Argentina's Trade Wars

A cautionary tale in own goals, self-sanctions and the law of unintended consequences...

(Palacio del Congreso de la Nación Argentina, Buenos Aires, Argentina. WikiCommons)

“Government is the great fiction, through which everybody endeavors to live at the expense of everybody else.”

~ Frederic Bastiat from his essay The State (1848)

Joel Bowman with today’s Note From the End of the World: Buenos Aires, Argentina...

Can government really make us rich?

By levying taxes at home... or imposing tariffs abroad... the State claims to be able to improve the lot of the common citizen.

It is a grand assertion to be sure, proffered willingly by our better angels on both sides of the political aisle.

But where’s the evidence?

Mr. Trump reckons he can Make America Rich Again by imposing tariffs on her foreign trading partners, notably China. As he explained at last weekend’s rally in Las Vegas, in his own, peculiar Trumpian dialect:

“Years ago, 1870 to 1913, we didn't have an income tax. We had, what we had is tariffs, where foreign countries came in and they stole our jobs, they stole our companies, they stole our product. They ripped us off. And, you know, they used to do numbers. And then we went to tariff, a tariff system. And the tariff system made so much money. It was when we were the richest from 1870 to 1930.”

Assuming that Mr. Trump is correct, and that the period from roughly 1870 to 1930 represented America’s Gilded Age (relative to other nations), does it necessarily follow that the genesis of such a national fortune was tariffs?

After all, correlation does not imply causation... or “cum hoc ergo propter hoc” for all you Latin dorks. (Yeah, we see you…)

Questionable Causes

Let’s say you walk into a casino, maybe even to glimpse a Trump rally. There you espy a well dressed man with a fancy gold watch seated at the craps table. Statistically speaking, the gentleman is not likely rich because of his gambling habit, but rather despite it. (Unless, of course, he owns the casino, in which case the odds are likely stacked in his favor.)

Gambling is a costly habit, in other words, but one a rich fellow can support because he derives his income elsewhere. Even so, he would probably be better off (financially) without it.

Is it possible, the curious reader wonders, that America enjoyed its age of abundance despite its trade tariffs and protectionist policies, rather than because of them?

Might limited government and freedom from burdensome income taxes (as Mr. Trump partially suggested) have led to the real wealth of a nation, one that was able to support a costly habit of higher import prices and coddled domestic industry?

Moreover, would a flourishing nation have been even more prosperous had it only eschewed its protectionist tariffs and leveraged its own, comparative advantage at home?

The revenue from the era of tariffs is easy enough to see... but what about the unseen costs of unfree trade?

Hmm...

We shall return to Mr. Trump’s trade wars – and the associated, unseen costs – in a future Note. In the meantime, we’ve long promised a cautionary tale from down here at the other End of the World.

A Long, Long Time Ago

There was a time, roughly nine sovereign defaults ago, when Argentina was considered one of the wealthiest places on the planet...

From its vast and fertile Pampas in the west... to the resource rich Patagonia in the south... from its prized cattle to its favorable geography and cultured, cosmopolitan people... it seemed as though this far-flung land had it all. It was a time when “to be rich like an Argentine” was said with a straight face... and not a heavy heart.

Alas, as history shows, there is no situation so favorable, no bounty so vast, no natural endowment so generous, that a hard working government can’t ruin it with sophisticated ideas and the irresistible, managerial impulse.

By the time Juan Perón’s strongman shadow fell across this nation, in 1946, Argentina was strongly positioned as one of the leading export countries on earth. But the tide was turning and, in the wake of WWII, nations across the Old World had begun turning inward, choosing to focus on domestic economic growth rather than international trade.

Here in the New World, too, the trend away from free exchange and laissez-faire economics was in full swing, with Big Government solutions to a whole host of challenges, both real, imagined... and purpose built.

One particularly potent strain of eggheaded idiocy, known as “import substitution,” professed to help developing countries like Argentina industrialize rapidly, by reducing dependence on imported manufactured goods. So went the theory, anyway.

Argentinian structural economist, Raul Prebisch, was a leading proponent of the idea. The Prebisch-Singer hypothesis held that primary goods tended to decline relative to prices of manufactured goods over time. Therefore, held Prebisch (and his coauthor, Hans Singer), poorer nations like Argentina would be forever at the mercy of, and dependent on, industrialized, developed nations.

Developed and developing... patrician and plebeian... guild-master and journeyman... oppressor and oppressed; such is the product of the binary, zero-sum “thinking” that infects the dark heart of every malignant Marxist scheme.

The subsequent “dependence theory,” by which peripheral nations are eternally subjugated by core wealthy states, characterized and informed Argentina’s disastrous foreign trade policy – as well as much of that across Latin America – well into the latter half of the 20th Century.

Prebisch argued that by imposing heavy-handed protectionist policies, like steep trade tariffs, the government could shield domestic manufacturers against rapacious and “unfair” foreign competition, bolstering growth and success at home with the typical mixture of lavish federal subsidies, central economic planning and that reliable, age old tool for controlling the hoi polloi: goose-stepping nationalism.

Overfed Mosquitos

It must have seemed simple enough. Of course, the real world is infinitely more complex and dynamic than any backward-looking bureau, central planning committee or meddlesome federal agency can possibly imagine. And yet, as H.L. Mencken liked to say, “For every complex problem there is an answer that is clear, simple, and wrong.”

So how did Prebisch’s theory – equal parts clear, simple... and wrong – work out for the citizens of this once proud and wealthy nation?

As Argentina erected massive trade barriers to foreign exporters, its domestic industry turned inward, concentrating instead on the local market. Like the only mosquito at a nudist colony, manufacturers soon grew fat and complacent owing to the lack of competition and constant supply of State subsidies. Over time, this resulted in both lower quality goods and higher production costs, making the country less competitive in global markets.

Additionally, as Argentina’s industry was directed by central planners – and not market forces – the country inevitably began to manufacture products in which it did not enjoy what classical economist David Ricardo described as its “comparative advantage.”

That is, a good that can be produced at a lower relative opportunity cost, or lower relative marginal cost prior to trade, than the competition. (Imagine the Saudis shuttering their hydrocarbon industry to instead focus on producing gender studies PhDs. Hardly putting their best sandal forward...)

By 2023, 77 grinding years after Perón’s “Argentina first” program, the country had fallen from its Top 10 position on the global wealth ladder to 71st place... well below the world average, somewhere between Kazakhstan and Mauritius. It was also about $4,000 per person poorer on an annual basis than neighboring Chile, which turned away from “import substitution” and “dependence theory” in the late ‘70s and began introducing pro-market reforms aimed at leveraging its own comparative advantages.

Within a few short generations, Argentina went from hero to victim... Full Ricardo to Full Retardo... from a land of immense wealth and prosperity to one of manufactured scarcity and State sponsored poverty...

Happily for the long-suffering Argentine citizens, their story doesn’t end there... even if today’s column does.

Stay tuned for more Notes From the End of the World...

Cheers,

Joel Bowman

P.S. As always, a big thanks to our dear Notes members for helping us bring the message of free markets, free minds and free people to readers across all 50 US states and in 135 countries around the world!

In many ways, the story here in Argentina is providing a beacon of hope for liberty-minded people around the world.

We regularly receive emails from folks up and down the Americas, across Europe, in Australia and New Zealand. Their message: “If it can happen in Argentina… maybe it can happen here, too?”

Here’s what a few of our Notes members are saying…

Thanks to ALL our Notes members for supporting our work. The future is bright with you on board. We may be small, but we are legion. And we are bringing down the mainstream narrative… one brick at a time.

If you’re not already a member, but would like to join our growing Notes community and help support the ideas of free markets, free minds and free people, please consider becoming a member today. Thanks in advance ~ JB