The effects of the Russian crisis dealt a severe blow to Lithuanian entrepreneurs, leaving them in desperate financial straits. The crisis put them to the test: turnover slumped; unplanned debts mounted; income decreased sharply; and some faced the threat of bankruptcy. Trying to fend off the reverberations of the crisis, the most resourceful entrepreneurs found markets in neighbouring countries, although these, despite free trade agreements, could not compete with the Russian market in terms of size.
In the meantime, the government, which displayed Olympian serenity for a long time, aroused hope that this time its action will be sound and well-considered. But as soon as some politicians and entrepreneurs, banking on government largesse, started to yell about an outright threat to the Lithuanian economy, the government took the same old protectionist stance. Proposals poured in to increase customs duties on sugar, glass, and fertilisers; and to tighten veterinary and quality requirements for imported goods. The programme for revitalising troubled enterprises was resumed. The crisis challenged not only business growth but also reforms and liberalisation and overshadowed Lithuania’s integration into the World Trade Organisation. We seem to be stuck halfway. Therefore, let’s look at what prejudices shackle us, and what can be done to help break them down.
The most popular argument for protectionism holds that exporting is a positive thing, whereas importing is evil, as it benefits only foreign manufacturers. Custom duties ostensibly safeguard the domestic industry and manufacturers.
Such arguments make one think that World War III is taking place. Only the frontlines separate exporters from different countries, and the most popular weapon is custom duties. But is trade a war? Countries trade not to improve their export-import balance but to exchange goods. The truth, known since the times of Adam Smith, is that it is wise to buy things you cannot produce better or more cheaply yourself and to sell things that you are best at producing. When people trade, they seek benefit: they want to obtain what they lack: money, commodities, values. Importing is the only way to obtain, by means of exchange, things we need or lack. It is much easier to buy a German or Japanese car rather than to try producing a Lithuanian one and, by doing so, boost the country’s economy.
On closer inspection, the largest part of the Lithuanian industry appears to depend on import. But implementing anti-import policies, the state forgets that there are two sides of the same coin: by restricting imports, they reduce export and make it more expensive. Noticeably, those who are unable to compete and are fearful of foreign rivals, who produce better and cheaper goods, seek the shelter offered by customs duties. They resort to government aid and power in order to cloak their impotence and to survive in the market at any cost.
Another argument comes from those who pretend to fight with unemployment. They believe that customs duties help protect the domestic economy and maintain jobs, whereas import ruins the local industry and boosts unemployment.
These arguments suit those who regard work as a value and welfare in itself, but not as a means of wealth creation. If we follow this widespread logic of central planning, we will most likely arrive at the conclusion that the best thing to do is to hand out spades to everyone in the country and go digging the meadows of Lithuania. This would solve the problem of unemployment in one fell swoop. But what people need is not simply work but opportunities to create their own well-being. If people could freely choose the means to achieve their welfare, the state would not need to take care of labour exchanges, the minimum wage, and unemployment benefits.
Customs duties do not create work. Quite the opposite. By restricting the flow of goods and services, and by raising their prices, customs duties reduce opportunities to create and find jobs. Free trade, for its part, allows people to choose the most effective method of division of labour. Each participant in an exchange chooses that which he can do best. That is why an engineer does not need to make shoes, and a shoemaker, to construct planes. As a result, time is saved and the greatest possible effectiveness is achieved. Of course, free trade does not create jobs on its own, but it creates wealth. And an individual seeking well-being is free to choose a profession and job that suit him best.
The champions of customs duties argue that it is a national interest to protect Lithuanian manufacturers. But who is going to protect Lithuanian consumers from local producers? The rhetoric about national interests makes one think that producers are the only residents of Lithuania, and that the government serves only them, by providing support, shielding them from foreign merchants and manufacturers, and by patriotically consuming their produced goods. The government not only safeguards producers, but also nurtures patriotic feelings among consumers by inveigling them in “buy-national” actions.
However, this widely manifested support policy invariably means concrete aid for a handful of producers. Such “national” support injures not only consumers, but also local businesses. Producer lobby groups always lean toward favourable laws regulating antidumping, market concentration, and international competition. By so doing, they create greenhouse conditions resistant to competition and safeguarded by national laws and outrageous customs duties.
Sadly, it is often overlooked that it is the consumers who pay the costs of such a producer-friendly environment. They bear the costs by maintaining the state that protects producers; by buying costly local products; and by consuming low-quality goods. In a producers’ country no one protects consumers from high, uncompetitive prices, low-quality production, and a shortage of goods.
The ultimate goal of any kind of production, trade, or import is consumption. Therefore, consumer rights and freedom of choice are the cornerstone of an effective market economy. Freedom of producers and traders is also an essential condition to ensure consumers’ freedom. In a free trade environment, consumers exchange their money for foreign goods and by doing so they enhance their welfare because they choose that which they lack most. So it is free trade only that can lay down conditions for the exchange of goods and prosperity.
It is a popular belief that, as long as neighbouring countries protect their consumers through high tariffs, Lithuania should join in the chorus and keep their borders shut. It is claimed that customs duties should be phased out gradually and only under pressure from international organisations. Also, some claim that a rapid removal of protectionist policies may destroy a country’s economy.
The argument exists that barriers to free trade should be eliminated gradually and only in conjunction with other countries. This reflects an attitude that if we all have our feet shackled, let us wait until others free themselves and then we will do the same. It is not only members of WTO who are advocate free trade. Singapore, Thailand, New Zealand, and even neighbouring Estonia have undertaken unilateral initiatives to lift restrictions on trade. Such steps towards trade liberalisation help to appreciate its merits, liberate economic relationships, and pave the way for free-market reforms. The importance of this position is marked not only by international recognition but, first and foremost, by favourable conditions for growth and prosperity.
