[Market Economy Guide] All Trade Is Fair Trade

Blocking free trade reduces consumer welfare...

Free trade is a “win-win” for all trading countries... and the fairest arrangement

In pre-capitalist societies, trade was seen as a process in which one side benefited at the expense of the other. In other words, every transaction was thought to produce winners and losers, exploiters and the exploited. This claim reflects the perception of trade as a kind of zero-sum game in which only one side gains.

But if that were really the case, commercial transactions could occur only temporarily and could never continue or be repeated over time. In a free market, each person pursues his own interest, but the gain involved is one that benefits both parties to the transaction. When someone accepts a trade offer, it is because he expects to gain something from it. In other words, voluntary exchange is always mutually beneficial to the parties involved.

Adam Smith, the “father of economics,” explained trade using the example of a butcher and a customer. The butcher and the customer exchange meat and money. The butcher offers meat because he needs money, and the customer offers money because he needs meat. It is a very simple example, but all the transactions we encounter in everyday life fall into this category. In such exchanges, both parties act according to their own interests, and there is no coercion or compulsion from anyone.

The same logic applies to trade. The only difference is that goods and services are exchanged across borders; the basic principle is no different from ordinary transactions between individuals. To illustrate, let us return to Adam Smith’s butcher example. The only thing that changes is that the meat sold by the butcher is no longer Hoengseong Korean beef from Gangwon Province, but American beef. If the butcher sells Hoengseong Korean beef, it is simply a transaction, but American beef, having crossed the ocean, becomes an import. Selling American beef is, in other words, a product of what we call trade.

Just as there was once a slogan saying, “Let’s neither smoke nor buy foreign cigarettes,” imported goods are often easily shunned. People say that livestock farmers in Gangwon Province have been hurt because of American beef. Consumers are pressured into feeling guilty, with the argument that if you are Korean, shouldn’t you help save Korean farmers?

But this is not logical. Suppose someone argued that because livestock farmers in Gyeonggi Province were suffering due to beef from Gangwon Province, people in Gyeonggi should eat only Gyeonggi beef. If we follow the logic that Koreans should eat only Korean beef, then people in Gyeonggi should eat Gyeonggi beef, people in Gangwon should eat Gangwon beef, and people in Jeolla should eat Jeolla beef. Of course, no one would agree with such a claim.

Yet this logic, which insists only on the interests of certain producers, frequently appears in reality under the names of tariffs and various trade barriers. Is it logically sound to allow trade between Gyeonggi and Gangwon while blocking trade between Korea and the United States? The complaint that imported American rice has driven Korean farmers out onto the streets is no different. No one says that rice from the Honam Plain entering Seoul has left farmers in Gyeonggi in tears. No one takes issue with the boundaries between cities, counties, or districts, yet somehow national borders are treated as a problem.

Of course, from the perspective that a state must put the well-being of its own citizens first, it is natural for the Korean government to try to protect the interests of Korean farmers. After all, there is no reason for the Korean government to go out of its way to provide American farmers with opportunities to make money. That may be true if the only parties participating in the rice market are American and Korean farmers.

But producers are not the only participants in the market; consumers are as well. Ordinary citizens who consume rice lose the opportunity to choose the rice that suits their preferences through the free exchange of Korean and American rice. In economics, this is called consumer welfare. If the welfare consumers lose were smaller than the welfare farmers gain, then it might still be worth considering from the standpoint of the nation as a whole. Unfortunately, however, when trade is blocked, the welfare lost by consumers is almost always greater than the benefit gained by farmers. In other words, the nation as a whole suffers an enormous welfare loss.

Behind the misunderstanding of capitalism lies the malicious notion that market transactions arise from greed and that one side exploits the other. But reality is not like that. Opening the market does not lead foreign companies to exploit Korean companies or the Korean people. Nor, of course, are foreign goods forced onto Korean consumers. On the contrary, it is when free exchange is blocked that consumers’ freedom of choice is unfairly restricted. That is why free trade is necessarily fair trade.

■ Please remember

Opening the market does not lead foreign companies to exploit Korean companies or the Korean people. Nor, of course, are foreign goods forced onto Korean consumers. On the contrary, it is when free exchange is blocked that consumers’ freedom of choice is unfairly restricted. That is why free trade is necessarily fair trade.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

---

Original title: [시장경제 길라잡이] 모든 무역은 공정무역이다

Author: Sung-no Choi

Date: 2020-07-20

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=7&idx=22937