The long and often bitter controversy surrounding last spring’s passage of the Omnibus Trade and Competitiveness Act of 1988 underscored the importance of international trade in America’s economic life. While there is broad agreement that we should do everything we can to increase U.S. exports, there is heated debate over what to do about sales of foreign goods inside the United States, as well as about how to respond when other countries impede the flow of American products into their markets.
The two main sides of this debate were represented at Hillsdale’s Shavano Institute for National Leadership conference on international trade, held August 30-31, 1989 in Louisville, Kentucky. Some speakers championed the free trade philosophy of minimum government interference, while fair trade advocates called for aggressive government moves to boost exports and counter penetration of the U.S. market.
Marshall Loeb, managing editor of Fortune Magazine, decried what he said were three “myths” which have dominated the discussion of trade and influenced the trade bill: (1) that U.S. industry is becoming less competitive, (2) that the manufacturing portion of America’s gross national product is decreasing, and (3) that restricting imports creates jobs and protects the U.S. economy.
“American business is now going through a crash diet of cutbacks, spin-offs and restructuring that is permanently changing the structure of the economy,” he said. “After years of stagnation, U.S. manufacturing productivity is rising sharply. In 1987 it went up about 3.5 percent, more than double the rate of the mid to late 1970s and faster than Japan’s or Germany’s.”
Moreover, Loeb pointed out that manufacturing currently accounts for about 20 percent of GNP, “almost exactly the figure that existed 10 or 15 years ago.” And he maintained that when import restrictions are applied, “we do preserve a number of jobs, but basically, those jobs are in outmoded, declining industries.”
Several speakers insisted that too much emphasis is placed on the fact that the U.S. imports more than it exports. Rather, they insisted that concern about the “trade deficit” overlooks America’s real economic strength.
Economist and author George Gilder saw strongly positive implications in the imports vs. exports statistics. “What happened in the early 1980s is that the United States began growing much faster than it had in the ’70s, and much faster, in fact, than its trading partners were growing,” he said. “If you’re an exporter from the United States, and you’re exporting to a stagnant global market, clearly you won’t be able to expand your exports as fast as an exporter from a country that faces a booming American market.”
Gilder suggested that the trade deficit, rather than being a threat to America’s economy, is actually beneficial, because much of the money earned by foreign exporters is reinvested in the U.S.
“The other side of a trade gap is necessarily a capital surplus,” he said. “That’s what it means when they say the United States is becoming a net debtor. People want to lend us money. And during this period when our debts were increasing, our assets were increasing much more rapidly.” Gilder explained that the value of assets owned by American companies increased from 180 percent of gross national product in 1980 to 240 percent currently.
Anthony Harrigan, president of the U.S. Business and Industrial Council, disagreed sharply with the explanations of the trade situation offered by Loeb and Gilder. He voiced the view, heard frequently during the debate on the trade bill, that American companies are being overwhelmed by foreign competition, and American jobs are being lost to overseas workers.
Expressing the U.S.B.I.C.’s position on trade, Harrigan said, “The U.S. should curb the movement of American jobs offshore. This is a disaster for employees, suppliers and affected communities. It’s a design for the collapse of the U.S. as a producer nation.” And he took no comfort in Gilder’s figures about manufacturing’s GNP share. “The U.S. has the lowest share of GNP engaged in manufacturing of any industrial nation,” he said.
Harrigan’s view of foreign capital was no more positive. “We find absurd the argument that we are exchanging pieces of paper—dollars—for real goods.” he said. “We don’t believe our trading partners are fools. They are using these pieces of paper to buy corporate assets in the United States.”
Raymond Waldmann, former assistant secretary of commerce for international economic policy, suggested that free trade is an ideal no longer attainable. “Traders, businessmen and investors should be able to make decisions based on market signals, with little or no interference from governments,” he said. But he pointed out that about one third of foreign markets for U.S. goods are covered by import restrictions, and he insisted, “All governments, even those with highly capitalistic systems, intervene in international economic matters in a wide and bewildering variety of ways. A large proportion of trade is managed by governments, and the proportion is increasing.”
Waldmann suggested that the U.S. is hobbled by its idealism. “We urge free trade for all countries, because it has worked for us,” he said. “In a sense, our insistence has provided a ‘free trade umbrella.’ We have allowed other countries to have it both waysfree access to the United States, the largest market in the world, while they manage their own trade.”
Edward Hudgins, a policy analyst for the Washington-based Heritage Foundation, took issue with Waldmann’s assertion that the U.S. market has been open while other countries have restricted U.S.-made goods. “Over the last six years the United States has enacted more new trade barriers than any country in the industrialized world,” he said. “We have created a cartel in steel, in computer chips with the Japanese. We have quotas against Japanese automobiles. Sugar imports have gone down, because of our quota system. We’ve tightened the textile trade and numerous others.”
Harrigan was outspoken in urging the extension of U.S. trade barriers. He stated flatly, “We don’t regard protectionism as a dirty word.” The key economic force in the world today, he said, is nationalism, and “only the United States fails to assert its national interest.”
Loeb pointed out that protectionism has its price, and it can be expensive. He cited the costs in higher prices to American consumers of protecting jobs in various domestic industries, such as $5.8 billion spent to protect 55,000 jobs in the U.S. auto industry (or $105,000 per job), and $6.8 billion to protect 9,000 jobs in the carbon steel industry (or $750,000 per job).
Louis Dehmlow, former chairman of the National Association of Wholesaler-Distributors, suggested that barriers protect manufacturing jobs, but invite reprisals that cause other hardships.
“Unfair trade is presumed to be something the other fellows are doing to us,” he said. “Not soit’s what we do to ourselves, because we don’t apply the basics of the marketplace. Instead of building protectionism to destroy world trade, we should do what is necessary in the entrepreneurial sense: Be customer-oriented, and push our products with marketing and innovation.”
U.S. Rep. Philip Crane, Republican congressman from Illinois and a Hillsdale alumnus, provided historical background on U.S. trade, and cautioned against being too aggressive in imposing protective measures. “You don’t go to a people as proud as the Japanese, put their backs against the wall, and say. ‘You’ve got a timetable, and you’d better observe it, or we’re going to bash you,’” he said.
He insisted that the way to eliminate barriers was by positive example, such as the U.S.-Canada trade agreement, which was then before the Canadian parliament, and would eliminate virtually every restriction on products moving between Canada and the U.S.
Yoshiji Nogami, economic counselor to the Embassy of Japan, offered a Japanese perspective on U.S. trade policy. “People [in the U.S.] tend to say that whatever is different from the American system is unfair. When American agriculture is subsidized, it’s called export enhancement. But when the European Economic Community subsidizes agricultural products, it’s unfair. Japanese beef can’t be exported to the U.S., and that is not unfair. On the other hand, we buy 30 percent of our total [beef] consumption from the United States, and that’s fair. This fairness/unfairness concept is very whimsical.”
Nogami said that the Japanese government is prepared to go to the World Court to fight any U.S. measure which Japan considers unacceptable under the new bill.
The discussion of trade in Louisville was wide ranging, touching even on the moral aspects of international commerce. Hudgins, especially, saw a moral dimension in the trade issue. “The fundamental principle which I believe the free market is based upon is the idea of individual choice,” he said. “Protectionism is an attempt to gain a value from somebody through force, by prohibiting them from buying from some other group and forcing them to buy from you. Protectionism is a form of extortion.”
Margaret Maxey, professor from the University of Texas at Austin, saw a moral responsibility to extend trade in order to help developing countries. She suggested that the major trading nations must become less concerned with protecting “little fiefdoms of privilege,” and think more about how trade can “take people in Third World nations, and give them the incentive of enterprise and entrepreneurship. If we want to drive a nail into the coffin of war,” she said, “we must turn have-not nations into prosperous states.”
Governments use several techniques to boost exports of their own industries and to try to protect domestic manufacturersand domestic jobsfrom the competition of imported products…
The most direct method is the imposition of outright quotas, or numerical limits, on quantities of certain types of products imported from specific countries or from all overseas sources. This method is usually employed to protect domestic industries (or their unions) that are especially hard hit by imports, that are generally on shaky economic ground, or that have special political clout.
Imposing a tariff, or import duty, has an effect similar to a direct quota (and is done for the same reasons), but relies more on the market as the mechanism to control the flow of imports. Demand for a foreign good decreases, because the duty makes its price uncompetitive with equivalent domestic products. Import duties also provide revenue for the government, an advantage of the tariff system not lost on lawmakers.
A more subtle method for suppressing imports is by imposing regulations or requirements that make it costly and troublesome for overseas manufacturers to invade the domestic market. Such measures include product standards, labeling requirements, health and safety inspections, or special insurance imposed on imports but not on domestic products. Governments, which are major consumers of all kinds of items themselves, can also restrict their own procurement to domestic products. Non-tariff barriers (or “NTBs”) can be highly effective in discouraging foreign competition, when the more direct methods of tariffs and quotas are unfeasible or politically inconvenient.
Rather than block foreign competition (or often in addition to raising barriers), governments try to give their domestic manufacturers a leg up by subsidizing exports. Low-interest loans, grants, tax incentives and other mechanisms are used widely, generally in the name of “economic development.”
An increasing number of countries are attempting to balance imports with their own exports by insisting that foreign sellers must take domestic products, instead of money, in payment for their goods. Bartering now accounts for 25 to 30 percent of all world trade.
A government can negotiate an arrangement with another country to mutually limit exports, and attempt to stabilize both markets. Or special trading preferences can be arranged that shut out third parties or establish special trade areas, such as the European Common Market. Also, cartels can be created by groups of countries wishing to promote key industries they have in common, such as the OPEC oil cartel.
The most drastic method used to control trade is imposing a complete embargo on certain types of products or on the goods of a particular nation. Prohibiting imports or exports is done mainly in wartime to deny commerce with an enemy. But it can also be used to enforce some critical national policy (such as President Jimmy Carter’s embargo on grain sales to the Soviets after their invasion of Afghanistan), or to punish a trading partner for breaking an agreement or trading in bad faith.
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