Entries Tagged as 'tariffs'

Free Trade Isn’t A Cure-All

June 10th, 2011 at 10:48 am 5 Comments

The American economy has entered a period of turmoil unlike any it has seen in decades.

The solutions, to me at least, do not seem radically easy or clear, but the first step in finding a solution is to clarify our language in talking/thinking about the problem. If we are serious about finding ways of addressing some of the serious structural problems of the economy, we must be willing to offer a thoroughgoing analysis of the whole economic order.

The trends of “globalization” have had a huge impact on the American economy in the past 20 years. Yet I think there have been some confusions in our contemporary discussions of globalization, so here are a few (mildly polemical) challenges to contemporary assumptions, focusing on trade and manufacturing policies.

The decline of manufacturing is not like the decline of agriculture. The shrinking manufacturing sector is often mistakenly analogized to the drastic drop in the number of Americans working in agriculture from 1870 to 1950. The current trade deficit, driven by manufactured goods, disproves that analogy. The story of the Industrial Revolution in America is not the replacement of agriculture by manufacturing but the incorporation of agriculture into a new, broader economy. Throughout industrialization, Americans still produced enough food to feed themselves and those in other nations.

For the most part, we still do produce enough food to do so. The number of Americans working in agriculture has declined drastically, but, due to increases in productivity, the output has only increased. While it is true that productivity has increased in manufacturing and that automation has cut down on the number of needed factory jobs (the US still does produce a lot), such an increase in efficiency does not tell the whole story of the decline of American industry: if it did, we would still be producing huge quantities of shoes, computers, tools, and countless other items. The fact that factories are closing down while our trade deficit has skyrocketed over the past 20 years is a sign of how different the fates of manufacturing and agriculture have been.

We do not live in an era of free trade (or: cheap imports do not equal free trade.) Some of those who criticize the reigning trade hegemony counterpose “fair trade” to the dominant “free trade.” This criticism is mis-aimed. We may not have “fair trade,” but we certainly don’t have “free trade,” either.

The current global trade order is not free trade but actually a species of neo-mercantilism. Many developed nations have opened up their economies to an influx of goods from poorer, often autocratic, mercantilist countries. Most importantly for the case of “free trade,” there is often a great disparity in openness between trading partners. These disparities are especially stark for the United States. U.S. policymakers have in a variety of ways unilaterally opened up the American market while allowing other countries to stack the deck against U.S.0 businesses and workers.

We are told that this flood of imports is “free trade” when, in fact, numerous barriers are put up against American products.

Consider our relationship with the People’s Republic of China, our second-largest trading partner. It would be a stretch to declare that this relationship is “free trade.” The PRC manipulates its currency as a de facto tariff against U.S. goods — and piles further outright tariffs on US goods. The price of entry into the Chinese market is often, in part, a joint-venture agreement, in which a foreign company provides intellectual property and other advanced technologies while local Chinese contacts supply workers and land for factories.

Mandating that businesses open up factories in a nation in order to have access to it is not exactly classical free trade.

These agreements are very often deleterious to U.S. workers and U.S. companies. The office-supply manufacturer Fellowes, for example, opened up a joint-venture manufacturing facility in the PRC. For a few years, this factory led to some considerable profits for Fellowes.

In  2010, this stream of profit came to a sudden end, when Fellowes’s Chinese partner moved to take possession of the facility:

The dramatic moment was in early August, 2010, when Zhou, under the aegis of Shinri, blocked the gates of the joint venture facility with security guards and trucks, preventing people from going in and goods going out, effectively shutting down production. Shinri expelled and confined the managers, moved funds from the joint venture to a Shinri-controlled bank account, sent packing the 1,600 joint venture employees, and at night, drove a truck into the facility and stole Fellowes-owned injection molding tools, some of them weighing several tons.

Fellowes’s former partner now has taken possession of millions of dollars of equipment and technological know-how—all without paying a cent (or a yuan) for it. The Chinese government appears to be giving cover to what many would consider theft. Fellowes is but one of many companies that have had their investments and technologies confiscated by the politically connected of the PRC. Without a basic respect for property rights, there can be no capitalistic free trade.

Trade policy does not happen in a vacuum. In part to cope with the throes of industrialization, the United States passed various worker and consumer protections in the twentieth century: regulations for environmental protections, worker safety, wages, and other areas. When the U.S. economy was bounded by tariffs, these regulations helped ensure that an increase in industrial production went along with an increase in the standards of society. However, in our new era of neo-mercantilist globalism, the role of these standards has become considerably more troubled for U.S. workers.

Consider the case of environmental standards.

As the decades have gone on, our environmental standards have become increasingly invasive and onerous. Government more and more regulates chemical usage, energy sources, waste disposal, land use, and other aspects of environmental production that affect industrial policy. The presumed beneficiary of these regulations is the public at large through the protection of the environment. Our laws tell companies that, if you manufacture in the U.S.A., you must face numerous obligations and pay increased costs due to all these regulations. Our trade policies, however, tell those very same companies that, if they manufacture their products abroad, they need not worry about any U.S. environmental or worker regulations.

One might wonder how the environment is helped when U.S. policies incentivize heavy industry leaving a country with some environmental regulations (such as the U.S.A. or many European countries) and going to a country with far fewer (such as the PRC or India).

I recognize that economic prosperity is often correlated with an increase in environmental protections, so a wealthier India may eventually introduce further environmental protections. But there seems to be an often radical disproportion between how politicians talk about environmental policies and what our trade policies actually encourage. The debate over “global warming” reveals this disproportion at the height of its absurdity.

In the name of “global warming,” the federal government has banned the classical incandescent lightbulb in order to cut down on carbon emissions; meanwhile, through trade policies, it has encouraged a gross increase in carbon emissions through encouraging manufacturing to move to nations with radically less efficient and more polluting forms of industrial production.

“Global warming” advocates often stress that the world is at a tipping point for carbon emissions and forecast the deaths of potentially hundreds of millions of people if carbon patterns do not change right now. Many of these same advocates, however, seem to see no problem with the continued destruction of American manufacturing.

A “cap-and-trade” scheme or carbon tax, without any attention to broader global industrial questions, would do little for American employment or lower carbon emissions. If environmentalism is more than NIMBYism and self-righteousness, we need to consider the effects of our current trade policies upon domestic policies.

To acknowledge (or to wonder about) the limits of neo-mercantilist globalism is not to embrace isolationism; on the contrary, this kind of critique opens up further ways of engaging with the broader community of nations. It would be foolish to turn our economic or political backs on the world, and a tariff war would very likely create more problems than it would solve.

But it would equally foolish to allow our thinking to be frozen by hazy myths and knee-jerk assumptions.

The theory of free trade does have much of value to it. Under the right conditions, trade between nations does lead to a rising tide for all boats. There have also been many benefits to the current neo-mercantilist order, though some of the implicit tensions of this order have risen to the surface during the last few years of economic turmoil.

Yet, living within this order, the United States must find ways to renew its competitive edge and successfully compete with mercantilist powers. It might also, with its allies, consider how best to revise this order so that it better advances the ideals of freedom and prosperity.

Originally published at A Certain Enthusiasm.

The Mugwumps: Public Moralists of the Gilded Age

David Frum August 25th, 2009 at 4:13 pm 1 Comment

To the extent that anybody remembers them at all, search the Mugwumps of the 1870s and 1880s get predominantly negative press. Their reputation has not recovered from the scorn applied to them by Richard Hofstadter in his famous work, The Age of Reform.

[T]he typical Mugwump was a conservative in his economic and political views. He disdained, to be sure, the most unscrupulous of the new men of wealth, as he did the opportunistic, boodling, tariff-mongering politicians who served them. But the most serious abuses of the unfolding economic order of the Gilded Age he either resolutely ignored or accepted complacently as an inevitable result of the struggle for existence or the improvidence and laziness of the masses. As a rule, he was dogmatically committed to the prevailing theoretical economics of laissez-faire . His economic program did not much beyond tariff reform and sound money – both principles more easily acceptable to a group whose wealth was based more upon mercantile activities and the professions than upon manufacturing and new enterprises – and his political program rested upon the foundations of honest and efficient government and civil-service reform… The Mugwump was shut off from the people as much by his social reserve and his amateurism as by his candidly conservative views.

Ouch!

Hofstadter contrasted the Mugwumps to his much preferred Progressives, who emerged on the political scene a generation later.

The sons and successors of the Mugwumps had to challenge their fathers’ ideas, modify their doctrinaire commitment to laissez-faire, replace their aristocratic preferences with a startling revival of enthusiasm for popular government, and develop greater flexibility in dealing with the demands of the discontented…

By and large this verdict remains the verdict of the historical profession – that is when they do not excoriate the Progressives too. It was to challenge this settled view that David Tucker published his The Mugwumps: Public Moralists of the Gilded Age in 1998.

The debate might seem an obscure one, a dusty brown controversy in the boring “taxes and tariffs” middle chapters of a history textbook. Look closer, though, and you discover a story of painfully sharp contemporary relevance.

In the seven years 1861-68, the Republican party of Abraham Lincoln, William Seward and Charles Sumner had remade the country. They had raised an army, won a civil war, and freed the slaves. They had seized upon Southern absence from Congress to legislate the long-stalled Whig nation-building agenda: national banks, a national currency, a transcontinental railroad, homesteading, land grant universities, the admission of new free states, the purchase of Alaska, and a constitutional amendment – the Fourteenth – defining and enforcing a national citizenship.

But with that great agenda accomplished, Republicans had to face the question: now what? Ulysses Grant won the 1868 election on the slogan, “Let us have peace,” and his party struggled to find a new identity for this peacetime era.

The predominant view in the Republican party was that of the group that came to be called the Stalwarts. The Stalwarts were dedicated above all to maintaining the unity of what was already beginning to be called the Grand Old Party. Then as now, sustaining a political party cost money. Then as now, there were a very limited number of ways of raising that money.

Way number one was through campaign contributions. Large and important industries had grown up during the war, and their prosperity was challenged by the return of peace. Pennsylvania’s ironmongers particularly had to worry about a drop in orders and cheaper competition from Great Britain. They offered large rewards to a party that would offer them tariff protection.

Way number two was through kickbacks from patronage hires – i.e., almost all hires. The 2% or 3% of salary returned to the party by grateful officeholders provided the single largest stream of party income through the 19th century. And after 1865, there were suddenly a lot more jobs to distribute! The new tariffs had to be collected, Civil War pensions had to be paid, the new Departments of Agriculture and Interior had to be staffed. And what better way to express the thanks of a grateful nation than to staff those jobs with wounded soldiers, securing not only their support but that of their extended families?

Of course, the purpose of raising money is to win votes. Again then as now, Americans voted their pocketbooks. The country had ended the war deep in debt. Not only government, but farmers and manufacturers had borrowed heavily. Most of that borrowing had been done in greenback dollars. Because the greenback had lost about half its value against gold, the weight of those debts would double if the US quickly returned to the prewar monetary standard. To protect debtors, Republicans in Congress called for a very slow return to the old money.

This very practical politics secured the Republican hold on power – but in ways that looked to many Americans not very different from outright corruption.

The group that would come to be called the Mugwumps (the name would not be applied until the election of 1884) coalesced around a few clear reform principles:

1)   Civil servants should not be appointed or removed on political grounds.

2)   Tariffs should be reduced according to the principles of free trade.

3)   The US should return to prewar monetary standards immediately.

From our modern point of view, the first two principles look unassailable, the third less so: the too rapid return to gold and silver would have (and ultimately did) plunge the US into an avoidable depression. Yet even on point 3, the future Mugwumps had intuited something correct: political control of the money supply was dangerous. Gold and silver were the wrong answer, but the right answer – an independent monetary authority like the Federal Reserve – still lay over the horizon of the American political imagination.

The issues that bedeviled post-Civil War America may seem remote. But the politics of the era is almost eerily familiar.

Talk about a divided nation! Here’s an extract from a famous speech of the era, more eloquent than usual, but more venomous:

Every man that tried to destroy the Government, every man that shot at the holy flag in heaven, every man that starved our soldiers, every keeper of Libby, Andersonville and Salisbury, every man that wanted to burn the negro, every one that wanted to scatter yellow fever in the North, every man that opposed human liberty, that regarded the auction-block as an altar and the howling of the bloodhound as the music of the Union, every man who wept over the corpse of slavery, that thought lashes on the naked back were a legal tender for labor performed, every one willing to rob a mother of her child – every solitary one was a Democrat.

That was Robert G. Ingersoll campaigning for James Garfield in 1880. Regular Republicans like Ingersoll imagined every election campaign as a re-enactment of the Civil War, and just as all manner of doubtful methods had been legitimated by the imperatives of national survival in the 1860s, they remained legitimate two decades later. When Benjamin Harrison attributed to Providence his narrow victory in 1888, the Republican boss of Philadelphia, Matthew Quay, was irked. Harrison, he said, would never know “how close a number of men were compelled to approach… the penitentiary to make him President.”

Who can wholly blame the people of that time for the intensity of their political feelings? Yet it is also true that those feelings made it possible for unscrupulous men seeking selfish advantage to beguile, dupe, and deceive their fellow Americans. And when party feeling failed, those unscrupulous men had one last weapon to use. They condemned Mugwump reformers as disloyalists , party splitters, and snobs. (The word “elitists” had not yet been coined.) These chargers gained credibility in 1884, when the GOP nominated the corrupt James G. Blaine for president – and the Mugwumps deserted to support Grover Cleveland.

Here’s where the story of the Mugwumps becomes most relevant to our time. A worn-out Republican party, using antique rhetoric to advance a special interest agenda, is challenged to govern better. The people who do the challenging make many mistakes. (There’s no avoiding it: the Mugwumps were snobs.) At first, the reform cause seems utterly quixotic. Individual Mugwumps wrecked their own careers. Shrewder reformers like Theodore Roosevelt and Henry Cabot Lodge, although broadly sympathetic to Mugwump concerns, nonetheless supported Blaine in 1884. Had they done otherwise, they would not have made it to the presidency and the Senate. And yet while as a movement for political power the Mugwumps failed, their ideas overwhelmingly prevailed.

Perhaps a modernized and democratized Mugwumpery may be just what the GOP needs today? Of course if the historical parallel does hold, the more Republicans need it, the more angrily they will repudiate and denounce it. And yet as Tucker teaches, today’s repudiation very often amounts to a prelude to tomorrow’s acceptance.