What do we pay with for the products and services we need? With money, of course. But if we realize that money is merely a medium of exchange, then what do we ultimately pay with? We pay with production. To be able to consume, one first needs to produce.
Consider a simple example:
Suppose that I’m a hairdresser who wants to buy some bread rolls. I can go to a grocery store and offer to buy the rolls in exchange for styling baker’s hair. I may even be able to do that, provided that the baker wants my services. But the owner of the bakery may turn out to be bald, and thus consider my service to be worthless. This is what makes money a useful medium of exchange. I can make money by styling, say, my friend Jessica’s hair, and then use the money to buy the rolls.
But let us not fool ourselves. The truth of the matter is that I buy the rolls with my hairdressing services. I produce my services, and this production allows me to eat the rolls. The fact that money is used as a medium of exchange does not change the basic truth that in order to buy something we have to sell something first.
Such exchange, if voluntary, is obviously beneficial for both parties. If it were not, then no one would participate in it. It suits me that as a hairdresser I can focus on providing the services I am good and efficient at, and leave baking bread rolls to people who are best at it. While the bald baker does not need my services, he is free to use the money he earns by selling his products to get other goods he needs. It can turn out, for instance, that Jessica knows how to prepare a hair growth lotion which she sells to the baker on a regular basis. Thanks to the market exchange, me, Jessica, and the bald baker can all get what we want cheaper and better than possible, were we to produce these things ourselves.
Then what are imports and exports? Basically, when you import something, you are buying it. An export, in turn, is a sale. The only reason we have separate names for these transactions is because they involve individuals from different countries. The economic laws, however, do not change simply because we have crossed a border. We still have to pay for consumption with production, and the voluntary exchange remains beneficial for both parties. To put it simply, we use exports to pay for imports.
You probably heard a claim that exports are more important than imports. Let us go back to the hairdresser’s case. What do I care most about as a hairdresser? Do I want to have more clients than bread rolls? Is production my real goal? Clearly not. I would be most happy just lying belly up on a beach, having free bread rolls served to me by a waiter. My goal is to be able to consume more, not to have to produce more. Production is only a means to this end. What we want is to import more, because it means getting all the cool stuff from abroad. Export is a “necessary evil” that allows us to pay for the imported goods. If we would be able to continually import without exporting, it would be better for us! But we cannot have that.
With that in mind, we can now talk about protectionism.
Consider this: we all know that sanctions are used to harm a country. However, many people for different reasons consider trade tariffs and restrictions, that is imposing trade sanctions on ourselves, to be a positive thing. “We will stimulate domestic demand,” they say. Is this the right thinking?
Let us go back to an example from a previous video. There are two countries. One is up far North and the other down far South. Suppose that there is no contact between them. The Northerners are superb producers of spruce planks, but they want oranges as well. This is why some individuals bore huge costs to build greenhouses, thus creating just the right conditions for growing oranges. The Southern country has an abundance of oranges, and they grow everywhere without any need to create special conditions for them. At some point these two countries establish trade relations. The Northern market is suddenly flooded with cheap oranges. Southern oranges, even after paying for transportation, are half as cheap and much tastier than the sour Northern ones grown in greenhouses. You may think that access to cheaper oranges would benefit everyone. Well, almost everyone. Most Northern orange producers will be most unhappy. Some of them will try to push for tariffs in an effort to protect domestic producers. One of them will say that 500 people employed in his company will suddenly lose their jobs. Another will argue that the Southern competition is unfair because Southerners have more sun than Northerners.
Were orange producers to succeed in pushing through the tariffs on Southern oranges, they would gain, but all other people including domestic consumers would lose. After all, the only reason for importing Southern oranges is that it is more profitable to grow them there. Introducing tariffs means that all consumers are subsidizing less efficient domestic producers by spending more on oranges than on anything else. Moreover, human capital, i.e. the employees of orange companies, is frozen in this ineffective activity, thus hindering the development of more effective industries that want to expand their businesses and need employees. To put it simply, it wastes limited resources on unprofitable production avenues. These resources could otherwise supply both countries with much more added value. For any individual, city, province, or country it is a blessing to be able not to spend money to produce something if it can be bought for less.
True, in the absence of such a tariff the ineffective producer will get into trouble, and he will probably have to close his business or restructure it. But the same applies on an even narrower scale. A more effective producer may appear in a city or one of its districts, thus pushing out a less effective producer out of his line of work. Which producer in his right mind cares whether he was pushed out of a market by domestic or foreign competition? None. Consumers do not care about this either. They just want to get a cheaper and better product. In this way, their living standard will increase, because they will be able to afford to buy more goods with their newly saved money. This also creates a chance for the producer who was pushed out of his line of work. Now that the people can afford new things, he can start to provide them. In other words, importing a product closes one avenue of work while opening up another someplace else. Thus free trade increases the wealth of both sides of the transaction. When we recognize that exchanges are positive for individuals, we must let go of the notion that the sum of these positive exchanges between individuals can have a negative effect. The imposition of tariffs and restrictions on trade, however, will always cause economic problems. On the other hand, taking part in the international division of labor increases our standard of living.
There is a question, however, that is worth asking. Can we make our production more competitive than the production of other countries? In a way, yes. As Jan Jakub Tyszkiewicz writes in his article, quite wittily entitled “Our enemy, imports”:
“Factors that make it more profitable to produce a good in one place instead of another can be divided into two types: intervention-based and market-based.”
It is quite difficult to influence market-based factors to improve, because they boil down to such matters as availability of raw materials, geographic location, or, for example, manufacturing traditions, while intervention-based factors can hinder productivity quite easily. Some of these intervention-based factors include market regulations, taxes and fees, or trade unions having a grip over legislators. True, we have little influence over the fact that a country simply has no significant oil reserves, and thus cannot be an oil superpower. With a bit of goodwill of the government, however, we can abolish governmental interventions hindering our productivity. Obviously, nothing will change the fact that our production capabilities will still be limited, as is always the case, but we will become more effective in our production. So the recipe for a better position on international markets is less regulation instead of more of it. Having better conditions to operate a business translates into an ability to compete with other companies more effectively where possible. No additional assistance from the government is needed.