Free Economies and Free Trade

Tariffs have become a popular subject of discussion since President Trump was elected in November 2024, and some of that discussion is somewhat absurd.  We think it is helpful to look past the headlines to some concepts we first introduced in 1992 with an article titled “How We Benefit from Free Trade.”[1]

1. People benefit from a free economy with a large free-trade zone.
2. A free economy is a volunteer economy in which the consumer is king, and no person (or company) can make you buy his or her product. The consumer drives free economies to benefit the consumer, and the producer must serve the consumer.
3. Command economies focus on production and are driven by producers. Producers decide (or are told) what to make, and consumers have no choice but to buy it.  The people who benefit decide and issue the commands, not the consumers.  As Thomas Sowell, American Economist, points out the difference between free and command economies: “One system involves each individual making choices for himself or herself, while the other system involves a small number of people making choices for millions of others.”[2]
4. Free trade zones benefit the producer and the consumer. A consumer-driven free economy allows a person with a good idea, talent, or a lot of energy to profit from it. If the market for a product is limited, so are the incentives for that producer to innovate and create to bring more, better, and cheaper products to the consumer.
5. We seem to have forgotten that free trade among nations makes the strength of each nation’s producers available to all their citizen-consumers. Yes, it drives the producer to make ever-better products at ever-lower costs. Yes, it requires the retraining of workers for better jobs. But it does result in better products and better jobs.

What do tariffs have to do with this?

Tariffs are a tax on trade. The more you tax something, the less of it you produce.    Tariffs reduce the amount of trade we engage in, and it’s hard to see because we don’t know how much trade we would have WITHOUT the tariffs.

Tariffs also impact prices, distorting market signals and giving us a skewed view of reality.  As Thomas Sowell explains: “The most valuable economic role of prices is in conveying information about an underlying reality—while at the same time providing incentives to respond to that reality. Prices, in a sense, can summarize the end results of a complex reality in a simple number.” [3]  This skewed view of reality adds to the complexity of an already VERY complex system, making it harder to make rational and informed decisions.

Tariffs, taxes, subsidies, wage and price controls, monetary policy, etc., are all exogenous impositions on markets that skew prices, restrict choices, add complexity, and result in fewer benefits to the consumer.  There can be very good reasons for them, but those reasons are policy-driven, not economic.

Some policy reasons for tariffs are: [4]

1. Countries want more money.
2. Countries aggressively and proactively use trade as an arm of foreign policy to safeguard perceived national interests.
3. Countries are trying to safeguard national interests by effectively protecting domestic production in specific economic sectors.
4. Countries are trying to shield workers from unfair competition from specific trading partners.

We don’t know if these policy goals are laudable or achievable. We do know tariffs make economies less free and inhibit the growth of free trade zones, which in turn increases the economic costs borne by national and global producers, consumers, and taxpayers.

[1] https://library.muhlenkamp.com/wp-content/uploads/sites/2/2022/06/how-we-benefit-from-free-trade.pdf

[2] https://ichthyoid.writeas.com/an-overview-of-prices-basic-economics-by-thomas-sowell-ch#:~:text=As%20Sowell%20explains%3A,reality%20in%20a%20simple%20number.

[3] Ibid

[4] https://www.epi.org/publication/tariffs-everything-you-need-to-know-but-were-afraid-to-ask/

The opinions expressed are those of Muhlenkamp and Company and are not intended to forecast future events, guarantee future results, or offer investment advice.