Magazines: Hollow Threats


You'd think that after 200 years of sound advice by economists, politicians would finally have figured out that free trade leads to growth, prosperity, and fortune, while protectionism leads to autarky, depression, and despair.

But it seems that the Clinton administration is determined to continue the addiction to protectionism that blighted the Republican administrations of the 1980s. And some people are calling for huge bureaucracies to pile more bricks on top of our already high tariff walls. Perhaps the most ardent trade warrior is National Journal's Bruce Stokes, writing in the Winter Foreign Policy.

While Stokes does support some measures that expand trade, such as the North American Free Trade Agreement, most of his proposed changes are designed to end what he calls "the ideological blind alley of laissez faire." Stokes supports President Clinton's efforts to create an Economic Security Council, and he also supports a new Department of International Trade and Industry (DITI) to oversee America's trade policies. Had this department existed in the 1980s, says Stokes, it could have given money to auto companies for research, supervised import quotas, and "required industry and labor to make sacrifices of their own, limiting wage demands, workplace rules, executive compensation, and investment options."

Stokes also wants to create a Trade Corps, a group of public-spirited civil servants who would work on "the development of common strategies on trade issues that transcend narrow departmental approaches." And to make sure that all these new bureaucracies are doing their jobs, a Congressional Trade Office would be set up to be a legislative watchdog.

One wonders why all these new bureaucracies are necessary. Surely the executives of the American car companies did a fine job fouling up their enterprises without thousands of Washington bureaucrats, most of whom have never managed a business or met a payroll, helping them push their firms over the brink. Recall also that by the single act of giving billions to Iraq in "agricultural credits," the Bush Administration trade warriors did a great deal of damage to American interests. Will the batallions of bureaucrats now based in the Export-Import Bank, the Overseas Private Investment Corporation, the U.S. Trade Representative's Office, and elsewhere suddenly become competent just because they happen to have their own department?

But isn't national trade policy necessary before we can compete against Japan and Europe? Aren't these competitors constantly beating America up in trade battles? Let's look at the Japanese and European economies.

On January 1, 1993, the economies of the member states of the European Community were supposed to fuse into a single market. The European economies, however, were not a smoothly purring wealth-creating engine: They were sputtering, spitting out the noxious fumes of racism, nationalism, and massive unemployment. Even Europe, a publication of the European Community, could not put on a happy face when discussing "Europe 1992."

"There was no dispelling the gloomy atmosphere and uncertainty on the EC horizon," International Herald Tribune editor Axel Krause reported in Europe's February issue, "nor denying the absence of rejoicing over the year 1992, which by any measure proved one of the most difficult, tense, and conflictive years in the Community's history."

In a pungent piece in the February Commentary, the Hoover Institution's Angelo Codevilla argues that much of the "Euromess" has resulted from voters' rejecting big government. "Within each country," says Codevilla, "people are searching for ways of saying 'no' to politicians of all parties, whom they perceive as really belonging to a single party, that of the ruling bureaucracy—a bureaucracy that takes about half a worker's income and no longer seems able to justify doing it."

During the Cold War, says Codevilla, European politics divided mainly along foreign-policy lines, depending upon whether a party favored or opposed accommodation with the Soviet Union. The major non-socialist parties (the West German and Italian Christian Democrats, the French conservative parties) felt as free to bloat government and give favors to their friends as did their rivals on the left.

When the Soviet Union collapsed, these non-socialist parties lost their raison d'être, and voters began to search for alternatives. All of Europe's leading politicians, says Codevilla, have little support. François Mitterand heads a party that can only count on one-fifth of the French electorate. Britain's John Major "is a colorless man who drifts with the wind." The entire ruling class of Italy appears to be corrupt. Helmut Kohl of Germany "has nothing to offer but more taxes as far as the eye can see." (The March 6 Economist reports that Germans are so disgusted with politics that two-thirds of those polled think that their government is incompetent and 40 percent say they will not vote in the 1994 general election.)

Codevilla adds that this European distaste for politics extends to the welfare state. Those who can afford it are backing out of national health-care plans, and parents are realizing that state schools cost more and offer less every year. The rising costs of government have made everyone in Europe poorer, thanks to taxes and regulations that ensure prices twice as high as those in America. The average bureaucrat in Copenhagen or Milan may make $30,000 a year, says Codevilla, but after his hearty day of regulation, he will take the bus or train home—not because of altruism or ecomindedness, but because on that salary, he cannot afford a car.

This rebellion against the state, writes Codevilla, is the primary reason why many Europeans hold the European Community in low regard. The Eurocrats in Brussels and Strasbourg issue regulations that seem picayune and asinine. The European Community, for example, has declared that only six kinds of apples are fit to sell within its single market and ruled that the European condom must be precisely 15.2 centimeters long, about 6 inches (with no national deviations allowed).

The E.C. also loves to impose tariffs on a product (such as cars or computers) and then decide which favored firms will be allowed to sell it. The resulting system favors those few big companies that can participate in E.C.-approved cartels, restricts entry by outsiders, and ensures that the European Community "has become the perfect source for intrusive, picayune socialist legislation that national parliaments would be loath to pass for fear of public retribution."

In the November Harvard Business Review, Andrew Hilton, managing director of Meletai (London) Ltd., observes that even European industrialists are skeptical about the merits of a single market. A survey of 15,000 firms conducted by the German Chamber of Trade and Industry reported that only 8 percent of these companies had considered investing outside Germany, and most of those wanted to set up plants not in the E.C. but in stable, low-cost Central European countries, particularly Hungary and the Czech Republic. A 1992 survey of 324 British firms conducted by KPMG Peat Marwick found that 76 percent of those surveyed "believed that the community's single-market program would have no effect on them."

Even "Euro-conscious" businesses, Hilton says, have found the notion of a single market to be a useless fiction. The British chemical firm ICI, for example, closed its European headquarters in Brussels after only 15 months because it found that there was nothing this branch could do that was not already being done by ICI's existing national divisions. And when Citibank tried to establish a London office to control its European operations, it found that this office could not adequately supervise Citibank's Dublin employees, let alone its staffers in Athens or Madrid.

Instead of a single market, Hilton sees that for the indefinite future Europe will be "a group of markets with distinct characteristics." Britain has far more in common with the United States, Canada, or Australia than it does with Portugal. The Danes are much more like the Swedes and Norwegians than they are the Italians. And a banker setting up operations in Greece, where a checkbook is a rare commodity, would conduct her operations in a manner far different from banking in England, which has nearly as many checking accounts as America does.

So Europe, far from being an economic colossus, is a pitiful, helpless giant slowly being strangled by red tape. And Japan, as The Economist's Clive Crook reports in that publication's March 6 issue, is in little better shape.

Japan's economic problems result partly from falling land prices, which have depressed the Japanese economy in much the same way that the savings-and-loan scandals have harmed America. "In 1990," Crook observes, "land prices in Tokyo were so high that the grounds of the Imperial Palace were worth more than all the land in California." But these high prices for property could not be sustained, and when the land bubble burst, the entire Japanese economy began to shrink.

In 1989, the shares on the Japanese stock market were worth ¥511 trillion ($3.6 trillion), or 30 percent more than the shares of all America's stock-issuing companies. In 1992, half this wealth—nearly $2 trillion—vanished as stock prices fell. The number of Japanese bankruptcies is not only at an all-time high, but Japanese banks may have up to ¥40 trillion ($330 billion) in unrecoverable debts, which may prolong the Japanese recession indefinitely.

While Japan still has some competitive advantages (efficient firms, high savings rates), Crook argues that the country still must make formidable changes to remain as competitive as it was in the 1980s. Lifetime employment must end, and up to 3 million workers may have to be fired. And Japan's ruling Liberal Democrats, Crook believes, must become more honest—and their opponents should modify their radical views, which currently consist of "the economic judgment of Fidel Castro."

Thus the principal argument of America's trade warriors is severely flawed. We have little to fear from Japan or Europe; their economies are in far worse shape than ours, and their protectionist policies have stifled growth and made their citizens miserable. Moreover, a trade war, warns an editorial in the February 6 Spectator, is "a war with no heroes." Should a full-fledged trade war break out, it would be the economic equivalent of World War I—prolonged trench warfare and tens of millions of "casualties" in the unemployment lines.

To win the trade war, America should use the sage advice that Vermont Sen. George Aiken gave during the Vietnam War. The best way for America to win a trade war is to declare victory, go home, and practice free trade.

Contributing Editor Martin Morse Wooster is a visiting fellow at the Capital Research Center.