Small governments have many close competitors. If they tax and regulate their own subjects visibly more than their competitors, they are bound to suffer from the emigration of labor and capital. Moreover, the smaller the country, the greater will be the pressure to opt for free trade rather than protectionism. Every government interference with foreign trade leads to relative impoverishment, at home as well as abroad. But the smaller a territory and its internal markets, the more dramatic this effect will be. If the U.S. engaged in protectionism, U.S. average living standards would fall, but no one would starve. If a single city, say Monaco, did the same, there would be almost immediate starvation. Consider a single household as the conceivably smallest secessionist unit. By engaging in unrestricted free trade, even the smallest territory can be fully integrated in the world market and partake of every advantage of the division of labor. Indeed, its owners may become the wealthiest people on earth. On the other hand, if the same household owners decided to forego all inter-territorial trade, abject poverty or death would result. Accordingly, the smaller the territory and its internal market, the more likely it is that it will opt for free trade.
