Wednesday, May 16, 2007

In Defense of Free Trade

The February 26th edition of the Washington Post carried an editorial calling for punitive tariffs on Chinese goods. On February 27th, the Chinese stock market fell 8.8% and other Asian markets followed suit. European markets also succumbed and then the US market had its worst one day loss since 9/11, dropping over 400 points on the day. This past week on May 9th, Rep. Sander Levin (D, MI), chairman of the House Ways and Means Committee, convened a hearing entitled, “Is China Playing by the Rules?” in which he and other politicians accused China and Japan, among others, of unfairly manipulating their currencies to gain a trade advantage with the US. The Dow promptly dropped 150 points. Coincidence?

The honorable(?) gentleman from Michigan of course is merely responding to his constituents. Detroit automakers, rather than trying to get their own house in order, find it much easier to trek to Washington and try to gain protection from their foreign competitors through legislation. It apparently matters little that these “foreign” competitors manufacture most of their US sold goods right here in the good ol’ USA. But why should the entire automobile buying public pay the price for GM’s mismanagement?

Senators, facing election only every six years, should theoretically be able to withstand the populist impulses of their House brethren. In fact, that is how the founders envisioned Senators – as elder statesmen who would look out for the good of the country rather than their own states’ narrow interests. Unfortunately, with Senators now popularly elected, they don’t seem able to restrain themselves. Sen. Charles Schumer (D, NY) and Sen. Lindsay Graham (R, SC) have been trying to pass an odious piece of legislation that would impose 27.5% tariffs on Chinese goods unless they revalue their currency upward against the dollar by a similar amount. The damage to the Chinese economy from such tariffs is debatable; the damage to our own is not.

In the debate of the Tariff Bill of 1842, John C. Calhoun argued that when tariffs are imposed for protective purposes, “government descends from its high and appointed duty, and becomes the agent of a portion of the community to extort, under the guise of protection, tribute from the rest of the community; and thus defeats the end of its institution, by perverting powers, intended for the protection of all, into the means of oppressing one portion for the benefit of another.” It seems not much has changed since 1842, except the consequences; the “Tariff of Abomination” ultimately led to the Civil War. This latest attempt to defy the principles of economics only has the fate of our economy at stake.

Unlike the debate over global warming, which is anything but settled, the debate over free trade, at least among economists, is truly over. From Adam Smith to David Ricardo to Ludwig von Mises to Friedrich Hayek to Paul Krugman to Greg Mankiw, economists have agreed on the beneficial effects of free trade. Politicians and the general public, being unconstrained by the truth of free trade theory, are the only ones who still believe there is something to be gained through protectionism. Politicians believe, and they are probably right, they can gain votes through tariff legislation. The general public believes they can exchange some of their freedom for economic security. To paraphrase Benjamin Franklin, those who would make that trade deserve neither.

Every consumer in this country will pay for tariffs in higher prices while the benefits will be limited to narrow, politically connected interests. John C. again put it well in the debate over the 1842 tariff: “Protection against what? Against violence, oppression or fraud? If so, Government is bound to afford it…It is the object for which government was instituted. No; it is against neither violence, oppression nor fraud…Against what, then, is protection asked? It is against low prices.” Why should the majority pay for benefits that only accrue to a small minority? Politicians are trying to protect well organized, politically savvy manufacturers from the “unfair” competition of foreigners, but manufacturing accounts for only 12% of our GDP and that share has been falling since the 1950s.

Wealth and economic security cannot be gained through protectionism. Even when other countries don’t practice free trade, as certainly China and Japan do not, we benefit from free trade. “If other countries injured us by burdensome exactions, it was not reason why we should do harm to ourselves.” (Calhoun, January 27th, 1841) American ingenuity and entrepreneurship, not protectionism, are the source of our nation’s wealth. Politicians would be well advised to concentrate on providing an economic framework that allows those characteristics to flourish rather than trying to protect their friends who represent only a small slice of our economy.

The revolution in communications wrought by the internet makes trade both easier and more profitable. Politicians trying to restrict trade are standing in the way of progress. Poor countries like India and China are desperately trying to improve the living standards of their citizens while the citizens of the US enjoy unrivaled riches. How can we justify restricting trade in the name of a minority of our citizens when so many around the world suffer the indignity of extreme poverty?

"I regard free trade, as involving considerations far higher, than mere commercial advantages, as great as they are. It is, in my opinion, emphatically the cause of civilization and peace.” Like my ancestor before me, I stand in defense of free trade because I believe in freedom and I believe the path to peace is through commercial interaction with the world. Our reputation has already suffered from the arrogant prosecution of the Iraq war. We will only further injure that reputation if we also seek to restrict trade. Tariffs and other forms of protectionism such as the demand for environmental and worker protections in trade treaties are antithetical to freedom. The United States has a moral responsibility to lead the world by example and we cannot do that by restricting trade with countries that are desperately trying to pull themselves out of poverty through industry. It is both economically ignorant and morally repugnant.

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