Trade: Free, Fair and Forgotten

Winston Churchill was so committed to the principle of free trade that in 1904 he chose to abandon his party rather than abandon the principle. In crossing the floor of the House of Commons to join the Liberal Party, he said: “We say that every (citizen) shall have the right to buy whatever he wants, wherever he chooses, at his own good pleasure, without restriction or discouragement from the state. There came last year into (our country) from every land and people under the sun millions worth of merchandise. … Why did it come? Was it to crush us, or to conquer us, or to starve us, or was it to nourish and enrich our country? All that vast catalogue of commodities came to our shores because some (citizen) desired it, paid for it and meant to turn it to his comfort or profit.”

Now, I’m not urging Republicans to jump ship – there is no free-trade Democratic ship on which to jump – but to emphasize that all trade in free enterprise is for the benefit of consumers and individual choice.

There is no doubt that President Bush’s pro-growth tax rate reductions significantly reduced the cost of capital and labor last spring and are now pushing hard on the economic accelerator.

As a result, imports are increasing and the trade deficit is rising, which is natural when the economy is growing and producers need capital goods and industrial supplies. That’s why I’m baffled that the White House insists on keeping the dead weight of protectionist trade policies hard on the economic brake in the name of reducing our trade deficit.

Protectionist policies are frequently justified with “fair trade” rhetoric, especially regarding our relations with China. For example, Commerce Secretary Don Evans stated recently that, “If you believe in free trade, you must also believe in a fair playing field.” That sounds good, but it is a euphemism for tariffs and quotas, and as economist Alan Reynolds pointed out in a recent column, “Tariffs and quotas restrict competition, restrict supply and raise prices.”

In recent days, U.S. trade policy has gone from poor (agricultural subsidies, tariffs on steel and Canadian soft lumber) to poorer with last week’s implementation of tariffs on China’s textile products. Fed Chairman Alan Greenspan, who consistently refuses to opine on economic policy beyond monetary and fiscal policy, was moved to warn of “clouds of emerging protectionism.”

Globalization’s malcontents brought about the collapse of trade negotiations at the last World Trade Organization trade summit in Cancun, but this time it wasn’t the usual suspects (radical environmental, labor and anarchist agitators) to blame. The talks collapsed because the developed nations – the ostensible vanguards of free trade – refused to yield on their own protectionist policies that harm developing nations. While the developed world does a good job talking about free trade, they have been an unmitigated disaster in pushing that agenda forward.

Sure, the developed nations have been “strong” in their support of intellectual property rights enforcement, reducing restrictions on exports and expanding foreign direct investment. But they have also been the primary sponsors of extending U.S.-style environmental and labor standards – standards that would directly impair poor countries’ ability to compete in the global market – on extending agricultural subsidies and erecting import restrictions on products from the developing world.

According to the Institute of International Econmics, since the United States imposed steel tariffs in March of 2002, the cost to steel users so far has been about $600 million in lost profits as well as an additional loss of 26,000 jobs. Contrast that with the benefit of just 5,000 jobs saved. My hope is that Bush will pragmatically find a way to remove the tariffs.

Adding insult to injury, the WTO ruled that the steel tariffs and the extraterritorial income/foreign sales corporation provisions of our tax code are illegal. That body has granted permission to the European Union to slap on retaliatory tariffs to the tune of $2.2 billion. As if that weren’t enough, the European Commission also authorized a plan earlier this month to institute sanctions on up to $4 billion of U.S. goods gradually from March 2004 unless the United States repeals disputed tax breaks for U.S. exporters by the end of this year.

So whether the issue is global trade talks, Chinese trade relations or sector-specific textiles, steel and even international tax policy, our trade policy needs some work.

Fortunately for Bush’s re-election efforts, the Democratic presidential hopefuls are even more determined to go farther down the protectionist/mercantilist track.

We need to change course on trade policy by supporting free trade with actions as well as rhetoric. It is not sufficient to talk about promoting peace and prosperity in Africa while closing our borders to their products. Retaliating against Chinese trade practices may serve short-term election-year politics, but it will not save or create American jobs. And ignoring our global commitments at the WTO will only lower American household income.

American voters already know protectionism is not sound policy. It won’t be long before politicians learn it is even worse politics.