The Emperor's New Clothes

People are led to believe that trade restrictions between regions or countries “create jobs at home”, which they certainly do not. If people had the opposite belief that “free trade” between regions or countries “creates jobs at home”, that would also be an incorrect belief. Trade restrictions or free trade does not cause unemployment or cause employment in a region or country. Trade restrictions only lower the standard of living, hamper competition and restrict liberty. If for instance, the EU imposes tariffs on Chinese textiles, the Euro will appreciate against the Chinese Yuan (the value of the Euro will increase relatively to the Chinese Yuan). This depreciation (decrease in value) of the Chinese Yuan against the Euro, in this example, is caused by a smaller demand for Chinese textiles and therefore a smaller demand for Europeans to buy the Chinese Yuan. Because of this change in exchange rates, prices of goods from the EU to China will be generally higher and prices of goods from China will be generally lower (apart from textiles). As you can imagine, this will increase employment in the European textile sector, but decrease employment in other sectors. At the whole, unemployment will not change but trade between the regions will be lower. Specialization, competition and living standards in the EU region will be hampered. The tariffs will only serve special interest that is the textile manufacturers and their employees. Surely, we want our representatives to serve the common good and the common man and not special interests!

Someone might complain that the Chinese are intervening in the exchange markets to keep their currency artificially low and that they are not letting market forces to appreciate their currency, and therefore my statement about free trade, in this case, is not applicable. Free trade, someone might think, is presupposed by freely fluctuating currencies with no Government intervention (also called clean floating exchange rates). Certainly I do not want Governments to intervene in exchange markets, but actually it is the Chinese that are in this case the losers and we are the winners. We should be glad that China is suppressing the rise of its currency, and the Chinese people should be mad about it. When market prices indicate that, for example, a project is unprofitable; investors naturally stop investing in such a project. Otherwise, factors of production such as land, capital, and labour would be wasted. Every government manipulation of market prices is a step toward economic breakdown and chaos. Land, capital, and labour that are invested in the exporting business in China because of a suppressed currency, have changed the economic structure in China and are mal investments, unprofitable for the nation to undertake, and we are getting something free. We don't need to export anything to pay for this "extra importation of Chinese products”. To make my statement more obvious, we could consider that if the Chinese currency would be suppressed to no value at all (which would not be possible to realize), the Chinese would be working for nothing and we would get goods and services from China for free (which is, naturally unprofitable for China to undertake), then the market forces in the EU (if market forces would not be hindered by Governments) would reallocate land, capital and labour for other uses and to those fields which the Chinese are not able to compete (even if the Chinese were working and exporting to full capacity, that will not, by far, be enough to satisfy all our wants, in other words, their GNP is by far, too small). The increases in production which mentioned reallocation of recourses leads to are our extra bonus. We should applaud this and the Chinese people should revolt!

If you want to know more about floating exchange rates, go to; http://www.hooverdigest.org/974/friedman.html


Productivity and trade will flourish more intensively with one currency* than with several different currencies, and even with one currency, market forces will smoothen out any imbalances between regions, cities or countries. We do not worry, for example, about the balance of payments between London and Manchester, Berlin and Munich, Paris and Bordeaux or Stockholm and Göteborg etc. If, for example, London exports more to Manchester than Manchester exports to London, the demand for goods and services will be greater in London relatively to their supply, and also relatively to the situation in Manchester. Because of this, prices will go up in London and therefore will exports from London to Manchester contract, as well as, imports from Manchester to London will expand. This happens all the time and we do not even know about it and therefore do not worry about it. Governments do create problems all the time.


If we really want increased competition, why not adopt free trade between nations. Why does the EU and the USA not follow that path? The reason is that they do not want increased competition.

For an example, I quote from answers.com;

“In the United States, the decade from the mid-1980s to the mid-1990s saw import quotas placed on textiles, agricultural products, automobiles, sugar, beef, bananas, and even underwear—among other things. In a single session of Congress in 1985, more than three hundred protectionist bills were introduced as U.S. industries began voicing concern over foreign competition”.
Go to;
http://www.answers.com/import+quotas?gwp=11&ver=2.0.1.458&method=3

Only Governments can be so silly to reject great offers and bargains. Individuals doing the same thing would be considered mad.

The essence with above statement is that Governments hinders competition, lower our standard of living, promote special interests and they make excuses for this with faulty theories and propaganda.


Björn Lundahl
Göteborg Sweden



* A gold standard. See also “What Has Government Done to Our Money?” by Murray N. Rothbard.
http://www.mises.org/money.asp