Free trade and international economic efficiency

In a previous discussion on this blog, Dan made this comment regarding the protectionist policies of Korea:

What you’re assuming vis-a-vis Hyundai and NASA is that there is a zero-sum game here when looking at these investments. If the nurturing of a high-wage, high-productivity industrial sector in Korea through government assistance to Hyundai and protectionist trade policies creates more exports does that not create more wealth? Are you really saying that keeping some kind of resource economy along with some light industry would have made for a more profitable country?

I’ve been pondering for a while what I think about this argument, and my main thought is along these lines:

1) Austrian economists frequently point out the fallacies involved in economic arguments that ignore opportunity costs. One of the most famous examples of this type of argument is called the “broken window fallacy”. Now, I don’t want to get into the details of that particular fallacy at this point, but I would like to point out the relevance of opportunity costs in the issue of redistribution or protectionist policies. That is, when a government subsidizes and creates a new industry to compete with other producers in the same field, they will always have to put forward start-up costs to get into the field which would not be involved for those who are already in the field, producing at the current price. What this seems to imply is that, by creating a new competitor where the market wouldn’t have, some wealth which would have gone to the most efficient (already existing) producers will instead be redistributed (or restricted from leaving the country) to producers who haven’t even started producing yet. Further, tariffs have similar opportunity costs: some local industry is made more attractive to local buyers by artificially making foreign prices high, but this of course has the effect of causing the more-efficient foreign producer to lose sales vis a vis the less-efficient domestic producer. So, these two issues (at least) considered, there seems to be an inherent inefficiency involved in this kind of activity. This leads me to my second thought which is more directly responsive to Dan’s comment…

2) It seems to me that, if Mises is right, one would not necessarily expect that there would never be a Hyundai-like event, but at the same time be able to say that, for the international economy, such intervention still has the net effect of the destruction of wealth, rather than the production of it. So, in other words, there doesn’t seem to be anything in free-market theory which would be falsified by the success of protectionist policies, measured in terms of how it benefits the nation protecting itself. Much the same could be said about imperialistic nations: at least in the short to medium term, empire can be a very lucrative enterprise. But when the good of the whole human race is considered, protectionism would seem to be a less efficient use of our scarce resources, which is intrinsically destructive of value. Or at least, so it seems to me.

Thoughts (from anyone)?