TCS Daily


Do No Harm to Ourselves

By Joseph Y. Calhoun - May 21, 2007 12:00 AM

The February 26 edition of the Washington Post carried an editorial calling for punitive tariffs on Chinese goods. On February 27, the Chinese stock market fell 8.8% and other Asian markets followed suit. European markets also succumbed and then the US market had its worst one day loss since 9/11, dropping over 400 points on the day. Earlier this month on May 9, Rep. Sander Levin (D, MI), chairman of the House Ways and Means Committee, convened a hearing entitled, "Is China Playing by the Rules?" in which he and other politicians accused China and Japan, among others, of unfairly manipulating their currencies to gain a trade advantage with the US. The Dow promptly dropped 150 points. Coincidence?

The honorable gentleman from Michigan of course is merely responding to his constituents. Detroit automakers, rather than trying to get their own house in order, find it much easier to trek to Washington and try to gain protection from their foreign competitors through legislation. It apparently matters little that these "foreign" competitors manufacture most of their US sold goods right here in the good ol' USA. But why should the entire automobile buying public pay the price for Detroit's mismanagement?

Senators, facing election only every six years, should theoretically be able to withstand the populist impulses of their House brethren. In fact, that is how the founders envisioned Senators - as elder statesmen who would look out for the good of the country rather than their own states' narrow interests. Unfortunately, with Senators now popularly elected, they don't seem able to restrain themselves. Sen. Charles Schumer (D, NY) and Sen. Lindsay Graham (R, SC) have been trying to pass an odious piece of legislation that would impose 27.5% tariffs on Chinese goods unless they revalue their currency upward against the dollar by a similar amount. The damage to the Chinese economy from such tariffs is debatable; the damage to our own is not.

In the debate of the Tariff Bill of 1842, John C. Calhoun argued that when tariffs are imposed for protective purposes, "government descends from its high and appointed duty, and becomes the agent of a portion of the community to extort, under the guise of protection, tribute from the rest of the community; and thus defeats the end of its institution, by perverting powers, intended for the protection of all, into the means of oppressing one portion for the benefit of another." It seems not much has changed since 1842, except the consequences; the "Tariff of Abomination" ultimately led to the Civil War. This latest attempt to defy the principles of economics only has the fate of our economy at stake.

The debate over the merits of free trade, at least among economists, is over. From Adam Smith to David Ricardo to Ludwig von Mises to Friedrich Hayek to Paul Krugman to Greg Mankiw, economists have agreed on the beneficial effects of free trade. Politicians and the general public, being unconstrained by the truth of free trade theory, are the only ones who still believe there is something to be gained through protectionism. Politicians believe, and they are probably right, they can gain votes through tariff legislation. Those in the general public believe they can exchange some of their freedom for economic security. To paraphrase Benjamin Franklin, those who would make that trade deserve neither.

Every consumer in this country will pay for tariffs in higher prices while the benefits will be limited to narrow, politically connected interests. John C. again put it well in the debate over the 1842 tariff: "Protection against what? Against violence, oppression or fraud? If so, Government is bound to afford it...It is the object for which government was instituted. No; it is against neither violence, oppression nor fraud...Against what, then, is protection asked? It is against low prices." Why should the majority pay for benefits that only accrue to a small minority? Politicians are trying to protect well organized, politically savvy manufacturers from the "unfair" competition of foreigners, but manufacturing accounts for only 12% of our GDP and that share has been falling since the 1950s.

Wealth and economic security cannot be gained through protectionism. Even when other countries don't practice free trade, as certainly China and Japan do not, we benefit from free trade. "If other countries injured us by burdensome exactions, it was not reason why we should do harm to ourselves." (Calhoun, January 27, 1841) American ingenuity and entrepreneurship, not protectionism, are the source of our nation's wealth. Politicians would be well advised to concentrate on providing an economic framework that allows those characteristics to flourish rather than trying to protect their friends who represent only a small slice of our economy.

The revolution in communications wrought by the internet makes trade both easier and more profitable. Politicians trying to restrict trade are standing in the way of progress. Poor countries like India and China are desperately trying to improve the living standards of their citizens while the citizens of the US enjoy unrivaled riches. How can we justify restricting trade in the name of a minority of our citizens when so many around the world suffer the indignity of extreme poverty?

"I regard free trade, as involving considerations far higher than mere commercial advantages, as great as they are. It is, in my opinion, emphatically the cause of civilization and peace." Like my ancestor before me, I stand in defense of free trade because I believe in freedom and I believe the path to peace is through commercial interaction with the world. Our reputation has already suffered from the arrogant prosecution of the Iraq war. We will only further injure that reputation if we also seek to restrict trade. Tariffs and other forms of protectionism such as the demand for environmental and worker protections in trade treaties are antithetical to freedom. The United States has a moral responsibility to lead the world by example and we cannot do that by restricting trade with countries that are desperately trying to pull themselves out of poverty through industry. It is both economically ignorant and morally repugnant.

The author is Chief Investment Officer, Alhambra Investment Management.


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19 Comments

State's Rights
"In fact, that is how the founders envisioned Senators - as elder statesmen who would look out for the good of the country rather than their own states' narrow interests."

What Senators were supposed to do was look after the "narrow" interests of their states. That is why they were appointed by state legislatures and NOT popularily elected.

While I don't disagee with concept of free trade and I oppose protectionism, it doesn't help the cause to have errors of fact in your article.

The real issue is that the federal government has too much power to control free trade.

Right on, Marjon
Here, hear!

As with all things moderation is key!
Just as I can agree that free (and equal) trade is beneficial to our nation's economic interests, I can also see that the hemorrhaging of jobs and manufacturing off shore. This not only depletes our own ability to be self sufficient/reliant, but forces our job forces into service sector jobs that will not pay was well as manufacturing job. Therefore as a matter of national security, sovereign independence and economic stability we should also engage in a moderate amount of protectionism and isolationism.

Except for Two Lines Perfect
Perhaps the Iraq War should have been conducted more forcefully, harsher and quicker -- or not at all. A description of "arrogance" seems very European and politically correct; it occurs to me few wars have been won "nicely", "modestly" or with "shyness." We can certainly control our actions to the best of our ability and with a moral conscience but to take actions based on other's other self-serving, biased, and ill-formed opinions shows little fortitude toward doing what is right. Free trade is right economically and morally. Support for workers needing training in the transition is right also and support to industries needing propping up against economic reality is wrong. My compliments to both the original Mr. Calhoun and to the author.
William Anderson
Bakersville, NC

The way to protect our workers and our economy
is through training and education in new positions for the new economic reality. I am hard-pressed to think of any time when a protectionist agenda is beneficial to the nation.

As the author points out, trade is the key to global peace between nations.

Perhaps what we really need is a better monetary policy, not protection from others' endeavors.

Justifying Protectionism
In the 21rst century, most economic transactions are more appropriately labeled “standardized” as opposed to “free” trade. “Standardized” trade is trade that occurs under the umbrella of formal domestic or international law.

Protectionist legal policies/statutes have never been historically proven to provide a net benefit. The US applies tariffs on imported sugar? Is this a case of "moderate" protectionism? What about direct subsidies or favorable tax treatments to selected US domestic industries/companies granted by both Federal and Local statue? Where is the evidence of net public benefit? Does the taxpayer even care?

Trade between consenting parties existed before the first government was formed. Trade is the "natural" or default state of economic affairs. Over time governments have instituted trade “standards”, which in most cases enhance trade by increasing the value accrued to the trading partners. The case for “moderate” protectionism requires a methodology and hard evidence that together are convincing that the gains of the few outweigh the losses of many.

I believe that infringement on consumer sovereignty must be justifiable beyond reasonable doubt. I am unaware of ANY protectionist statute that meets this standard.

High Tech Manufacturing looking for workers
I just read a story yesterday that manufacturing companies in the USA cannot find qualified workers.

People who know a little about math and science and who can show up to work on time.



moderation means protect my job
1) The total amount of manufacturing in the US is not falling anywhere near as fast as manufacturing jobs are. The reason for this is automation.

2) Some service sector jobs don't pay very well, others are amongst the highest paid in the country. You really need to learn the definition of these terms before you start throwing them about.

3) Why do you think the American consumer should be forced to buy over priced good, just because some Americans don't want to worry about competition for their jobs?

protectionism
In every country that has ever tried it, protectionism has always meant that the protected industry stagnated. Quality improvements and innovation ground to a halt. Meanwhile, the products available to the rest of the world continued to improve. The result is that the consumers being protected, found that there options were limited to over priced, second rate goods. While the companies and workers being protected, got rich on the backs of their fellow citizens.

Legal SERVICES
They get paid WAAAYYYY too much.

Anyone care to speculate ...
... on the outcome of the USA unilaterally dropping all economically protectionist laws, regulations, and so forth?

Errr, you miss the point...
First off, service jobs do NOT pay less than manufacturing jobs and that myth needs to be dispelled right now. College professors are in the service industry, so is anyone involved in the finance industry, so is anyone involved in the medical industry. This is a myth that "service" jobs pay less well than manufacturing jobs... in fact you'd be hard pressed to find a manufacturing job that pays more than the highest paying service jobs (Guess what? Being a CEO is a service job)

So the idea that outsourcing production is a bad thing, is in fact false and unless you're a neo-keynesian or a mercantilist, the idea that outsourcing is bad is a complete joke.

Politics...
Of course, this is all a political joke. Designed to bring out a certain type of voter. Any "...legislation that would impose 27.5% tariffs on Chinese goods unless they revalue their currency upward against the dollar by a similar amount" would more than eliminate the profit margins built into all such (mostly commodity) goods...and the flow into America of any such items would immediately stop.

Companies who are manufacturing over there would need to shift those contracts into other low cost markets or simply shut down. Manufacturing such products here in America (with workers we do not have standing by) would be inflationary enough to destroy our currency.

Alternatively, closing all the companies that source in China today would throw us into such a recession that no lowering of interest rates could save us from a depression and probably a deflation that would crush our currency in the other direction.

Economic meltdown. The same day. Because the stock market would crash before lunch.

And everyone knows it. Therefore, any such legislation that could never be passed is completely safe to propose. It is like calling for the draft...Pure politics. Harmless posturing. And it does not mean a thing.

BOOM!
The US economy would grow significantly if all subsidies and protections were lifted.

Ag subsidies
Agriculture depends on massive federal subsidies for much of its profit, and would be utterly disrupted if subsidy programs were to cease. Such progrmas are, of course, the flip side to tariffs. They allow us to sell massive amounts of products by dumping them on the world market well below actual production cost.

They are the reason behind the post-NAFTA rush of dispossessed Mexican laborers to the US. Sunsidised Chicken, corn, wheat and cotton ruined the local industries, that eployed millions of Mexicans.

They are the reason for much of Africa's poverty in the semidesert belt north of the equator. Heavily comped US cotton sells on the world market well below the price that can keep a subsistence farmer's family alive, when he hand tends a small plot.

With a level playing field the ag picture would look totally diferent. There would be no ethanol, for instance. The stuff is more expensive than gas and contains fewer therms. And the costs of production outweigh the benefits.

Existing world trade laws (the so-called "free trade" rules) are maintained for the benefit of the gorilla in the room, the world's largest consumer, the United States.

Benefits to the U.S. of removing Ag subsidies
“…removing all remaining barriers to trade would raise U.S. incomes anywhere from $4,000 to $12,000 per household.”
~ Ben Bernanke,
Chairman, Federal Reserve
Butte, Montana
May 1, 2007

1. Lower Food Prices for American Families
2. Lower Costs and Increased Exports for American Companies
3. Budget Savings and Equity for U.S. Taxpayers
4. More Environmentally Friendly Land Use
5. Larger Markets for U.S. Farmers and Economic Diversity for Rural America
6. A More Hospitable World
~ The collective effect of American farm policies is to depress the income of agricultural producers worldwide, exacerbating poverty in areas, such as sub-Saharan Africa and Central Asia, where people are heavily dependent on agriculture... “It is hypocritical to preach the advantages of free trade and free markets,and then erect obstacles in precisely those markets in which developing countries have a comparative advantage”... American subsidies and tariffs amount to much more money than its foreign aid to the developing world. According to Oxfam, “in crop year 2002, the U.S. government provided $3.4 billion in total subsidies to the cotton sector,” including about 25,000 growers. “To put this figure into perspective,” Oxfam says, “it is nearly twice the total amount of U.S. foreign aid given to sub-Saharan Africa. It is also more than the GDP of Benin, Burkina Faso, or Chad, the main cotton-producing countries in the region.” Poor countries don’t want our pity; they want our respect.

http://www.freetrade.org/node/493



Good reference
The comments you've found are very apropos to our subject. But I'm a little confused. Bernanke refers to the "removal of all trade barriers", where you title your comment "Benefits to the U.S. of removing Ag subsidies".

US ag subsidies are not exactly trade barriers. In fact one main effect they have is to improve US trade, as they facilitate ag industries being able to dump products onto the world market below the production costs nonsubsidised industries can achieve.

I would also add a couple of caveats to two of his bullet points:

1. Lower Food Prices for American Families.

Without subsidies we would technically pay less for ag products. But the shelf price would increase. We now pay hidden costs in the form of federal taxes going toward producers. Without such subsidies we would have to pay more for the products themselves.

Net savings would be positive though, if all subsidies were removed.

2. Lower Costs and Increased Exports for American Companies.

Exports would suffer. The products being offered for sale would cost more, thus be less competitive.

However, compared to your comment on cancer research, I would say this observation comes much closer to being "great".

Sugar
"The federal sugar subsidy program is comprised of government-backed loans, price
supports, and import quotas. The non-recourse loan program allows sugar processors
to post sugar as collateral for a loan. Unlike most
other commodity programs, sugar loans are made
to processors, not producers, due to the highly
perishable nature of both sugar cane and sugar
beets."

http://www.taxpayer.net/agriculture/learnmore/factsheets/TCSSugarCommodityFactSheet_2003.pdf

This is just one commodity.

More info:

http://www.ewg.org/farm/progdetail.php?fips=00000&progcode=rice


Food products not subsidized
There are food products grown in the USA which you probably consume that are not subsidized.

They somehow are able to make a profit and stay in business.

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