The Mises Institute monthly, free with membership
Volume 14, Number 4
Gus Stelzer, a retired General Motors senior executive, is on a rampage against free trade. It makes sense from his point of view. Like most big business, GM does not welcome competition from abroad, however much it's spurred product improvements over the years. It turns to the government to tax imports that consumers desire more.
Today, Stelzer heads the American Council for Economic Security, a group that lobbies for American consumers to pay even higher prices for imports. He doesn't put it that way, of course. His highly influential, if cranky, book is The Nightmare of Camelot: An Expose of the Free Trade Trojan Horse. Its thesis is that protectionism is essential for our national survival.
His argument is uniquely designed to appeal to American conservatives upset with the direction the country has taken in the last thirty years. He talks about the evils of inflation, crime, family breakup, taxes, deficits, cultural depredation, welfarism, and rising interest rates. Steadily but implausibly he gets around to blaming the whole mess on trade and imports.
Free trade "has inflicted more pain on this nation than any other political or economic policy," says Stelzer, pushing the federal government itself way down the list. It is a "root cause of most social and economic problems now confronting America." Along with many truths about the Fed, Nafta, globalism, and the IMF, he repeats all the old fallacies on trade.
All foreign labor is either cheap, child, or slave. This is why he says we can't have free trade with Hong Kong or Latin America. But Japan's and Germany's wages, reflecting worker productivity and the size of the capital stock, are on par with those in the U.S. But this does not convince Stelzer. He doesn't want free trade with them either.
If the labor argument were valid, every U.S. manufacturer would have already moved to Bangladesh, paid workers a buck a day, and then shipped the products back to the U.S. High wage rates aren't an accident; they are the consequence of productivity and investment. They only scare off capital when they are artificially high due to government interference.
Nafta and Gatt are free-trade agreements. Everyone but government and well-connected multinationals hates these treaties, and for good reason. With their Byzantine maze of regulations regarding rules of origin, customs procedures, bureaucracies, restrictions, disputes settlement boards, and product definitions, they can only be called free trade in an attempt to disparage the ideal.
Free trade means no tariffs on any goods for any reason. Economists have always distinguished revenue tariffs (the framers preferred small ones to internal taxes) and protective tariffs (which are always a result of special interest lobbying). The former are a form of taxes, which are harmful enough, but the latter are always terrible for consumers and non-protected businesses.
Lower tariffs mean freer trade. But government frequently lowers tariffs only to impose regulations on the classification of particular products, more import quotas, strict anti-dumping laws, and regional trade blocs like Nafta. These are just as harmful, or more so, as direct tax on imports.
Trade deficits are detrimental to the economy. Trade deficits are an accounting fiction. The fact that we buy more from any country than they buy from us ignores the fact they cannot eat dollars. They have to be spent, which is why this "deficit" tends to ebb and flow. Also, the U.S. runs surpluses with many countries, but we don't hear the government saying we should pull back exports.
Free trade is based on outdated theories. To the contrary, the older free trade theories, along with the newer ones, have not been fully implemented since early in our nation's history. Governments have usually interfered with the right to trade and invest across borders, and always with bad consequences.
Foreign products are purchased only for their lower price. Tell that to a buyer of a Mercedes-Benz or a BMW. Price is in many cases the last consideration when buying an imported product. Yet price is important. It tells us the least costly means of production and therefore the most economic. If foreigners want to sell us inexpensive products, we should cheer.
The purchase of foreign products destroys U.S. industries. What kills business is uncompetitiveness, a bloated work force, artificially high union wages, egregious union demands, strikes, government meddling, high taxes, and regulations. The purchase of foreign products does not. Besides, much of what is currently imported consists of industrial materials and unfinished products. These are in turn made into products and are frequently exported.
Tariffs are paid by business and not consumers. It's true that consumers do not pay them directly because taxes can't be "passed on" so easily. Tariffs, like Social Security taxes and payroll taxes, impose new costs on business that can't always be paid. The result is fewer products and less efficiency. Consumers pay in the form of fewer choices at the retail level, which raises prices, while smaller businesses are harmed by not having access to materials.
Tariffs make nations great. The theory is that rich countries, e.g. the U.S. and Britain, have a mercantile trade policy. This is an elaborate example of the post hoc ergo propter hoc fallacy that ignores every counterexample. In fact, these countries were and are rich despite the taxes they impose on trade. If autarky made nations great, Albania would be our model and ideal.
The framers were protectionists. This assertion is "proven" by pointing to people who preferred tariffs to internal taxes or by reference 19th-century industrial supremacists. But the framers, e.g. George Washington in his Farewell Address, favored commercial relations with all and as few political connections with foreign government as possible. That should be our policy too: the 1790 Tariff Code fit on one page.
The Constitution endorses protectionism. Yes, the Congress has the authority to "regulate Commerce with foreign nations," but this is not protectionism. Neither does the "general welfare" clause mean we should have food stamps. The purpose of the trade clauses was to eliminate tariffs between states. All arguments against internal protectionism also apply internationally.
America has a free trade policy. In fact, the U.S. is among the most protectionist and trade-belligerent nations in the world. Bureaucrats can impose tax on more than 8,000 imports. The U.S. has negotiated 170 bilateral trade agreements to restrict exports to the U.S. The Commerce Department declares the defendants in 95% of dumping cases to be guilty.
As we should expect from opponents of trade, Gus Stelzer is an interventionist and a statist to the core. He favors an increased minimum wage, thinks FDR's socialist policies stimulate the economy, believes capitalism should be "constantly audited," favors more business regulation, and laments the decline of unions.
This is nothing more than resurrected mercantilism, government planning to bring about export-based industrialism. It has always and everywhere favored big companies over small ones, special interests over consumers, and short-term advantage over long-term freedom, security, and prosperity.
Stelzer's solution to our woes is an army of bureaucrats to further regulate the U.S. economy instead of what we really need: a wholesale dismantling of federal intervention. His policy would set in motion a vicious cycle of ever-increasing taxes and tariffs to combat the ever-increasing government burdens on business.
Laurence M. Vance teaches at Pensacola Bible College