No. 412 November 2010 Your Sovereignty & Trade By Donald J Bourdreaux 16 November 2010 American consumers are choosing to take advantage of attractive bargains offered by Chinese producers. American producers who compete with those Chinese imports are choosing to do what producers have done from time immemorial: cowardly turning to government for relief from consumer sovereignty. And government is doing what it has so often done throughout history: protecting politically well‐organized producers by squelching consumer sovereignty. Consumer sovereignty is the right and ability of consumers to spend their money as they see fit. You exercise your consumer sovereignty when you choose to buy salmon for dinner rather than pork or beef or tofu. I exercise my consumer sovereignty when I continue to buy my favorite brand of breakfast cereal ‐‐ and when I switch to another brand. Along with entrepreneurial freedom, consumer sovereignty is one of the two fuels of competition ‐‐ and consumer sovereignty is the more important of the two. Unless consumers are free to reject products that they once bought in order to purchase new or different products, entrepreneurs will have no incentive to compete against each other by lowering prices, making better mousetraps or otherwise improving their offerings to consumers. But insofar as consumers do have sovereignty, entrepreneurs are driven by their desire for profit to outdo each other. Burger King tries to make its menu and its prices more attractive than those offered by McDonaldʹsʹ; McDonaldʹs responds by trying to offer tastier and lower‐priced food than consumers find at Burger King. This ongoing rivalry works to consumersʹ benefit. Consumer sovereignty means that entrepreneurs can profit only by pleasing consumers. Consumer sovereignty reflects the fact that the ultimate measure of any economyʹs success is how well it provides for peopleʹs needs and desires ‐‐ how much access it affords to the particular combination of goods and services (including leisure) that each of us uniquely desires in order to make his or her life as rich and as meaningful as possible. Opponents of free trade are quick to reply, ʺYes! ‐‐ and thatʹs why free trade is bad. It destroys jobs and, thus, denies people the income to buy the things they want.ʺ This reply has an air of superficial plausibility (which, no doubt, is why a recent poll reported in The Wall Street Journal finds Americansʹ support for free trade to be abysmally low). But scientific truth in this matter, as in all other matters, is not determined by polling or established by popularity. The very jobs that Americans today think ought to be protected from foreign trade are jobs that were either created by foreign trade or made attractive by foreign trade. Take steel. Much of the capital that built Americaʹs railroads in the 19th century came from foreigners (especially the British). Foreigners directly earned some of the dollars that they invested in American railroads by selling goods to Americans. Other dollars were gotten when foreign investors exchanged their own currencies (say, British pounds) for U.S. dollars. But these other dollars themselves were earned by other foreigners through their successful efforts to sell their wares to willing American buyers. Foreign investment in U.S. railroads, in turn, created a huge demand for steel, especially for the tens of thousands of miles of rails that were laid. Without this demand for steel rails, the American steel industry would not have developed when and as it did; without foreign investment, the demand for rails would have been much lower; and without trade, there would have been no foreign investment. The same can be said for countless other industries and jobs throughout America. Yet even for those rare jobs that have no direct connection with trade, the wages earned by their workers are higher because of trade. By keeping prices down, and outputs and product varieties up, trade makes every dollar earned go further. This fact means that the attractiveness of any particular job ‐‐ even one that does not depend upon sales to foreigners or on inputs or investments supplied by foreigners ‐‐ is raised by trade. Put differently, among the very reasons that losing a particular job to trade is so traumatic is that that job is made so attractive by trade. Of course, each of us would love to have our own job guaranteed while we simultaneously exercise the consumer sovereignty that enables us to enjoy a high standard of living. But to guarantee your job requires a sacrifice of some of your neighborʹs consumer sovereignty ‐‐ just as a policy that guarantees your neighbor his job requires a sacrifice of some of your consumer sovereignty. The only fair policy ‐‐ and the only one that ensures long‐run prosperity for all ‐‐ is a policy in which no oneʹs consumer sovereignty is ever sacrificed. Click here to read article. This article was published by the Pittsburgh Tribune‐Review online on 13 October 2010. To subscribe to our free perspectives series please email us your contact details by clicking here Related studies and commentary: Submission on the New Zealand China Free Trade Agreement A submission by the New Zealand Business Roundtable 8 May 2008 [Full text] The Role of the State in an Era of Globalisation The 2004 Sir Ronald Trotter Lecture 15 December 2004 By Martin Wolf [Full text] Free Trade or Fair Trade: What’s Best for New Zealand? A speech delivered to the University of Waikato Management School Public Seminar Series 8 August 2000 By Roger Kerr [Full text] Globalisation, Asia, and Implications for New Zealand A speech delivered to the Greenwich Financial Services Client Function in Auckland 9 December 1998 By Roger Kerr [Full text] New Zealand’s External Economic Policies A report published by the New Zealand Business Roundtable By David Henderson 1997 [Full text]