@ jimmysong

Libertarians believe in open borders in theory. In practice, open borders don’t work, because, among other things, the combination with a welfare state creates a moral hazard, and the least productive of society end up within the borders of welfare states and drain resources. The social services are paid by the productive people of the country or, in the case of most fiat systems, by currency holders through inflation. Welfare states are much more likely under fiat money and the redistribution goes from native taxpayers to illegal immigrants. Thus, under fiat money, open borders end up being an open wound by which the productive lifeblood of the country bleeds out, despite the theoretical trade-efficiency benefits. As libertarians like to say, open borders and the welfare state don’t mix. In this article, we’ll examine the other sacred cow of libertarian thought: free trade. # Free Trade without Libertarian Ideals Free trade is very similar to free movement of labor in that it works great in theory, but not in practice, especially under fiat money. In a libertarian free-market world, free trade works. But that assumes a whole host of libertarian ideals like sound money, non-interfering governments, and minimal aggression. Once those ideals are violated, such as with government intervention in the market, similar moral hazards and long-term costs come with them, making free trade about as libertarian as a fractional reserve bank. An example will illustrate what I’m talking about. Let’s say Portugal subsidizes their wine for export to other countries. The obvious first-order effect is that it makes Portuguese wine cheaper in France, perhaps undercutting the price of French wine. Libertarians would say, that’s great! French customers get cheaper goods, so what’s the problem? As with any government intervention, there are significant second- and third-order effects in play. Subsidization puts unsubsidized companies at risk, perhaps driving them to bankruptcy. In this case, this might be a French wine maker. Subsidized companies may become zombies instead of dying out. In this case, this might be a Portuguese wine maker that was failing domestically but survives by selling to customers abroad with government subsidies. While French customers benefit in the short run with cheaper prices for wine, they are ultimately hurt because the goods that would have existed without government intervention never come to market. Perhaps French wine makers that went bankrupt were innovating. Perhaps the resources of the zombie Portuguese wine maker would have created something better. Further, the dependency of French people on Portuguese wine means that something going wrong in Portugal, like a war or subsidy cuts, disrupts the supply and price of wine for France. Now France must meddle in Portugal internationally if it doesn’t want the wine supply to get disrupted. The two countries get entangled in such a way as to become more interventionist internationally. A war involving Portugal now suddenly becomes France’s business and incentivizes military aid or even violence. As usual, the unseen effects of government policy are the most pernicious. # Not Really Free In other words, what we call free trade isn’t really free trade. A country exporting to the US may subsidize their products through government intervention, making the product cheaper in the US. This hurts US companies, and they’re forced into choices they never would have had to face without the foreign government intervention. But because the good is crossing borders under the rubric of “free trade,” it’s somehow seen as fair. Of course it’s not, as government intervention distorts the market whether it’s done by our own government or a foreign government. So why would a foreign government do this? It gets several benefits through targeted market manipulation. First, it makes its own companies’ products more popular abroad and conversely, makes US companies’ products less popular. This has the dual benefit of growing the foreign government’s firms and shrinking, perhaps bankrupting, the US ones. Targeted subsidization like this can lead to domination under free trade. It’s not unlike the Amazon strategy of undercutting everyone first and using the monopoly pricing power at scale once everyone else has bankrupted. The global monopoly is tremendously beneficial to the country that has it. Not only is there significant tax revenue over the long term, but also a head start on innovations within that industry and an advantage in production in the adjacent industries around the product. Second, the manufacturing centralization gives that country leverage geo-politically. A critical product that no one else manufactures means natural alliances with the countries that depend on the product, which is especially useful for smaller countries like Taiwan. Their chip manufacturing industry, holding 60% of global supply (2024), has meant that they’re a critical link for most other countries, and hence, they can use this fact to deter Chinese invasion. Third, because of the centralization of expertise, more innovations, products, and manufacturing will tend to come within the country. This increased production has cascading benefits, including new industries and national security. China leads the world in drone technology, which undoubtedly has given it an innovation advantage for its military, should it go to war. Fourth, the capital that flows into the country for investing in the monopolized industry will tend to stay, giving the country more wealth in the form of factories, equipment, and skills. While that capital may nominally be in the hands of foreigners, over time, the ownership of that industry will inevitably transition toward native locals, as the knowledge about how to run such industries gets dissipated within the country. # Currency Devaluation: The Universal Trade Weapon It would be one thing if only a specific industry were singled out for government subsidies and then the products dumped into the US as a way to hurt US companies, as that would limit the scope of the damage. But with currency devaluation, a government can subsidize all of its exports at the same time. Indeed, this is something that many countries do. While short-term, this helps US consumers, it hurts US companies and forces them into decisions that aren’t good for the US. To compete, they have to lower costs by using the same devalued currency to pay their labor as their foreign competition. That is, by relocating their capital, their manufacturing, and even their personnel to the country that’s devaluing the currency. Not only does relocating reduce labor cost, but it also often gets them benefits like tax breaks. This makes US companies de facto multinationals and not only makes them subject to other jurisdictions, but ultimately divides their loyalties. To take advantage of the reduced labor, capital must move to another country and, along with it, future innovation. Such relocations ultimately leave the company stripped of their manufacturing capability in the US, as local competition will generally fare better over the long run. Much of the value of the industry then is captured by other governments in taxes, development, and even state-owned companies. Free trade, in other words, creates a vulnerability for domestic companies as they can be put at a significant disadvantage compared to foreign counterparts. # Hidden Effects of Foreign Intervention Unlike the multinationals, small companies have no chance as they’re not big enough to exploit the labor arbitrage. And as is usual in a fiat system, they suffer the most while the giant corporations get the benefits of the supposed “free trade”. Most small companies can’t compete, so we get mostly the bigger companies that survive. The transition away from domestic manufacturing necessarily means significant disruption. Domestic workers are displaced and have to find new work. Factories and equipment either have to be repurposed or rot. Entire communities that depended on the manufacturing facility now have to figure out new ways to support themselves. It’s no good telling them that they can just do something else. In a currency devaluation scenario, most of the manufacturing leaves and the jobs left are service-oriented or otherwise location-based, like real estate development. There’s a natural limit to location-based industries because the market only grows with the location that you’re servicing. Put another way, you can only have so many people give haircuts or deliver packages in a geographic area. There has to be some manufacturing of goods that can be sold outside the community, or the community will face scarce labor opportunities relative to the population. You also can’t say the displaced workers can start some other manufacturing business. Such businesses will get out-competed on labor by the currency-devaluing country, so there won’t be much investment available for such a business, and even if there were, such a business would be competing with its hands tied behind its back. So in this scenario, what you end up with are a large pool of unemployed people whom the state subsidizes with welfare. So when a US company leaves or goes bankrupt due to a foreign government’s subsidies, the disruption alone imposes a significant short-term cost with displaced labor, unused capital goods, and devastated communities. # Mitigations So how do countries fight back against such a devastating economic weapon? There are a few ways countries have found around this problem of currency devaluation under free trade. First, a country can prevent capital from leaving. This is called capital controls, and many countries, particularly those that manufacture a lot, have them. Try to get money, factories, or equipment out of Malaysia, for example, and you’ll find that they make it quite difficult. Getting the same capital into the country, on the other hand, faces few restrictions. Unfortunately, the US can’t put in capital controls because dollars are its main export. It is, after all, the reserve currency of the world. Second, you can compete by devaluing your own currency. But that’s very difficult because it requires printing a lot of dollars, and that causes inflation. There’s also no guarantee that a competing country doesn’t devalue its currency again. The US is also in a precarious position as the world’s reserve currency, so devaluing the currency more than it already does will make other holders of the dollar less likely to want to hold it, threatening the reserve currency status. So the main two mitigations against currency devaluation in a free trade scenario are not available to the US. So what else is there? The remaining option is to drop free trade. The solution, in other words, is to add tariffs. This is how you can nullify the effects of foreign government intervention, by leveling the playing field for US manufacturers. # Tariffs One major industry that’s managed to continue being manufactured in the US despite significant foreign competition is cars. Notably, cars have a tariff, which incentivizes their manufacture in the US, even for foreign car makers. The tariff has acted as a way to offset foreign government subsidies and currency debasement. The scope of this one industry for the US is huge. There are around 300,000 direct jobs in auto assembly within the US (USTR) and there are an additional 3 million jobs supplying these manufacturers within the US. But the benefits don’t end there. The US is also creating a lot of innovation around cars, such as self-driving and plug-in electric cars. There are many countries that would love to have this industry for themselves, but because of tariffs, auto manufacturing continues in the US. And though tariffs are seen as a tax on consumers, US car prices are cheap relative to the rest of the world. What surprises a lot of people when they move from the US to other countries is finding out that the same car often costs more abroad (e.g. 25% tariffs keep U.S. prices 20% below Europe’s $40K average, 2024). The downside of tariffs pales next to the downsides of “free trade.” # Free Trade Doesn’t Work with Fiat Money The sad reality is that while we would love for free trade to work in the ideal libertarian paradise, it won’t in our current fiat-based system. The subsidization by foreign governments to bankrupt US companies or to make them multinational, combined with the unfortunate reality of the US dollar being the world reserve currency, means that free trade guts the US of manufacturing. Tariffs are a reasonable way to protect US manufacturers, particularly smaller ones that can’t go multinational. What’s more, tariffs make the US less fragile and less dependent on international supply chains. Many of the wars in the past 60 years have been waged because of the entanglements the US has with other countries due to the reliance on international supply chains. Lessening this dependency, if only to prevent a war, has clear value. Lastly, labor has been devalued significantly by fiat monetary expansion, but at least some of that can be recovered if tariffs create more manufacturing, which in turn adds to the demand for labor. This should reduce the welfare state as more opportunities are made available and fewer unemployed people will be on the rolls. # Conclusion Fiat money produces a welfare state, which makes open borders unworkable. Fiat money also gives foreign governments a potent economic weapon to use against US companies, and by extension the labor force that powers them. Though currency debasement and capital controls are available to other countries as a defense, for the US, neither of these tools is available due to the fact that the dollar is the world reserve currency. As such, tariffs are a reasonable defense against the fiat subsidization of foreign governments.