Economists have failed dismally to convince the public of the benefits of trade. Perhaps we should admit that and start from scratch.
Economists have believed trade is beneficial for at least 226 years, which is also as long as our discipline has had an identity of its own rather than as a branch of philosophy.
But despite Smith, Ricardo, Samuelson and a host of other insightful thinkers, the general public here and around the world is not buying it. Perhaps we should be honest, admit failure and take a close look at why our sermons are not being taken to heart.
The problem may lie in our complicity with a little bit of hypocrisy for the last 70 years. We know that the benefits of removing tariffs and other barriers accrue primarily to consumers in the country doing the dismantling. But in an effort to promote trade, which we think is good, we go along with a more popular but false belief that removing trade barriers is a favor to other nations and that we should do so only if we are given something in return.
This is silly.
This is like a group of carpenters building a house, each with a dozen bricks strapped to his back. One turns to another and says, “I’ll take one of the bricks off of my back if you take two off of yours.” Both would be more productive if they just dropped their bricks. There is no reason for one to wait for another to do it before getting rid of his dead weight.
From antiquity to the modern era, nations determined trade restrictions based on their view of their self-interest. The British Parliament or U.S. Congress drafted trade laws taking into account revenue needs and which sectors possessed the political power to demand insulation from foreign competition.
Britain was the first nation to remove most trade restrictions, and it did so unilaterally. The great economist David Ricardo had argued against the Corn Laws, which placed stiff tariffs on grain imports, contending that they benefited wealthy landowners but hurt consumers and the nation as a whole.
Richard Cobden, an intellectual predecessor of today’s issue-oriented activists, formed an Anti-Corn Law League because he felt his Christian beliefs forced him to act against trade restrictions that weighed most brutally on the poor. Free trade was a matter of social equity, not just economic efficiency.
But economists of the period also argued that free trade was not a zero-sum game in which gains by one group needed to come from losses by another group. Free trade, they asserted, would broadly benefit the British economy as a whole and would improve economic efficiency as well as equity.
They eventually won the intellectual and political debate. The laws were repealed in the late 1830s. This was the British century, and the British economy boomed for a variety of reasons, of which free trade was only one. But there was a general acceptance among the educated public that unilateral free trade was in the nation’s interest.
World War I disrupted global trade and finance. The “Roaring 1920s” had elements of strong economic growth, but also post-war xenophobia. In 1929, before the U.S. stock market crashed and at a time when the United States was running a large trade surplus, Congress passed the Smoot-Hawley bill to raise U.S. tariffs to the highest levels ever.
By the time President Hoover reluctantly signed the bill into law in early 1930, the market was well on the way down, recession was spreading and a shortsighted Federal Reserve was letting the money supply collapse. Smoot-Hawley touched off a beggar-thy-neighbor trade war among the major nations and international trade imploded during a 30-month period. A bad recession turned into the worldwide Great Depression.
President Franklin D. Roosevelt and other Democrats denounced Smoot-Hawley in the 1932 elections and, after victory, tried to reverse its pernicious effects. They passed the Reciprocal Trade Agreements Act in 1934, which authorized the president to negotiate with other nations to mutually reduce tariffs.
It worked, but only slowly. If you brain someone with a baseball bat you can put an icepack on the injured head, but the pain does not go away immediately. Unfortunately the act introduced the idea, now nearly universal, that trade restrictions should only be removed if someone else was willing to do it rather than because it was in one’s own self-interest.
This was a dangerous idea. Cobden had seen the danger a century earlier when he wrote, “We came to the conclusion that the less we attempted to persuade foreigners to adopt our trade principles, the better; for we discovered so much suspicion of the motives of England that it was lending an argument to the protectionists abroad to incite the popular feeling against free-traders, by enabling them to say ‘… they are seeking to prostitute our industries at the feet of that perfidious nation.’ ”
If you read any left wing or nationalist newspaper from Latin America, you will find precisely that argument today. The more George W. Bush, with his well-founded reputation for cowboy unilateralism, presses for a Free-Trade Area of the Americas, the greater the resistance is and will be.
Here at home, the benefits to households of cheaper children’s clothing, orange juice, shoes and sugar are never mentioned. Both sides rely on intellectually dubious arguments about jobs.
We economists have failed and continue to fail. If we want to win the argument about trade, which fundamentally involves fairness to households as well as efficient use of resources, we need to put those issues back at the center of the discussion.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.