Free trade isn't free


PRESIDENT CLINTON yearns for fast-track extension of the North American Free Trade Agreement to Central and South America. He wants trade agreements negotiated by the executive branch to be voted up or down, as in the recent past, without amendment by Congress.

Like so many others in Washington and on Wall Street, the President exudes faith in free trade. This faith has become so pervasive that doubters often hesitate to voice their reservations, lest they be identified with flat-earthers like Pat Buchanan and Ross Perot. Americans who question the wisdom and desirability of free trade are often suspected, by their believing countrymen, of an inability to reason abstractly.

Free trade, as the term is used today, means an absence or bare minimum of import duties. A tariff is merely a list of such duties, which are deemed objectionable on the ground that they increase the price of imported goods and services to the consumer. thereby degrading the allocative efficiency of the domestic economy.

It is a subtle argument in that the mere mention of the word "efficiency" seems to persuade people who neither know nor care what "allocative" efficiency actually is. It sounds like a good thing, so the country should have more of it. Despite the fact that the founding fathers intended the federal government to generate the bulk of its revenues by collecting import duties -- as it did, more or less, for about a hundred years -- free trade has come to sound as American as baseball, apple pie and the freedom to bear assault weapons. That doesn't necessarily mean it's a good idea.

Americans routinely buy and sell water rights, mineral rights, timber rights, hunting rights, fishing rights, grazing rights, patent rights, copyrights, translation rights, syndication rights, movie rights, book rights, sunshine rights and rights of way. More option rights are traded on financial markets than actual securities. Why then must the right to offload cars, VCRs and TV sets onto U.S. soil be given away?

What do import rights have in common with other items modern society deems it improper to buy and sell, such as sex, drugs and babies, along with the outcomes of trials, elections and athletic contests? Is free trade a moral decision or a business decision?

For some, unaccountably, it has become a moral one: More than a few opinion makers advocate free trade on the ground that it's the right thing to do! For others, it remains a business decision. They acknowledge that there is easy money to be made by the imposition of import duties (like the 25 percent duty the U.S. already collects on trucks), yet fear that to collect such duties would be penny-wise and pound-foolish.

Manufacturing jobs

Why so? Although import duties would undoubtedly raise the price of the proverbial "market basket" of goods and services upon which the consumer-price index is based, they would also create jobs in the manufacturing sector -- where the highest-paying jobs tend to be -- and enhance employers' ability (if not their inclination) to raise wages.

If import duties raise consumer prices by 10 percent, while increasing per-capita income by 15 percent, Americans will be better off. Where is it written that such duties must increase prices more than they boost income? Most foreign nations continue to impose import duties because, in their closely monitored experience, such duties boost income more than they raise prices.

Protection, which investments need, should not be confused with isolation, which they don't. Professional athletic teams charge serious money for the right to attend their contests. They do so not from any desire to isolate themselves from their fans, but in an effort to protect and make good their investments in franchise and talent. An import duty is nothing more than an admission fee, which could and should be determined as any other such fee is, by the interplay of supply and demand. What else is the price system for?

If an import duty is set too high, the flow of the corresponding import will abate, and revenues will suffer. If it is set too low, revenues will also suffer. In either case, the government will be obliged either to borrow more, or to tax something else. Import duties are among the least burdensome of taxes, in that they can be avoided simply by buying American.

Neverthless, Washington and Wall Street, not to mention the economics profession, remain bullish on free trade. They seem to have persuaded one another that the business lost at home, due to weak customer earnings stemming from actual job loss, early retirement or declining real wages, can be recouped overseas by increasing "competitiveness and productivity."

They seem oblivious to the fact that the rest of the world, while eager to sell in the United States, remains unwilling to buy anything here that can be obtained elsewhere, and lives for the day when that will exclude nothing -- a day America only hastens by running multi-billion dollar trade deficits year in and year out.

But then, Washington, Wall Street and the economics profession have been wrong before, as during the months preceding the stock market crash of October 1929, when none of the three lifted a finger against the speculative excesses of the age.

Free trade is fool's gold. As a 19th-century humorist once put it, "It ain't the things we don't know that get us in trouble. It's the things we know that ain't so!" The virtues of free trade are among the things all educated Americans seem to know -- but they just ain't so.

James Case is a writer and consultant living in Baltimore.

Pub Date: 9/18/97

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