Posted on 06/15/2004 9:55:41 PM PDT by Remember_Salamis
It is often said that bad economic policy reflects disagreement among the experts; that if all economists gave the same advice, economic policy would be good. Economists often do disagree, but that has not been true with respect to international trade. Ever since Adam Smith there has been virtual unanimity among economists, whatever their ideological position on other issues, that international free trade is in the best interests of trading countries and of the world. Yet tariffs have been the rule. The only major exceptions are nearly a century of free trade in Great Britain after the repeal of the Corn Laws in 1846, thirty years of free trade in Japan after the Meiji Restoration, and free trade in Hong Kong under British rule. The United States had tariffs throughout the nineteenth century, and they were raised still higher in the twentieth century, especially by the Smoot-Hawley tariff bill of 1930, which some scholars regard as partly responsible for the severity of the subsequent depression. Tariffs have since been reduced by repeated international agreements, but they remain high, probably higher than in the nineteenth century, though the vast changes in the kinds of items entering international trade make a precise comparison impossible.
Today, as always, there is much support for tariffs--euphemistically labeled "protection," a good label for a bad cause. Producers of steel and steelworkers' unions press for restrictions on steel imports from Japan. Producers of TV sets and their workers lobby for "voluntary agreements" to limit imports of TV sets or components from Japan, Taiwan, or Hong Kong. Producers of textiles, shoes, cattle, sugar--they and myriad others complain about "unfair" competition from abroad and demand that government do something to "protect" them. Of course, no group makes its claims on the basis of naked self-interest. Every group speaks of the "general interest," of the need to preserve jobs or to promote national security. The need to strengthen the dollar vis-à-vis the deutsche mark or the yen has more recently joined the traditional rationalizations for restrictions on imports.
One voice that is hardly ever raised is the consumer's. That voice is drowned out in the cacophony of the "interested sophistry of merchants and manufacturers" and their employees. The result is a serious distortion of the issue. For example, the supporters of tariffs treat it as self evident that the creation of jobs is a desirable end, in and of itself, regardless of what the persons employed do. That is clearly wrong. If all we want are jobs, we can create any number--for example, have people dig holes and then fill them up again or perform other useless tasks. Work is sometimes its own reward. Mostly, however, it is the price we pay to get the things we want. Our real objective is not just jobs but productive jobs--jobs that will mean more goods and services to consume.
Another fallacy seldom contradicted is that exports are good, imports bad. The truth is very different. We cannot eat, wear, or enjoy the goods we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV sets. Our gain from foreign trade is what we import. Exports are the price we pay to get imports. As Adam Smith saw so clearly, the citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports or, equivalently, from exporting as little as possible to pay for its imports.
The misleading terminology we use reflects these erroneous ideas. "Protection" really means exploiting the consumer. A "favorable balance of trade" really means exporting more than we import, sending abroad goods of greater total value than the goods we get from abroad. In your private household, you would surely prefer to pay less for more rather than the other way around, yet that would be termed an "unfavorable balance of payments" in foreign trade.
The argument in favor of tariffs that has the greatest emotional appeal to the public at large is the alleged need to protect the high standard of living of American workers from the "unfair" competition of workers in Japan or Korea or Hong Kong who are willing to work for a much lower wage. What is wrong with this argument? Don't we want to protect the high standard of living of our people?
The fallacy in this argument is the loose use of the terms "high" wage and "low" wage. What do high and low wages mean? American workers are paid in dollars; Japanese workers are paid in yen. How do we compare wages in dollars with wages in yen? How many yen equal a dollar? What determines the exchange rate?
Consider an extreme case. Suppose that, to begin with, 360 yen equal a dollar. At this exchange rate, the actual rate of exchange for many years, suppose that the Japanese can produce and sell everything for fewer dollars than we can in the United States--TV sets, automobiles, steel, and even soybeans, wheat, milk, and ice cream. If we had free international trade, we would try to buy all our goods from Japan. This would seem to be the extreme horror story of the kind depicted by the defenders of tariffs--we would be flooded with Japanese goods and could sell them nothing.
Before throwing up your hands in horror, carry the analysis one step further. How would we pay the Japanese? We would offer them dollar bills. What would they do with the dollar bills? We have assumed that at 360 yen to the dollar everything is cheaper in Japan, so there is nothing in the U.S. market that they would want to buy. If the Japanese exporters were willing to burn or bury the dollar bills, that would be wonderful for us. We would get all kinds of goods for green pieces of paper that we can produce in great abundance and very cheaply. We would have the most marvelous export industry conceivable.
Of course, the Japanese would not in fact sell us useful goods in order to get useless pieces of paper to bury or burn. Like us, they want to get something real in return for their work. If all goods were cheaper in Japan than in the United States at 360 yen to the dollar, the exporters would try to get rid of their dollars, would try to sell them for 360 yen to the dollar in order to buy the cheaper Japanese goods. But who would be willing to buy the dollars? What is true for the Japanese exporter is true for everyone in Japan. No one will be willing to give 360 yen in exchange for one dollar if 360 yen will buy more of everything in Japan than one dollar will buy in the United States. The exporters, on discovering that no one will buy their dollars at 360 yen, will offer to take fewer yen for a dollar. The price of the dollar in terms of the yen will go down--to 300 yen for a dollar or 250 yen or 200 yen. Put the other way around, it will take more and more dollars to buy a given number of Japanese yen. Japanese goods are priced in yen, so their price in dollars will go up. Conversely, U.S. goods are priced in dollars, so the more dollars the Japanese get for a given number of yen, the cheaper U.S. goods become to the Japanese in terms of yen.
The price of the dollar in terms of yen would fall, until, on the average, the dollar value of goods that the Japanese buy from the United States roughly equaled the dollar value of goods that the United States buys from Japan. At that price everybody who wanted to buy yen for dollars would find someone who was willing to sell him yen for dollars.
The actual situation is, of course, more complicated than this hypothetical example. Many nations, and not merely the United States and Japan, are engaged in trade, and the trade often takes roundabout directions. The Japanese may spend some of the dollars they earn in Brazil, the Brazilians in turn may spend those dollars in Germany, the Germans in the United States, and so on in endless complexity. However, the principle is the same. People, in whatever country, want dollars primarily to buy useful items, not to hoard, and there can be no balance of payments problem so long as the price of the dollar in terms of the yen or the deutsche mark or the franc is determined in a free market by voluntary transactions.
Why then all the furor about the "weakness" of the dollar? Why the repeated foreign exchange crises? The proximate reason is because foreign exchange rates have not been determined in a free market. Government central banks have intervened on a grand scale in order to influence the price of their currencies. In the process they have lost vast sums of their citizens' money (for the United States, close to two billion dollars from 1973 to early 1979). Even more important, they have prevented this important set of prices from performing its proper function. They have not been able to prevent the basic underlying economic forces from ultimately having their effect on exchange rates but have been able to maintain artificial exchange rates for substantial intervals. The effect has been to prevent gradual adjustment to the underlying forces. Small disturbances have accumulated into large ones, and ultimately there has been a major foreign exchange "crisis."
In all the voluminous literature of the past several centuries on free trade and protectionism, only three arguments have ever been advanced in favor of tariffs that even in principle may have some validity.
First is the national security argument--the argument that a thriving domestic steel industry, for example, is needed for defense. Although that argument is more often a rationalization for particular tariffs than a valid reason for them, it cannot be denied that on occasion it might justify the maintenance of otherwise uneconomical productive facilities. To go beyond this statement of possibility and establish in a specific case that a tariff or other trade restriction is justified in order to promote national security, it would be necessary to compare the cost of achieving the specific security objective in alternative ways and establish at least a prima facie case that a tariff is the least costly way. Such cost comparisons are seldom made in practice.
We could say to the rest of the world: We cannot force you to be free. But we believe in freedom and we intend to practice it.
The second is the "infant industry" argument advanced, for example, by Alexander Hamilton in his Report on Manufactures. There is, it is said, a potential industry that, if once established and assisted during its growing pains, could compete on equal terms in the world market. A temporary tariff is said to be justified in order to shelter the potential industry in its infancy and enable it to grow to maturity, when it can stand on its own feet. Even if the industry could compete successfully once established, that does not of itself justify an initial tariff. It is worthwhile for consumers to subsidize the industry initially--which is what they in effect do by levying a tariff--only if they will subsequently get back at least that subsidy in some other way, through prices lower than the world price or through some other advantages of having the industry. But in that case is a subsidy needed? Will it then not pay the original entrants into the industry to suffer initial losses in the expectation of being able to recoup them later? After all, most firms experience losses in their early years, when they are getting established. That is true if they enter a new industry or if they enter an existing one. Perhaps there may be some special reason why the original entrants cannot recoup their initial losses even though it may be worthwhile for the community at large to make the initial investment. But surely the presumption is the other way.
The infant industry argument is a smoke screen. The so-called infants never grow up. Once imposed, tariffs are seldom eliminated. Moreover, the argument is seldom used on behalf of true unborn infants that might conceivably be born and survive if given temporary protection; they have no spokesmen. It is used to justify tariffs for rather aged infants that can mount political pressure.
The third argument for tariffs that cannot be dismissed out of hand is the "beggar-thy-neighbor" argument. A country that is a major producer of a product, or that can join with a small number of other producers that together control a major share of production, may be able to take advantage of its monopoly position by raising the price of the product (the Organization of Petroleum Exporting Countries cartel is the obvious example). Instead of raising the price directly, the country can do so indirectly by imposing an export tax on the product--an export tariff. The benefit to itself will be less than the cost to others, but from the national point of view, there can be a gain. Similarly, a country that is the primary purchaser of a product--in economic jargon, has monopsony power--may be able to benefit by driving a hard bargain with the sellers and imposing an unduly low price on them. One way to do so is to impose a tariff on the import of the product. The net return to the seller is the price less the tariff, which is why this can be equivalent to buying at a lower price. In effect, the tariff is paid by the foreigners (we can think of no actual example). In practice this nationalistic approach is highly likely to promote retaliation by other countries. In addition, as for the infant industry argument, the actual political pressures tend to produce tariff structures that do not in fact take advantage of any monopoly or monopsony positions.
A fourth argument, one that was made by Alexander Hamilton and continues to be repeated down to the present, is that free trade would be fine if all other countries practiced free trade but that, so long as they do not, the United States cannot afford to. This argument has no validity whatsoever, either in principle or in practice. Other countries that impose restrictions on international trade do hurt us. But they also hurt themselves. Aside from the three cases just considered, if we impose restrictions in turn, we simply add to the harm to ourselves and also harm them as well. Competition in masochism and sadism is hardly a prescription for sensible international economic policy! Far from leading to a reduction in restrictions by other countries, this kind of retaliatory action simply leads to further restrictions.
We are a great nation, the leader of the world. It ill behooves us to require Hong Kong and Taiwan to impose export quotas on textiles to "protect" our textile industry at the expense of U.S. consumers and of Chinese workers in Hong Kong and Taiwan. We speak glowingly of the virtues of free trade, while we use our political and economic power to induce Japan to restrict exports of steel and TV sets. We should move unilaterally to free trade, not instantaneously but over a period of, say, five years, at a pace announced in advance.
Few measures that we could take would do more to promote the cause of freedom at home and abroad than complete free trade. Instead of making grants to foreign governments in the name of economic aid--thereby promoting socialism--while at the same time imposing restrictions on the products they produce--thereby hindering free enterprise--we could assume a consistent and principled stance. We could say to the rest of the world: We believe in freedom and intend to practice it. We cannot force you to be free. But we can offer full cooperation on equal terms to all. Our market is open to you without tariffs or other restrictions. Sell here what you can and wish to. Buy whatever you can and wish to. In that way cooperation among individuals can be worldwide and free.
-------------------------------------------------------------------------------- Adapted from "The Tyranny of Controls" in Free to Choose: A Personal Statement, by Milton Friedman and Rose Friedman, published by Harcourt Brace Jovanovich, © 1980. To order, call 800-543-1918. Available from the Hoover Press is The Essence of Friedman, edited by Kurt R. Leube. To order, call 800-935-2882. -------------------------------------------------------------------------------- Milton Friedman is a senior research fellow at the Hoover Institution. He was awarded the Nobel Prize in economic sciences in 1976. Rose Friedman studied economics as a graduate student at the University of Chicago and has collaborated with Milton Friedman on several books.
Before you say it, yes. Free Trade is government engineered.
It is not some centrally planned, micro managed communist system. It is however an engineered set of common laws employed to create an environment. It is not some liberatarian idea.
It is a basic set of rules, just like football has, then everyone has to abide in those rules and compete as they will.
Making a rule book of common rules is not micromanaging the football team. Likewise, Liberatarian views and philosophies on trade are not in touch with reality.
I can explain that if you want...
No, it 'works' because of comparative advantage and government isn't getting in the way of me driving across the border and buying what I want. When a State like California imposes upon it's citizens and businesses excessive taxes, it's not allowed to tax goods at the State border from Nevada, or anywhere else that doesn't have the same dumb regulations. They're not allowed to put up a Berlin Wall and try to keep people in either.
WTO is managed trade, ie communism, it's not Free Trade.
But California can't impose duties on goods coming into California from States that don't have the same worker compensation laws. ie Fair Trade
If there were no government intervention Microsoft would have never been sued, Standard Oil wouldn't have been broken up, and the telephone company wouldn't have been chopped into pieces.
You're heading into different territory (which I'd gladly discuss, but in another thread). Those were also national actions. California can't put a tax on Microsoft software just because it's made in Washington, in order to encourage software development in California. California is not allowed to put up trade barriers with every State it considers 'unfair' because of different minimum wage or worker compensation rules. It also can't put up a Berlin Wall to keep businesses and people in, so both people and businesses flee as they see fit to more hospitable governments (Nevada, Florida, etc.)
Yes. And that is essentially what we are doing on an international scale. We are using our sovereign power to make what was considered a 'national action' into an international one. In an FTA both sovereign nations agree to a set of rules and use their sovereign power to enforce them. It is only slightly different than the California vs Washington example. California agreed to abide in those rules upon entering the union. But now, most characterize the situation as the Federal Government imposing those rules on them. If you view it as compulsion on a federal level thats ok. However on an international level its not compulsion, its willing participation.
Free Trade Agreements ultimately set out to make international locations part of our economy. Its no different. It requires actions on both parts, and willing participation of the sovereign nations entering into that agreement.
California can't put a tax on Microsoft software just because it's made in Washington, in order to encourage software development in California. California is not allowed to put up trade barriers with every State it considers 'unfair' because of different minimum wage or worker compensation rules. It also can't put up a Berlin Wall to keep businesses and people in, so both people and businesses flee as they see fit to more hospitable governments (Nevada, Florida, etc.)
EXACTLY. You are making my point exactly. That hits the nail on the head.
Now, why can't they? Because there is a higher law governing how they treat each other. And they agreed to it long ago.
A Trade Agreement is the highest form of international law governing the two respective parties. That law often eliminates tarriffs, but it is not just about tarriffs. Its about the system as an overall operation. Again, it is entered into willingly, and submitted to lawfully by both parties.
The WTO has NO sovereign authority whatsoever. None. Zip. Nada.
It is NOT like the US House where the majority rules and the winners win and losers lose.
It is a negotiating body where two or more sovereigns can come together and bilaterally negotiate those agreements.
If we got into a WTO negotiation with France and didn't like the terms...what can the WTO do? Nothing. We can tell them to take a hike. They can impose no penalties. The WTO is a negotiation body, almost like a large scale trade show. One does not have to buy anything if they don't want to.
The WTO is also a trade dispute body. Say we enter into an agreement with Japan, via the WTO. (The WTO is a a body of trade experts basically). Now say Japan signed on the line, but 5 years later decided that they didn't like this or that.
If we complain about that we can take it to a panel who will study it out in some form of arbitration.
If that still doesn't work the WTO itself does nothing. They just say "OK America. They broke the rules you guys agreed to. We have used the proper channels of arbitration and it didn't work. As a sovereign power you are free to impose whatever retaliation you want."
It works for us, because often the problems are solved through negotiation. And if not, no one takes Japan seriously next time around. On top of that we can still retaliate as we see fit, with the blessing of the international community.
They set it up that way to avoid the numerous trade wars. They decided ultimately that arbitration (or family counciling) is ultimately better than going straight into a fist fight over things.
Again, the WTO has no authority, but it can lend legitimacy to decisions of retaliation. Thats about it.
As long as the WTO is respected by those involved it can function. As soon as that stops, its all over.
A Trade Agreement has to be ratified into law by all concerned parties.
We cannot just jump into an FTA. It has to be signed off on, and into law, by the House, Senate, and President. That, as well as the same procedure in whatever the other respective country is.
We both agree to use our own sovereign powers to uphold that set of laws we agreed to...Thats not giving up sovereignty.
It is also not at ALL managed trade. It is far from it, and actually the opposite of it.
Oh, really? Has the American Iron & Steel Institute noticed?
Every time a modern nation has attempted economic self-suffeciency it has ended in disaster. Nazi Germany wanted to gain self-suffeciency in wheat, and called this type of economic activity "autarky". Stalinist North Korea is currently trying it nationwide, calling it "juche". We cut ourselves off in the 1930s and that didn't end up very well either.
Wanna fix the problem? Change the tax code!
We encourage consumption while discouraging investment and savings through the income tax, payroll tax, and capital gains tax.
We encourage importation while discouraging exportation through corporate taxes.
"Pop culture" is at it's core a consumer society. Our Keynesian consumption-based economy has spawned it.
Want to change it? Want to get active? Want to stop the slide? Support the FairTax, a National Retail Sales Tax. Want to know more? Ask me or go to http://www.fairtax.org
Yes, excuse me.
true, but it CAN cut it's own taxes in order to entice businesses to set up shop in california instead of washington or Nevada. That is what this country doesn't understand when it comes to international trade: the theory of tax competition. It works well between the states, but we don't even acknowledge it on the international stage. Other states have, however. Ireland has slashed corporate taxes and have seen their economy BOOM. Even socialist Europe has realized it; they cut their corporate taxes too, although they replaced a lot of them with a exporter-exempt Value-added Tax. Now the EU waqnts to put in place a MINIMUM coporate tax because low-tax Ireland is stealing manufacturing jobs!
Tax comeptition works wonders between the states, and there is no reason why we shouldn't be employing it on the world stage.
Sounds pretty good, huh? Gotta love that Marx - he's only got a perfect score of being 180 degrees off the mark, so to speak.
One, my dad had to catch a ride to work with a friend since Mom didn't have her own vehicle. Two, if she wanted to make a phone call, someone had to get off the line. You remember good ole' Ma Bell don't you? Who had more than 1 line? Three, we had to hoof it to the library to look up something in the encyclopedia, rather than just crank up the PC.
I could go on, but I think you get the point. Just because medicine has changed doesn't mean the country is becoming poorer. On the contrary, the country has become so wealthy that even 'poor' people can now afford to kill themselves from all the luxury: limited physical blue collar work, a sea of cheap, used autos, and of course, the ability to inexpensively consume 5k+ calories a day.
Yeah, France is actually leading the charge on this 'tax fairness' crap. Let them hang themselves. I think the sooner we drop the sophistry that corporations pay taxes instead of just collect them from you and I the sooner we can eliminate corporate taxes and encourage business to be located here instead of elsewhere. People have to remember the global environment has changed a lot over the last 20 years, and there is nothing automatic about the U.S. as a haven for a capital investment.
Damn straight! Are you familiar with the FairTax, a plan for a National Retail Sales Tax that would replace ALL federal income, payroll, corporate, capital gains, and estate taxes with a 23% across-the-board retail sales tax? It's picking up major steam in congress (HR 25). If you have any questions, I'd be glad to answer them.
That would be nice, but how do you tell people that a 4-5% tariff is excessive, yet a 23% sales tax is not? If 4-5% is killing trade, then what is 23% going to do to sales?
The 'business cost' exception looks like a vehicle that everyone with an account will be able to drive complete tax avoidance through. That bothers me. Further, I'm not interested in a tax that replaces the 2+ Trillion dollars the government takes, I want them to take much less. Instead of a general sales tax, which they would continually lever up like they did the income tax (have you ever seen the original, 1913 income brackets and tax rates?). I prefer something along the lines of our original system of excise taxes to fund the federal government. This puts the final control over government purse strings in the hands of consumers by allowing them to adopt alternatives and curb egregious taxation.
I don't dispute that a consumption based taxed is superior to an income tax, but I don't like this proposal because the flaws are too great, imo.
Repeal the 16th amendment and enforce the 13th. End the wealth transfers and you'd cut over half the government spending in one stroke.
Of your first complaint, for every product bought for business purposes would have to be accounted for. If things are being bought tax-free but not being re-sold, something's fishy and they're subject to audit. What's more, the most likely enforcement system would have EVERYBODY pay the tax at the counter, with businesses able to recieve a check for "taxes paid" that month.
On your sec0ond complaint, the size of government, the FairTax actually restricts the size of government. goods and servicces purchased by government entities WOULD be taxed. This would encourage outsourcing and privatization of government busineeses. Purchases made by the Post Office or Amtrak wouldn't be taxed if they were spun off and privatized, as an example. And it would work at all government levels too. What is a state going to do when purchases made by a public school are taxed while purchases made by a private school are not? And remember, tuition isn't taxed either. So what would be the most economic course of action in this case? Give everyone a voucher. There are thousands of examples, at all levels.
Regarding excise taxes, the FairTAx IS an excise tax, only applied to domestic and imports. Even if we spent only spent $500B, which we would spend if we only spent on programs specifically outlined in Article I, section VIII, we would need almost a 100% tarriff on all imported goods. That is literally impossible.
Regarding the 16th-- It's repeal WOULD NOT prohibit an income tax. It's repeal would only make an UNAPPORTIONED Income tax unconstitutional.
Regarding the 13th, that regards slavery, and I thikn it's enforced fairly well (sarcasm). I think you may be referring to the 10th amendment, which states:
"The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people."
The only problem with that is FDR's court packing scandal stretched the commerce clause so bad that virtually anything is within the domain of the Feds.
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