of the trade losses he anticipated after his next foray into Ukraine. How could anyone imagine that he cared about that trade? … XI’s policies have destroyed $30 trillion of Chinese household wealth since 2021 to further the interests of the CCP. An invasion of Taiwan would have economic consequences that dwarf those of that of Ukraine, a CCP with trade as a priority would never even dream of it — instead of making it a #1 state priority … In 1938, as part of appeasement policy, the British government was so pro-trade with Germany that it actually punished private firms that refused on moral grounds to trade with the Nazis. And after Munich, Adolf was furious that he didn’t get his war already. Was trade reducing the risk of war?
I once saw the development economist William Easterly get asked, why do so many poor countries persist in such poor economic practices, why don’t their leaders know better? His answer was: ‘Of course they know better, their children go to top western universities, and the World Bank and IMF have frequent flyer programs into their capitals. But the leaders do what is best for their leaderships, the economy is secondary’. So where does all this faith in trade driving enlightened peaceful policy come from?
The data often cited to support “more trade = less war” actually support “more liberal democracies = less war”. No two liberal democracies have ever declared war on each other. (The argument of the Thucydides Trap is refuted by the Great British-American War of the 1920s.) There has been tremendous growth in the number of liberal democracies over the last 100 years, and as they are always capitalist, also great growth in the volume of trade among them. The trade-war correlation is an artifact of that.
People often say that when Western Europe became a friendly trading zone after WWII, 1,500 years of war ended. No — when the US and British Armies marched across Western Europe and filled it with new liberal democratic capitalist regimes, 1,500 years of wars ended. To paraphrase James Carville in his day, “It’s the regimes, stupid.”
Sure — but what matters is whether the adversary regime cares about that cost relative to its other priorities. Remember, economic cost to the nation need not be any cost at all to those in the regime, quite the contrary in fact. Ask the Kim family, as well as the leaders of all the regimes mentioned above.
Jon Murphy
Dec 7 2024 at 7:20pm
This is the book. See, in particular, pgs 101-103.
Essentially, the concern (among other things) is that wealthier nations can now afford more war, which may lead to arms races with neighbors concerned with their defense.
Scott Sumner
Dec 8 2024 at 1:00pm
I actually agree with most of what he says there. I read him as saying that trade is not a panacea, but may reduce warfare at the margin.
David Henderson
Dec 7 2024 at 11:17pm
Thanks, Scott.
Knut P. Heen
Dec 10 2024 at 7:45am
Option theory. Do not exercise a call early unless the underlying asset pays enough dividend to justify early exercise.
The implication is that you wait with trade restrictions until it becomes strictly necessary, and that you only use these against the likely opponents. Trade restrictions against allies hurts the war effort.
David Seltzer
Dec 11 2024 at 5:55pm
Knut, nice use of option theory. Of course if the option is in the money, the ex-div date becomes the expiry date. In the great recession a lot of real estate asset values fell below remaining mortgage obligations. No rational being would exercise an out of the money call, but the the rational trader will exercise an in the money put.
Jim Glass
Dec 11 2024 at 2:06am
It seems odd to me that the worth of “sanctions motivated by national security” as a matter of principal should be discussed in light of an anecdote about rubber.
Why not consider the history of the real deal comprehensive sanction regime that the western allies imposed on the Soviet block from 1948 to 1991, via the Coordinating Committee for Multilateral Export Controls.
As Stalin was swallowing Eastern Europe, blockading Berlin, starting the Korean War, etc. … Khrushchev was crushing the people of Hungary, staging haranguing shoe-banging (maybe) shows at the U.N., and proclaiming “We will bury you” … and the Soviets were building a stockpile of 45,000 nuclear weapons, did the West’s “Compound Containment of the Soviet Union” amount to nothing but a sin against Free Trade?
Those are trade restrictions worth discussing.
David Seltzer
Dec 11 2024 at 6:01pm
I agree Jim. Putin seems to be singing from the same hymnal. The Israeli’s are making a similar case for restrictions Vis-à-vis Iran and her client states.
Jim Glass
Dec 12 2024 at 8:51pm
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