Remarks at the Institute for Free Trades inaugural Global Trade Summit at Mercers

Hall, London, celebrating the 200th anniversary of the theory of comparative advantage
on October 16, 2017 by Mark J. Perry, American Enterprise Institute and University of
Michigan-Flint.
200 years ago, David Ricardo developed the theory of comparative advantage in 1817 to
explain why countries engage in international trade even when one country's workers
are more efficient at producing every good than workers in other countries. He
demonstrated that if two countries capable of producing two commodities engage in
trade, then each country will increase its overall consumption by exporting the good for
which it has a comparative advantage while importing the other good. Widely regarded
as one of the most powerful yet counter-intuitive insights in economics, Ricardo's theory
implies that comparative advantage rather than absolute advantage is responsible for
much of international trade.
As Harvard economics professor Greg Mankiw said: Few propositions command as
much consensus among professional economists as that open world trade increases
economic growth and raises living standards. The insights of Smith and Ricardo are
now standard fare in Econ 101.
So while there is a strong consensus among economists that free trade produces positive
net benefits, increases economic growth, and raises living standards why is there is so
much misunderstanding and resistance among the general public to free trade, and why
is there so much political support for protectionism?
There is also a strong consensus among economists that protectionism will harm
economic growth, eliminate net jobs, destroy prosperity, and lower the standard of
living of the protectionist country. Thats because protectionism is guaranteed to
generate costs to consumers that outweigh the benefits to producers. Therefore,
protectionism inflicts great economic damage on the protectionist country, and that can
easily be demonstrated using international trade theory.
There is also plenty of empirical evidence showing that protectionism and tariffs always
generate costs to consumers that far exceed the benefits to producers, and in terms of the
cost per job saved, protective tariffs typically cost consumers more than $500,000 in
higher costs on average for every job saved, according to a study the Peterson Institute
of International Economics that looked at several dozen case studies of protectionist
trade policy in the US.
So why is protectionism being taken so seriously, and given so much credibility, when
its actually a job-destroying, prosperity-destroying form of economic suicide?
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Its because of the distorted way the costs and benefits of protectionism are considered.
Take the case of protectionism for US sugar producers in the form of sugar tariffs and
restrictions on sugar imports into the US. Its a great case study and very unique
because we can actually observe the effects of that form of protectionism on a daily
basis. In contrast, the costs of most protectionist policies are hidden and invisible.
In the case of sugar, there are two futures contracts traded daily in New York, London
and Singapore: one for sugar at the world price, currently about 14 US cents per pound,
and one for sugar at the US price, currently about twice that amount at 28 US cents per
pound. That 2:1 price ratio has existed for centuries, since the U.S. sugar industry has
enjoyed trade protection since 1789 when Congress enacted the first tariff against
foreign-produced sugar.
The burden of those higher sugar prices is imposed on American consumers who pay
more than $3 billion per year in unnecessarily high food and sugar prices. But lets say
the $3 billion in higher costs are spread pretty evenly over about 300 million Americans
who pay about $10 per year in higher sugar and food prices.
There are about 5,000 sugar beet and sugar cane farmers in the US, and lets say they
collectively share about $1 billion annually in higher revenues due to sugar protection,
or about $200,000 per year per producer.
The cost to consumers is dispersed and invisible, so that consumers dont even notice
the $10 per year in higher food prices, and even if they notice they have no incentive to
organize as a grassroots consumer group to try to go up against Big Sugar.
Conversely, the generous benefits to sugar producers are very large and visible and
concentrated on a small group of farmers, who therefore have a strong incentive to
organize as a special interest group, and who find it very easy to organize through an
industry trade group like the American Sugar Alliance, the main lobby group for
American sugar growers, which spends about $2 million per year to protect the Big
Sugar cartel.
So when you understand that the benefits of protectionism are concentrated on a small
group of producers who are well-organized and politically powerful and the costs are
diffused over hundreds of millions of rationally ignorant consumers who are not
organized and not politically powerful, then you can understand why we have many
examples of protectionism in the US and around the world, even though the costs
imposed on consumers are greater than the benefits received by producers, it costs the

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economy several hundred thousand dollars or more in higher costs per job saved, and
leads to a loss of jobs on net.
In the world of economics, going back to Smith and Ricardo, we recognize that the
benefits of free trade are greater than the costs, and it makes us better off. Further, we
understand that the costs of protectionism are greater than the benefits, and it makes us
worse off.
Its only when we enter the world of politics, that sound economics is ignored in favor
of politically favored outcomes that impoverish us.
Given that background, here are my top 25 reasons that explain why protectionism is
taken so seriously, despite the fact that its guaranteed to impoverish our economies and
destroy jobs:
1. The false belief that trade is a zero-sum game (win-lose), when in fact its win-
win. Reagan in 1988 said, Part of the difficulty in accepting the good news about trade
is in our words. We too often talk about trade while using the vocabulary of war. In
war, for one side to win, the other must lose. But commerce is not warfare. Trade is an
economic alliance that benefits both countries. There are no losers, only winners; and
trade helps strengthen the free world.
2. The costs of protectionism to consumers are mostly hidden.
3. The benefits of protectionism to producers are easily identifiable and visible.
4. The jobs saved by protectionism are observable and visible.
5. The jobs lost from protectionism are not easily observable or visible.
6. The benefits of protectionism to individual producers are very high (e.g. $200,000
annual increase in revenues per sugar farm from trade barriers for foreign sugar).
7. The costs of protectionism to individual consumers is very low (e.g. $US10 per
year in higher sugar prices per person due to sugar tariffs), although the costs in the
aggregate of protectionism are very high.
8. The costs of protectionism to consumers are delayed over many years.
9. The benefits of protectionism to producers are immediate.
10. Producers seeking the benefits of protectionism are concentrated and well-
organized.
11. Consumers paying the costs of protectionism are dispersed and disorganized.
12. There is a huge political payoff to politicians from protectionism in the form of
votes, political support, and financial contributions received from protected domestic
firms and industries.

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 13. There is a huge political cost to politicians who attempt to remove or lower trade
barriers in the form of lost votes, support and financial contributions from previously
protected domestic producers.
14. The pathological, but false obsession that exports are good (mercantilism).
15. The pathological, but false obsession that imports are bad (mercantilism).
16. The fact that most employees work for a company that produces a single product
and are therefore favorably disposed to supporting protectionist trade policies that
benefit their employer and industry.
17. The fact that consumers purchase hundreds, if not thousands of individual
products, goods and services, and are therefore unlikely to be fully aware of the
negative effects of protectionism or be motivated to fight protectionism.
18. Many citizens think that exporting their products to other countries is patriotic.
19. Many citizens think that importing foreign products is unpatriotic.
20. The false belief that trade deficits are a sign of economic weakness.
21. The false belief that trade surpluses are a sign of economic strength.
22. The fact that protectionism is guaranteed to create what are called economic
deadweight losses is not easily understood, nor are those losses easily observable or
measurable.
23. The general lack of economic literacy among the general public.
24. The general lack of economic literacy among politicians, or their intentional
disregard for the economics of protectionism in favor of enacting public policies that
help them get re-elected.
25. The failure to recognize that most imports are inputs purchased by domestic
firms, which allow them to be as competitive as possible when selling their outputs in
global markets.
Taken together, the 25 reasons above help us understand the popularity of
protectionism, despite the fact that its guaranteed to inflict great economic harm.
Protectionism is popular primarily for political reasons, not economic reasons. When
politicians can count on the economic illiteracy of the general public and their blind
patriotism to empty slogans like Buy American, the political payoffs from
protectionism are too tempting to ignore despite the reality that its a form of economic
suicide. And because the benefits of tariffs to producers (and jobs created or saved) are
concentrated, immediate and visible, while the costs to consumers (and jobs lost) are
diffused, delayed and invisible, its pretty easy to understand why protectionism is
popular, even though the economic costs far outweigh the economic benefits and its
therefore ultimately a form of self-inflicted economic poison.

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On the 200th anniversary of comparative advantage, we owe a great debt of gratitude to
David Ricardo, for greatly advancing our understanding of international trade. In the
textbook I use to teach Principles of Economics, the authors (James Gwartney et al.)
refer to it as the LAW of Comparative Advantage, not just the theory, and say that
comparative advantage is universal as it applies across individuals, firms, regions, and
countries.
As one of the core laws of economics (along with the laws of supply and demand),
comparative advantage helps us understand the way the economy and trade work. And
that understanding of trade helps to advance free market principles and appreciate that
free market capitalism is the best path prosperity as my friend Larry Kudlow often
says.
Unfortunately, once we introduce the inevitable influence of politics into the picture we
often move away from the best path to prosperity down a road that makes us worse off.
To quote Thomas Sowell: The first lesson of economics is scarcity: There is never
enough of anything to satisfy all those who want it. The first lesson of politics is to
disregard the first lesson of economics.
And thats the danger. That politicians will disregard the proven advantages of free
trade that we learned from Ricardo 200 years ago, and protect domestic producers at the
expense of the consumers and to the overall detriment of society and the general
welfare.
To close, let me share some words of wisdom from another great 19th century economist
the French economist Frederic Bastiat who framed the tension between producers
and consumers very well:
There is a fundamental antagonism between the producer and the consumer. The
producer wants the goods on the market to be scarce, in short supply, and expensive.
The consumer wants them abundant, in plentiful supply, and cheap. Our trade laws
usually take the side of the producer over the consumer, of high prices over low prices,
of scarcity over abundance.
It is necessary to always view economics and trade from the viewpoint of the consumer.
All economic issues and trade policies must be judged by the advantages and
disadvantages they bring to the consumer. everything finds its meaning in the
consumer, for the consumer represents mankind.
In conclusion, if we can all agree that we want greater prosperity for mankind, then we
can all agree to fight for consumers and free trade, and oppose protectionism.
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