Most economically literate people realize that there is a problem when it comes to trade policy. The current Clinton-established trade regime, despite the Bush administration’s clumsy but real concessions to reality, is a kind of free-trade extremism. The alternative commonly considered, however, is a Buchananite protectionism that simply does not make economic sense. Retaliatory tariffs against nations that impose them on us should be a given, but this is not enough. There is a middle position, a moderate position on trade, that I would like to name “rational trade.”
The current free-trade extremism has clear intellectual roots. It is based on two things:
1. A model of the economy that implies that the ideal tariff is zero because it ignores real costs which trade imposes and for which trade should pay.
2. A model of the world in which economic factors are so much more important than any others that the others may therefore be subordinated or ignored.
Both of these delusions must be attacked separately. In order to make rigorous economic arguments that will stand the test of the best economic knowledge available, the reasons must not be confused. It is essential that no arguments be advanced for the trade moderate position which are known forms of economic sophistry. This will just discredit the position and get it thrown into the same intellectual dustbin as paleo-protectionism. In particular, this means conceding that the prevailing economic model is correct insofar as its assumptions are true. The problem is that they are not.
The first issue is to make clear the costs of trade which it currently does not pay. Principally, we are talking about security here, particularly after 9/11. The key costs are:
1. The cost of border freight security, which has gone up since 9/11 and will have to go up much further if this country is to be secure.
2. The cost of defending the places where foreign goods come from. This is a cost of trade that has not traditionally been considered much, but it is huge, so it should be.
It is no secret that our last Mideast war was motivated by the need to defend our oil supply, and that this motivation lurks in the background of the present one. I have no problem with this, given that oil is the lifeblood of our society. But foreign oil that must be expensively defended should carry a price that reflects the cost of that defense. This cost should be borne by the people buying that oil, not by society at large. Our current situation is in effect a public subsidy for expensively-defended oil. It is also unfair
A tariff on Middle Eastern oil would create a price incentive to move our oil dependence away from the Mideast and towards grubby but less troublesome places like Canada, Mexico, Venezuela, and West Africa. It would also provide a financial incentive for the Middle Eastern oil exporters to promote peace, and as a warning to our other suppliers not to become politically troublesome.
Once we have established the logic of this principle in the case of the Middle Eastern oil, it follows we should apply it generally. For example, though I certainly support the benefits of the Pax Americana in Europe, I have never heard a good argument for why we, rather than the nations we are defending, should pay for it. This is particularly true since the taxes that must be levied domestically to pay for defending Germany, for instance, get added to the cost of a Cadillac and subtracted, in effect, from the cost of a BMW, hurting our competitiveness, our workers, and our companies. The same is obviously true for the money we spend defending nations in the Far East, mainly Japan, Korea, and Taiwan. A tariff should be levied on their exports to us sufficient to pay for the cost of defending them.
At this point, one may reasonably object that our trade with these nations is not the only reason we defend them, a valid complaint. In 1945, when our trade with Germany and Japan were both essentially nil, we spent billions keeping them out of the greedy paws of the Red Army, and would do so again in similar circumstances. Fine. But quite apart from the moral argument that nations – particularly rich nations — should pay for their own security, there remains the fact that at least some part of our defense of these nations is due to their trade with us. That part, logically speaking, should be paid for by a tariff on that trade.
Obviously, the trade-related portion of our defense varies from nation to nation, being something like 99% in the case of Kuwait and maybe 1% in the case of Diego Garcia, a British-owned island in the Indian Ocean we have a base on. It is also obvious that we must net against the cost of defending foreign nations the benefits that we derive from defending them. These considerations open up, surely, a can of worms that we may not be able to close. Pick a percentage, come up with an argument to support it, and we can have a public debate on the subject. Anything is better than the present military welfare state we are running for our allies.
The preceding issues, though they concern security, may analytically be treated as economic because they amount to the argument that we have made trade artificially cheap by concealing its economic costs. Therefore, a tariff would make its price equal its true cost, leading to rational economic outcomes like the correct balance between foreign trade and domestic production.
The other class of objections to extreme free trade concerns non-economic problems with free trade, that is to say problems that are not ultimately a matter of goods being imported into this country at a covertly subsidized price.
The key issue here is the need to protect our strategic industrial base. The US is already in the position of having to contemplate war with powers, like China, upon which we are dependent for a wide variety of manufactured goods. This is a problem for extremely obvious reasons.
Even in peacetime, hollowed-out strategic industries can create problems. We recently found ourselves in the embarrassing position of making the decision to sell diesel submarines to Taiwan, an endangered ally, and then discovering that there is no company in the US that knows how to build them anymore. The only suppliers are in Germany and Holland, which refused to sell because their foreign-policy objectives differ from ours.
Obviously, a policy of protecting strategically-important industries would be subject to potential abuse. Any failing industry could claim to be strategically important. But this just means we will have to have a national debate on the issue, like on every other issue. If we can’t manage that, we’re sunk already, no matter what.
Foreign trade weakens our strategic industrial base not just by undermining domestic industries, but our base of skilled labor. We need not only strategic industries, but the workers to man them, and WW II experience suggests that skilled labor is the key bottleneck in industrial mobilization. The dreadful H1-B foreign worker program currently encourages companies to import foreigners rather than training Americans. It also allows foreigners from potentially hostile nations to infiltrate our technological assets. Let’s not forget that Wen-Ho Lee was guilty of selling nuclear secrets to China and only escaped conviction because prosecuting him would have disclosed classified information.
Another way free trade can undermine our security is by enriching potential enemies. Is anyone seriously prepared to defend free trade with North Korea or Iraq? Even free trade with China has not led them along the path of democracy as naïve capitalist romantics predicted, but has enriched and strengthened their existing hostile regime. Their growing military budget isn’t financed out of thin air: it’s financed by exporting goods to America. I loathe Mexico, for other reasons, but we’d be better off buying our cheap knick-knacks from them. And let’s not forget that Bin Laden is (was?) only a millionaire because of our trade with Saudi Arabia.
This last example brings up a more general point: for us to choose to do business with a nation, is a favor granted by us to them and should be treated as such. It should be used as a carrot and a stick for good behavior. We have already done this in a few cases, like the embargo of Cuba and the sanctions against South Africa and Iraq. We should generalize this policy. The extreme free trade position deprives us of this powerful but peaceful weapon by promising free trade to everyone whether they behave or not.
None of this is to say that we should immediately cut off all trade with China, Saudi Arabia, or anyone else. My point is only that the decision to trade with foreign nations is a political act, with potentially lethal consequences, that needs to taken seriously in public debate. Instead, we have in recent years had one-sided cheerleading for free trade, balanced by the worst counterarguments: those of the anti-globalization Left and of rustbelt protectionists like Pat Buchanan who believe we can protect our way to prosperity. It’s time to stop free-trade extremism by retiring those invalid arguments and bringing the right ones to the fore.