The Limits of Free Trade

...It unquestionably adds to national wealth...

...This is important if for no other reason than that the producers who benefit from protectionism are concentrated and know who they are, while the consumers who benefit from free trade are diffuse and often not fully aware that their cost of living is being reduced by lower-cost imports...

...And Smith even anticipated modern-day arguments that considerations of fairness justify retaliation "when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country...

...To them, trade is merely one in the arsenal of weapons to be used to implement the nation's foreign policy...

...Others, among them many China critics who cannot be accused of covert protectionist leanings, disagree...

...For a decision to move away from freer trade might be costly but nevertheless in the national interest...

...Were we to close our markets to Chinese goods—a practical impossibility given the difficulty of determining the origin of many products—we would have to bear some costs: higher prices for some consumer items, the possibility that China would retaliate by closing the few cracks through which American firms have managed to slip some goods and services into China, and the loss of such benefits as might be associated with a policy of engagement...

...Indeed, so significant are the benefits of free trade that policymakers should bring a bias in its favor to their work...

...market, compared with the variety, quality, and prices now available, to understand these benefits...

...The China issue provides a perfect example...

...And freer trade, an important contributor to the increase in that wealth, is worth fighting for in the vast majority of cases...

...It is also mitigated at times by the feeling that easier access to the huge, affluent American market is a gift not to be bestowed on the unworthy...

...This sort of economic rationality has its uses, too, in the debate over the relation of trade to other issues...

...And never mind the economist's argument that such a move is equivalent to shooting oneself in the foot by denying consumers access to the goods of the protection-minded country...

...So freer trade is not an absolute good in all cases...

...Imported automobiles may be a boon to consumers, in no small part by putting pressure on domestic manufacturers to keep prices down and quality up, but they are unwelcome threats to the wages and benefits of American auto workers...

...Win-win, surely...

...Similarly, Americans happily snatch from store shelves the low-cost sneakers and T-shirts that flow from China into the nation's malls, at one and the same time saving vast sums that would otherwise be spent on costlier made-in-the-USA shoes and garments, and helping impoverished Chinese workers begin the long ascent to Western standards of living...

...Columbia University's Jagdish Bhagwati contends that his study of data relating to trade, income, and other economic variables establishes "the overwhelming probability that diminishing trade barriers were a major contributory force in the postwar expansion of incomes...

...Joy at every trade-opening move is not bounded only by worries that such advances, albeit clearly in America's overall interest, create some losers...

...True, if we deny others the benefit of access to our markets we are depriving our consumers of access to the most efficiently produced goods the world's producers can offer, but there are times when the sacrifice of that benefit is in the broader national interest, or in the interests of preserving some of the values that Americans see as their obligation to export to other, less fortunate nations...

...The mechanism by which elimination of tariffs and other barriers to trade contributes to the wealth of nations has long been understood...

...In any case, it is important to seek the cheapest solution to any trade problem that cries out for solution...

...Defence," he wrote, "is of much more importance than opulence...

...Or at least until the Arab countries decide to unsheathe what they call the oil weapon, and deny America access to their relatively cheap oil unless it tailors its foreign policy to the desires of the anti-Israel oil producers...

...Start with an undeniable fact: A good part of the post-World War II Contributing editor Irwin M. Stelzer is director of regulatory studies at the Hudson Institute and a consultant to AT&T, News Corp., and several energy companies...

...He was right two hundred years ago, and the policy he enunciated remains right today...

...Listening to this debate, the public seems to have decided that both protagonists are right: It votes with its dollars in favor of the free trade that brings cheaper goods to its shopping malls, and simultaneously tells pollsters that trade restrictions are sometimes necessary to protect specific industries, or to "get even" with countries that misbehave towards the United States...

...The national interest has as a component, and an important component, the maximization of the wealth of the nation...

...In America, to cite just one example, it might well prove cheaper to pension off beet sugar growers than to continue to protect them from imports of far cheaper cane sugar...

...In this view, the promise of freer trade with America is an important policy tool for use in a wide range of circumstances: Access to American markets can be used as a carrot to get other countries to do things that we want them to do, and as a stick to get them to stop doing things that we don't want them to do...

...Smith saw such retaliation as an instrument that just might induce the offending trading partner to mend its ways...

...Cheap steel from Korea may make various household goods cheaper for consumers, but it plays havoc with the paychecks of American steel workers...

...But others have grander motives, such as the need to protect a key defense industry...

...It benefits consumers while, at times, harming some workers and investors...

...Before deciding between satisfying our natural inclination to freer trade, and our desire to use access to our markets to induce China to modify some of its domestic policies and its aggressive foreign policy, we should appraise the costs and the benefits of each of these policies...

...He argued, too, that national defense considerations—in the case of Britain the preservation of the large fleet on which its defense and ability to import necessities depended— make protection desirable...

...Some who want to prolong China's special trade treatment and welcome it into the World Trade Organization undoubtedly are convinced that free trade with that country is in America's economic interests—that free trade is so unambiguously valuable to our nation's interests that there can never be reason for using the trade carrot or the protectionist stick as an instrument of national policy...

...But it cannot determine policy...

...or workers caught in the gale of international competition, now more commonly known as globalization...

...Win-win, surely...

...or the need to make it clear that treading on us can have serious consequences because we Americans do not live only to maximize the flow of goods and services in international commerce...

...Once again we can turn to Adam Smith, no protectionist, he, for guidance...

...And let's agree that not everyone who favors preserving preferential trade treatment for China is a greedy capitalist, insensitive to China's appalling human rights record and its recent display of lawlessness in forcing down an airplane in international air space and holding the crew as hostages...

...The Bush administration, rumor has it, is preparing to grant special protection to the steel industry, either because "cheap imports" have produced a spate of bankruptcies, or because it wants steel-state congressman to vote to restore fast-track authority to the president...

...If a political decision is taken that it is somehow unfair to ask American firms to compete with subsidized foreign competitors, even if those subsidies represent wealth transfers from the taxpayers of the subsidizing nation to American consumers, that decision is in no sense irrational...

...Cheap labor imported from Mexico may keep the cost of maintaining a Beverly Hills swimming pool lower than it would otherwise be, but it also demonstrably depresses the wages of unskilled Americans and, in times of less-than-full employment, threatens their jobs...

...For there is more to a nation than its GDP When our then-minister to the French Republic, Charles Pinckney, said that we as a nation are prepared to pay millions for defense but not one cent for tribute, he was telling his countrymen that the economist's cost/benefit computations are at times quite properly trumped by considerations of national interest and pride...

...What writers today would call a win-win situation...

...But such enrichment is not a policy goal to be elevated above all others...

...prosperity and economic growth is attributable to the liberal trading regime erected, step by step, after the war by a combination of American policymakers and Britain's John May-nard Keynes...

...And Federal Reserve Board chairman Alan Greenspan contends that "the dramatic increase in world competi-tion—a consequence of broadening trade flows—has fostered markedly higher standards of living for almost all countries that have participated in cross-border trade, . . . most especially the United States...

...Complaints about the economic inefficiencies of such policies are, in the end, quite beside the point...

...Writers, that is, who are not troubled by serious doubts about where such reasoning leads, doubts that immediately trouble policy types, who see freer trade as only one of many objectives of national policy...

...America now trades fighter planes for Middle East oil, an economically sensible arrangement, given the fact that Middle Eastern countries could not develop an aircraft industry except at exorbitant cost, and oil produced in the United States probably costs at least ten times as much as oil from the sands of Saudi Arabia and other Arab countries...

...Some, it is true, bow to parochial protectionist pressures to win the votes of congressmen...

...One need only recall the price and quality of home-made automobiles before the Japanese cracked the U.S...

...None of this is to say that economic considerations are irrelevant to the formulation of a trade policy that serves the national interest...

...The resultant disparity of political power puts a responsibility on policymakers to enter the trade debate with a presumption in favor of the liberal trading regime that not only maximizes the availability of more efficiently produced goods from overseas, but puts pressure on domestic producers to become and remain efficient...

...Adam Smith summed it up by saying, "If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage...

...Free trade permits each country to do what it does most efficiently, and to trade that lowest-cost output for the goods of other countries specializing in what they do best...

...They can compare the costs and benefits of policies aimed at redistributing income from producers to consumers by supporting freer trade, and from consumers to producers by restricting the movement of goods and services in international commerce...

...Until the Chinese use the technology we have exported and the fruits of their enormous trade surplus with America to make possible an arms build-up that threatens America's Asian allies, and requires us to beef up our military presence in the region...

...If the people, speaking through their elected representatives, decide that forgoing cheap T-shirts is a small price to pay in order to deny support to a regime that has a repugnant human rights record, that is for them to decide...

...If nothing else, a sense that trade is "fair" as well as efficient is necessary to retain political support for ever-freer trade...

...Smith argued that it might be appropriate to grant relief from foreign competition to industries that face a heavy burden of taxation, which today we can reasonably interpret to include the costs of environmental and other regulations in instances in which the costs of those regulations exceed their benefits...

...Unless one is prepared to argue that there is some ethical reason why consumers are to be given preference over producers when making policy, this clash of interests must somehow be taken into account in formulating trade policy...

...Such a move might make sense if it costs consumers (including domestic industries that use steel in their products), say, one billion dollars, but not if it costs them ten times that...

...It may be bad economics, but that does not automatically make it bad public policy...

...That calculation can inform policy...

...When the presumption in favor of free trade is tested against the facts of specific pleas for exemption from its rigors, policymakers can use some help in deciding which cases warrant protection or special treatment, and which do not...

...But, like all other policies, it is best seen as only a part, albeit an important part, of a variety of policies designed to secure our national interest...

...In Britain, for example, it proved cheaper to grant generous lump-sum pensions to coal miners than to protect them from foreign competition or competition from other fuels...

...Here, economists come in handy...

...Because the benefits of trade are unevenly distributed, and because other considerations can be more important than increasing the efficiency of the international economy, even free-trading presidents at times have strayed from the straight and narrow...

...Serious policy types also worry that free trade creates losers as well as winners...