| Free
Trade: what's government got to do with it?
 Author:
Luke Brown
Posted: November, 27,
2003
Someone once told me that he was all for free trade but couldn't
understand why free trade agreements needed thousands of pages.
The simple answer is that this is not free trade. All that is required
for free trade are willing buyers and sellers agreeing voluntarily
to deal peacefully with each other, the eradication of protectionist
tariffs, quotas and subsidies, and the presence of important foundations
of a free market economy such as secure property rights and sound
money. So instead of a massive, detailed agreement between governments
(which, to be fair, would make a handy doorstop) that invariably
includes a witches brew of subsidies, bailouts, aid programs, bogus
regulations, exceptions, bureaucracies, quotas, favours, cartelisation,
etc. one would really need a commitment by governments to stay the
heck out. And there is a Father Christmas.
Bill Clinton had more
than a passing resemblance to Santa, with his hearty laugh, desire
to be liked by all, and his showering of gifts on many off the backs
of the little people. His commitment to free trade was also the
stuff of fiction. Witness NAFTA, with its expansionary bureaucratic
structure, the bailout of Mexico, exclusionary deals, subsidies,
dubious spending programs; all hardly the stuff of free markets.
The bullying of foreign countries like Japan over their automobiles
and photographic film, Thailand's rice, the birth of the WTO, export
subsidies, tariffs, production subsidies, and other monstrosities.
While free in Clinton's slictionary may mean what he wishes it to
mean, in most other people's books, free, like say, liar, is pretty
clear.
The current leader of
the free world President George W. Bush likes to portray the image
of a straight shooter. In his election campaign he sounded dedicated
to promoting free trade to the world, saying it had not only an
economic but also a moral basis. But somewhere along the line he
dropped his free trade commitment and replaced his blanks with deadly
protectionist cartridges. The signing of the massive farm bill with
its subsidies for farmers of $180 billion over ten years (an increase
over existing spending programs of $73.5 billion) was a large blow
against free trade and free enterprise. As were the likes of the
textile, lumber and Catfish industries running for protection. In
the meantime, the United States has been negotiating a series of
regional and bilateral trade deals around the world, all for various
reasons. For example, trade representatives have been in talks with
Australia over a "free trade" agreement but not New Zealand,
with the former supporting the US over the Iraq war and the latter
not. So because governments disagree with each other, its citizens
should suffer from possible benefits from reduced tariffs and the
like that may arise from "free trade" agreements. Thus
reducing barriers to trade is seen as some form of gift or favour
to be handed down by benevolent governments. But producers and consumers
don't normally enter into foreign trade because they are feeling
generous (as opposed to those in government who spend other people's
money); the quality of the product or its price usually determines
whether a trade will be entered into. If they could get a better
deal elsewhere they would pursue that opportunity. So not only are
the wishes of buyers and sellers being interfered with, but scarce
resources are also being directed away from more to less valued
lines of production, meaning lower overall wealth. And then there
were, of course, the steel tariffs of last year. Some defenders
argued that this cave-in was necessary for Bush in order for him
to get Trade Promotion Authority (formerly known as "fast-track
authority") whereby he could take a trade agreement to Congress
and they could have an up-or-down vote on it (ie. either vote to
accept or reject it with no amendments). Clearly, if he needed to
compromise on steel, he would have to buckle on other things in
his "free trade" deals to retain his fast track authority.
So what of the steel
tariffs then? The US International Trade Commission came out recently
with its report on their impact. It is a case study in the effects
of tariffs. A politically well connected group, the steel industry,
gained special protection, ostensibly to give it some breathing
space and allow it to restructure even though this industry has
pleaded for special protection in the past for the same reason and
imports have been decreasing of late. Its share of the US market
increased from 79.6 per cent to 81 per cent (although its share
of worldwide steel production fell from 12.4 per cent to 10.2 per
cent). But even despite the steel tariffs, thirty-one steel companies
went bust and employment in the industry has dropped 10 per cent.
Prices have gone up and, as expected, those manufacturers who use
steel in their products and the consumers of their products have
been slugged in the process, with thousands and thousands of job
losses in related industries. The Bush administration is now under
pressure to drop the tariffs, not only by the WTO who have just
ruled the tariffs illegal, and the EU, Japan, China and South Korea
who have promised to apply their own tariffs and sanctions on unrelated
US exports (the law of increasing protectionist stupidity), but
also by opposing forces in the United States representing steel
producers and consumers in the run up to Presidential elections
in 2004.
The European Union was
up in arms over the decision. However, the hypocrisy of European
Union politicians stinks like surplus piles of taxpayer-subsidised
Common Agricultural Policy cow excrement. European taxpayers have
the misfortune to subsidise mostly rich agricultural interests (around
half of the spending goes to the largest 17% of farming enterprises)
by $41 billion per year and put up protectionist barriers against
the imports of those poor countries that try and compete with European
agriculture. These subsidies, which make up half of the EU budget,
lead to overproduction, crowding out competitors from the Developing
World, with deadly effect. The Centre for the New Europe estimates
that "[o]ne person dies every 13 seconds somewhere in the world
- mainly in Africa - because the European Union does not act on
trade as it talks." Quotas and tariffs on non-agricultural
products are also rife. Jacques Chirac, for instance, seems (allegedly)
to care for Iraqi war victims, but not much (do they ever?) about
taxpayers and (conclusively) not for African trade victims.
It's no wonder then that
many in the Developing World are losing faith in the "Developed"
World and their continued proclamations of commitment over the years
to free trade. Unfortunately, much of the blame for their lack of
development is being placed on "free trade" which is in
actual fact a mix of protectionism, mercantilism and managed trade.
So what then are the
economic arguments for free trade? Well, just as it makes no sense
for a doctor to grow his own potatoes when he can get them cheaper
from a farmer, also enabling him to treat patients instead of them
treating themselves, and it makes no sense for a farmer to make
his own jeans when he can buy them from a clothing manufacturer,
nor does it make sense for those in a specific district to be self-sufficient.
And just as it makes no sense to create barriers between various
districts within a state, or between states within a country, which
would interrupt the regional specialisation and division of labour,
so does it not make sense to apply barriers to international trade.
The theory of comparative advantage, the ultimate economic basis
of free trade, demonstrates that even if a country (that is the
individuals or groups of individuals within it) can produce certain
goods (eg. apples) more efficiently than another country, it might
still pay for the former to buy from the latter. This would be so
if the value from alternative production (eg. wine) it could have
entered into (ie. the opportunity cost) exceeds the value arising
from the production of apples. What tariffs, quotas, subsidies and
other protectionist measures accomplish is to distort production
and trade, interfering with the international division of labour
and specialisation, and as a consequence lowering overall wealth.
Restrictions by governments on foreign investment in the material
means of production, capital, which is the key to the raising of
productivity and hence wage rates, will also ensure that the poor
stay poor. Unfortunately, as is the case with many beneficial principles,
genuine free trade has been distorted and trashed. That its so-called
defenders and proponents in government have been party to it says
nothing about the case for free trade and a lot about them and government.
Author: Luke Brown
Email: editor@polosbastards.com
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