Posted on 07/13/2005 10:24:41 AM PDT by Willie Green
For education and discussion only. Not for commercial use.
As data gathered in the real world of international rivalry continues to show an expanding U.S. trade deficit that will likely hit $700 billion this year (up from $617 billion last year), a great wailing is heard from the Defenders of Free Trade. Their libertarian economic faith is immune to facts, either from present observation or historical experience. That's what makes it a secular religion. Nothing better reveals its reliance on superstition and ignorance than how readily its adherents resort to falsehoods to defend its dogma.
Consider two recent columns that appeared in putative conservative forums. First, there was Lawrence Kudlow's column in The Washington Times newspaper July 7 entitled "China Tariff Time bomb." Kudlow attacks Senators Charles Schumer (D-NY) and Lindsey Graham (R-SC) for "China-bashing trade legislation." He alleges "this protectionist duo should be compared to the late congressmen Smoot and Hawley, as their bill echoes the catastrophic tariff legislation that set off the stock market crash and Great Depression of decades ago."
Lawrence Kudlow is a consultant who started his career at the Federal Reserve Bank and has worked his way through various Republican policy positions and investment banking jobs. He is a regular commentator on CNBC and writes regularly for National Review, as well as The Washington Times. Unfortunately, nowhere along the line does he seem to have learned how to read a calendar.
The myth that the Smoot-Hawley Tariff "caused" the Great Depression is nonsense. The act was signed in June 1930 to go into effect in 1931. The stock market had already crashed in October 1929. What made the depression so "great" in scale was the collapse of the banking and financial system. By the end of 1931, over 1,300 banks had failed, wiping out the life savings of millions and most of the nation's money supply. That is why the key reforms enacted to prevent future depressions focused on providing deposit insurance and on insulating banks from the stock market. The financial collapse was devastating to the two largest pillars of the American economy in the 1920s, construction and the auto industry.
Trade played only a small role in the American economy at the time, and changes in tariff rates had nothing to do with the economic downturn. Indeed, the U.S. continued to run a trade surplus after the passage of Smoot-Hawley, as it had done before. This was a positive influence on the economy but not nearly strong enough to counteract the more general downturn.
Smoot-Hawley did little to change U.S. trade policy. Frank W. Taussig, a leading economist, wrote in the 1931 edition of his book The Tariff History of the United States, "The new duties on manufactured goods were mostly of a petty sort....On the important branches of these industries the protective system had already been carried so far that no considerable further displacement of imports could be expected." The last major increase in tariff rates had occurred in the Ford-McCumber Tariff of 1922, a measure that was followed by an economic boom. Smoot-Hawley was a reaction to the depression, an attempt to safeguard the American market – the largest in the world, from foreign dumping as the world economy collapsed. It should be noted that the British economist John Maynard Keynes, who emerged from the Depression as one of the great thinkers of the day, had advocated in his classic work The General Theory of Employment, Interest and Money (published in 1936) that England abandon "free trade" and adopt tariffs to protect its large home market during the global downturn.
But Kudlow's lack of historical knowledge is not the worst aspect of his thinking. Far worse is his willingness to embrace the protectionist policies of a rival nation rather than modify his own theories to benefit his own country. "By keeping its yuan pegged to the dollar, China chooses to import our monetary system. In the last 10 years, this has generated 10 percent growth and low inflation in China, while creating more jobs and higher living standards for hundreds of millions of heretofore impoverished Chinese," he writes. But he never mentions that Beijing has undervalued its peg so as to gain a trade advantage that has wiped out thousands of U.S.-based firms and lowered the living standards of millions of Americans.
It is doubly ironic that other nations are able to play us for fools because useful idiots like Kudlow rail against "protectionism" here at home while applauding its benefits abroad. Having revealed a total inability to understand why his theories don't work in the real world – because those benefitting from trade aren't free traders at all but mercantilists, Kudlow should be dismissed by all those whose concern is focused on the betterment of the U.S. economy and the lives of the American people.
Another good example of this useful idiot syndrome is John O. McGinnis, a professor of international trade law at Northwestern University and a member of the U.S. advisory committee on NAFTA labor standards. On June 30, he wrote a piece on National Review Online that grossly distorted the economic views of the Founding Fathers. Entitled "The Second American Trade Revolution," the piece offers up the "Model Treaty" written during the Articles of Confederation as proof that America's leaders were free trade zealots. Yet, near the end of the piece, McGinnis has to admit, "Despite the best efforts of Adams and Jefferson, however, the Model Treaty did not bear much fruit. America was then a weak nation and other nations were not confident that it would amount to much." Indeed, the Confederation itself proved to be a failure, which is why we now have the much stronger government established by the Constitution.
The principle failing of the Confederation was in the conduct of foreign policy, and particularly trade policy. As Secretary for Foreign Affairs in 1786, future Federalist Papers author John Jay argued that "to be respectable abroad, it is necessary to be so at home: and that will not be the case until our public faith requires more strength." The Constitution gave Congress power over foreign trade and interstate commerce in order to create a unified trade bloc of the States that could promote national economic development and expand commerce. But this was to be done by hard work, not by a simple trust in abstract theory.
McGinnis mentions Adams and Jefferson, but not how their views evolved. As minister to Great Britain, Adams made no progress pushing liberal trade, leading him to write to Jefferson, "We must adopt reciprocal prohibitions, exclusions, monopolies and imposts" to "preserve ourselves." Jefferson urged the same course of action as Secretary of State under President George Washington.
Jefferson was not, however, initially an advocate of industrialization. As an agrarian, Jefferson wanted the factory system, which he equated with dirty smokestacks and urban slums, to stay in Europe. Writing in 1785, Jefferson said, "Were I to indulge in my own theory, I should wish [our states] to practice neither commerce nor navigation but to stand, with respect to Europe, precisely on the footing of China." Not a wise choice of comparison given that China would soon be carved into spheres of influence by the more advanced industrial-imperialist powers. Indeed, much of Beijing's aggressiveness today is born of resentment for having been exploited by foreign traders in the past.
Jefferson was a liberal "mugged" by the War of 1812. Writing to the French economist J.B. Say in 1815, Jefferson switched his support to industrial policy, including tariffs:
"the prohibiting duties we lay on all articles of foreign manufacture which prudence requires us to establish at home, with the patriotic determination to use no foreign articles which can be made within ourselves without regard to difference in price, secure us against a relapse into foreign dependency."
Jefferson's earlier political foe had been Alexander Hamilton. As Treasury Secretary and top advisor to President Washington, Hamilton advocated strong trade and industrial policies to build up the economic capacity of the country. He had read Adam Smith and understood the message better than many who cite Smith today. The real "wealth of nations" was not trade, but internal development. Trade could support this effort, but Smith's assault on mercantilism was based on his rejection of the notion that trade was the more important activity. Smith complained "private persons frequently find it more for their advantage to employ their capitals in the most distant carrying trades of Asia and America, than in the improvement and cultivation of the most fertile fields in their own neighborhood." This problem is seen today in the decision of so many American firms to pour their money and technology into expanding the industrial capabilities of China rather than further improving the United States.
Even before the American Revolution was over, Hamilton had written his famous "Continentalist" essays in which he had stated "There are some who maintain that trade will regulate itself [but] this is one of those speculative paradoxes...rejected by every man acquainted with commercial history." Richard B. Morris in his biography of Hamilton observed that his "brand of conservatism meant holding to the tried and proven values of the past, but not standing still....He could scarcely be expected to allow government to stand inert while the economy stagnated or was stifled by foreign competition."
The Hamiltonian program became the party line of the Whigs before the Civil War and of the Republican Party afterwards. By the beginning of the 20th century, the United States had become the world's leading industrial power, easily surpassing "free trade" England. President Teddy Roosevelt wrote to Henry Cabot Lodge, "Thank God I'm not a Free Trader." Lodge wrote a biography of Hamilton claiming that his case for a system of "industrial independence" had never been overthrown. Indeed, it had built the United States into the greatest industrial power in the world, with more manufacturing capacity in 1914 than England and Germany combined.
The United States has always been a trading country, epitomized by the clipper ship. The nation's premier strategic thinker is Alfred Thayer Mahan, who noted that "the necessity of a navy springs from the existence of peaceful shipping." Yet, wise policy avoids the extreme ideological name-calling positions of "free trade" versus "isolationism." Trade policy, like all other elements of international relations, must be pragmatic and results-oriented in a world of contending powers. The dramatic shift of the United States from a creditor nation running a century of trade surpluses, to a massive debtor nation mired in expanding deficits is not the result anyone wanted – or should want – from international economic and trade policy. The financial strain of such deficits slows the economy and threatens the status of the dollar as the world's reserve currency, an asset of immense strategic value if we want to remain the world's only Superpower. And in the case of China, the gains from trade are used by Beijing to support ambitions at odds with American and allied security.
Rather than try to resuscitate various failed notions more than from two centuries ago, when America was small and weak, McGinnis would do a better and more honest service by explaining how we discarded the Model Treaty and climbed to the top of the world system. Those successful policies, which placed the development and expansion of the domestic economy first, are the ones that are needed again – if we are to stay on top.
ping
Freemarketeering false myths bump!
I'm showing my ignorance but I really don't don't the answer to this question - why is China able to unilaterally set the exchange rate? The US can't by itself decide the value of the dollar against the Euro, we can only influence it. We have at least as much at stake in trade with China as they do - why can we not influence the exchange rate?
I'm sorry if this is a stupid or naive question but I really don't know the answer.
Ping.
A big problem I have with our trade with China is that while we pay them for the goods they offer to sell to us, they steal the goods we offer to sell to them -- Movies, Music, Software piracy in China is huge industry and while it may not be state sponsored, it is certainly ignored by the state.
When the trade deficit hits $600 billion the country will be destroyed. I mean when the trade deficit hits $700 billion the country will be destroyed. I mean.....when exactly will these negative things happen that Hawkins and Buchanan have been predicting since NAFTA? Give us an idea. This year, next year, five years from now? Pin down the date of our downfall please. This way, when it doesn't happen, again, we can ignore you clowns once and for all.
They can be spent on buying out American assets. You can support your consumption by selling your furniture, your house, you investments etc ...
In the end Americans might be working for the foreigners or export raw resources without added value.
They can only control the dollar/yuen exchange rate. They do it by regulating the supply of yuen: if the yuen falls relative to the dollar, they print less until the exchange rate rises, and conversely. Doing that can help china by limiting inflation, but it also means that they must inflate the yuen to keep pace with inflation of the dollar, which puts them at the mercy of American politicians.
Note that fiddling with the value of the yuen can't remotely do what the article claims. He theorizes that the Chinese devalue the yuen slightly, making one dollar worth more yuen, which then tempts us to buy Chinese. The problem with that theory is that it creates an equal and opposite burden when the Chinese go to cash in their dollars, as they must sooner or later do. In the end it's more or less a wash.
The author doesn't explain how cheap goods "lower the living standards of millions of americans". Would I really be better off if I pay double for my low-end consumer goods? Where does the "better off" part come in?
The dollars come back to buy Maytag and Unocal...
Chinese can buy American assets. Also they can buy other currencies bringing the value of dollar down.
Another outstanding essay.
History, facts, ...now all that has to happen is that somebody in the Oval Office reads it...
They can be spent on buying out American assets. You can support your consumption by selling your furniture, your house, you investments etc ...
Interesting point. I'm uncomfortable with that phenomenon, and even more uncomfortable with foreign investment in US savings bonds--effectively buying a claim on future tax dollars.
I guess the standard libertarian answer would be to the effect that foreign investors buy US assets to make a profit, which means ultimately that everything comes out in the wash. They couldn't, for example, buy every inch of Texas and then kick the Americans out. My problem is that I'm not so sure they mightn't do exactly that.
"The US can't by itself decide the value of the dollar against the Euro, we can only influence it."
With basically fictional units of value, which are increasingly not even printed paper but electronic, combined with a "new," high-growth market that everybody wants a piece of, you're looking at a nation that can very well dictate what the value of that "unit of value" will be. Particularly if much of the world is vested in the continued flow of lower cost manufacturing emanating from that nation.
Internationally, too many stand to benefit from the Chinese "discount dollar" or yuan/renminbi. The dislocation within our domestic economy is surmountable, and actually long-term beneficial, in this view (one to which I don't subscribe, by the way).
What do you suppose the U.S. pays annually in interest on our debt?
Don't you think that would be better spent elsewhere? or maybe we could even keep it with a impressive tax cut. We could be a lender instead of a debtor nation.
That only works if owners of currency X value dollars higher than currency X, so they can't simply arbitrage the dollar down to nothing. The only real threat to the dollar is internal: government creates inflation in order to legally default on its debt, and the strength of the dollar reflects their shenanigans.
"Where does the "better off" part come in?"
By being able to participate in the creation of value and wealth, instead of merely consuming production?
So the problem is that the Chinese aren't buying American toasters? And here I thought the problem was insanely out-of-control government spending...
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