Up With Free Trade

The Washington Post, Tuesday, October 20, 1998; Page A19

Despite the series of interest-rate cuts in store from the Fed, the U.S. economy is slowing down. New figures show unemployment rising and industrial production falling.

As conditions deteriorate, suffering industries will look to the government for help. Often, what they seek is protection from foreign competition—which, while understandable, is extremely dangerous.

The world can survive the current financial crisis—and, in fact, emerge stronger, as foolish speculation and crony capitalism are punished and shaken out of the system. But if the response to tough times is to build new walls to keep foreign goods out, then the inevitable result will be a decline in trade overall, which, in turn, will mean higher prices, less efficient production and a much lower standard of living everywhere.

In fact, a resurgence of protectionism would almost certainly plunge the world into a deep recession, or worse. It's happened before, when the tariff wars of the 1920s and 1930s helped precipitate the Great Depression.

The ingredients are there again. Asian countries, especially, are suffering from overproduction—too many goods chasing too few domestic buyers. They are shipping those goods to Europe and the United States, where consumers, at least at this point, are still active.

When supply rises, prices fall. For example, the list price of a 1998 Elantra, made by Hyundai Motor Co. of Korea, is $12,493. But when the 1999 model, which has better features, goes on sale next month, it will cost just $11,499.

American companies, put at a further disadvantage by currency devaluations, have to respond by cutting their own prices, even if it means lower profits, or even losses. While falling prices help consumers, the benefits are dispersed among 100 million households. The damage, on the other hand, is concentrated in specific industries, some of which have substantial political clout.

Already, U.S. steel companies and unions are conducting a lobbying campaign with the theme, "Stand Up for Steel." An ad says: "Foreign competitors are destroying an American success story. Hundreds of thousands of American jobs are threatened. . . . Foreign steel is being dumped on our shores at cutthroat prices. . . . It must be stopped."

Meanwhile, farmers are complaining about falling prices for their crops. To placate them, the new budget contains $6 billion in relief. While this sounds humane, it's a subsidy that will keep prices higher—an intervention in free markets for which the United States criticizes Japan and Europe.

What's worse is that we seem to lack the intellectual, moral and political firepower to defend the system of more open trade that has spread prosperity around the world over the past half-century.

President Clinton can't rally Democrats to the cause, and on Sept. 25, a House bill giving him "fast-track" negotiating authority was defeated, 243-180. Fast track lost last year as well in the first serious setback for more open trade since World War II.

In a recent paper, Brink Lindsey, director of the Center for Trade Policy Studies at the Cato Institute, argues that the old strategy of "diversion and appeasement" won't work. For six decades, he writes, advocates have pushed for free trade by saying that it will increase exports and advance foreign policy goals while, at the same time, they have appeased "protectionists at home with 'fair trade' policies in hope of preventing even worse trade barriers."

Now, he says, "it is time for a change of strategy." I agree. We need to tackle protectionists head-on by making the case not just for exports, but for imports. "It is the maxim of every prudent master of a family," Adam Smith wrote 200 years ago, "never to make at home what it will cost him more to make than to buy. . . . If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them."

After we buy cheaper imports, we can use the money we save to buy goods made here—or invest it. Imports also force domestic businesses to compete for the consumer's dollar by making better products for less (some inefficient companies will fail, but overall, employment and wages will rise). And imports lower inflation.

So, why not embrace unilateral free trade? That is, the United States will say that we will take down all of our barriers—including our absurd anti-dumping laws—and enjoy the fruits of what the world makes.

Yes, we would lose the leverage of using our own trade barriers as bargaining chips: You know, we'll lower our tariffs only if you lower your tariffs—which is like saying, we'll stop banging our heads against the wall only if you stop banging yours.

But such tactics haven't gotten us very far. Other nations lower their barriers only when they realize that free trade is in the best interests of their consumers. By unilaterally adopting free trade, we can show them the way.

The problem is that, even if advocates take a more moderate, but principled, position, this is a tough time to launch an intellectually honest campaign for free trade, with more and more politically powerful industries suffering from foreign competition.

But consider what is at stake: On the current course, broader protectionism—along with its financial equivalent, capital controls—is inevitable. That would make a world recession or depression inevitable, too. The only answer: stand up for free trade.