Forget the Crowbar
What's the best way to open markets overseas? Keep those imports coming.
Can we open foreign markets by closing our own? One of the hottest ideas in Washington is that we should retaliate against protectionist countries by raising our own import barriers against them. We will remove our restrictions only when they remove theirs, the theory goes, forcing these countries to negotiate with us to eliminate all trade barriers. "Retaliation" is the rallying cry of a new economic nationalism that has gained support from powerful Republicans and Democrats alike. But it doesn't work.
So far, the most important result of all this talk of retaliation is the so-called Super 301 law. Passed as part of the 1988 trade package, this measure amends Section 301 of the trade code, expanding the power of the U.S. trade representative to crack down on countries with "unfair" trading practices by erecting barriers to those countries' goods. When Super 301 was passed, House Ways and Means Committee Chairman Dan Rostenkowski (D–Ill.) proclaimed, "This is a positive step toward dismantling foreign trade barriers that adversely affect American interests."
And last year, President Bush declared he would "work vigorously to break down trade barriers abroad." He gave the new U.S. trade representative, Carla Hills, a crowbar at her swearing-in ceremony, suggesting that trade retaliation is a crowbar to force open foreign markets.
Underlying all this is what we might call the "crowbar theory" of trade sanctions. In his 1981 study, Economic Sanctions, Robin Renwick, of Harvard's Center for International Affairs, expressed it this way: "The theory of sanctions rests on the assumption that if subjected to economic penalties a nation will, as a matter of self-interest, change its conduct." But it's hard to find any significant cases where the theory has worked. The United States has closed its market many times, and almost always foreign markets have just closed even tighter.
During the 1980s, the portion of U.S. trade subject to import restrictions increased about 50 percent. We closed our market mainly with import quotas, "voluntary" agreements with other countries to reduce their exports, antidumping duties, and retaliatory tariffs. Yet other countries didn't respond by opening trade to outsiders. The Europeans, for example, merely counter-retaliated with punitive tariffs, "voluntary" restraint agreements with the United States, antidumping duties, and local-content laws.
And if you look at particular American retaliatory actions, the record is dismal. Since 1974, when Section 301 first became law, the United States has brought 78 cases against foreign governments. Threats of American retaliation have forced only 13 market openings—and those were generally trivial.
In 1975, for example, the American Farm Bureau complained that Canadian egg import quotas were harming American producers. After lengthy talks with the U.S. trade representative, the Canadians agreed to increase their quota limits. In the world of Section 301, that was designated a market opening.
And consider the following actions, not one of which led the target country to lower its trade barriers:
• In 1982, President Reagan imposed retaliatory tariffs against Argentine leather.
• In 1987, he ordered 100-percent retaliatory tariffs against Japanese laptop computers, power tools, and other products, because of a dispute involving Japanese semiconductors.
• In 1988, after the trade representative was unable to resolve a dispute about pharmaceutical patent protection in Brazil, Reagan ordered 100-percent retaliatory tariffs against Brazilian paper products, pharmaceuticals, and consumer electronics.
Despite their utter lack of success, all of these retaliatory tariffs are still in force. Some U.S. manufacturers may benefit—but by charging American consumers more, not by gaining "fair" access to new markets overseas.
The most significant "victory" for the crowbar theory was the opening of the Japanese cigarette market three years ago. But although cigarette exports to Japan have increased substantially, they still account for less than 2 percent of total exports to Japan. And overall American exports to Japan jumped 40 percent over the same period—largely because lower exchange rates and higher quality made American products more competitive. Retaliatory threats had nothing to do with these big changes.
Over the years, many American companies have actually been harmed by Section 301 actions. In 1978, for example, American broadcasters filed a complaint because Canada had abolished tax deductions for advertising on stations in the United States. The United States retaliated by removing tax deductions for advertising on Canadian-owned stations. The consequence, of course, was that American advertisers had a harder time reaching the Canadian market. Twelve years later, these retaliatory measures are still in place—and Canada has not changed its original policy.
In 1982, after failing to resolve a dispute about European steel subsidies, Reagan ordered .higher tariffs on imported European steel—making it more difficult for American automakers and appliance manufacturers to get competitively priced supplies. Georgetown University economist Gary Hufbauer argues that steel quotas cost Americans $1.5 billion to $3 billion in 1988. Similarly, the U.S.-engineered 1986 semiconductor agreement led to shortages of memory chips and a quadrupling of chip prices, harming American computer companies and consumers.
Last May, the trade representative targeted a number of Japanese electronics products for retaliatory tariffs, because of complaints that Motorola made about Japanese import limits on cellular telephones. In response, U.S. communications companies noted that they and their customers—not Japan—would be the ones to suffer if electronics equipment were slapped with new import restrictions.
"We are seriously concerned," said Edwin B. Spevack, president of the North American Telecommunications Association, "about the propriety of imposing sanctions so broadly when the problem concerns so narrow a segment of the entire industry. Not only do we believe that such measures are inappropriate, we also know their imposition would be counter-productive.…it mandates that the American consumer and American businesses—many of them small businesses—will be forced to bear penalties greater than those Japan may experience."
But while some companies complain about retaliatory trade barriers, others are learning to use the process for their own benefit. Last year, the trade representative began an investigation into complaints that Brazil allows its computer manufacturers to pirate American software. Alert to an opportunity, U.S. footwear manufacturers and ferro-alloy metal producers stepped forward to urge that their Brazilian competitors would be ideal targets for retaliatory tariffs if action were taken against Brazil.
If the trade representative does slap tariffs on Brazilian shoes and metal, that probably won't stop the alleged pirating of software. But U.S. shoe factories and metal makers will have a little less competition to worry about. And, of course, consumers will pay more for shoes, while manufacturers that use ferro-alloys will get socked with higher costs.
Far from opening markets, retaliation tends to provoke nationalism and xenophobia, generating even more pressure to keep out American goods. This rising nationalism—notable today in South Korea and Japan—is undoubtedly driven at least as much by resistance to free trade as by resentment of US. trade barriers. But, either way, the crowbar will prove ineffective if not counterproductive.
South Korea began its first vigorous antismoking campaign, for instance, after the United States pressured it to eliminate barriers to American cigarettes. Anti-American Korean leaders promote greater self-sufficiency and oppose letting in more imports. Their rallying cry is Minjok chajo: "We can do it alone." Similar sentiments are on the upswing in Japan. Facing the threat of U.S. retaliation, those (such as South Korean and Japanese farmers) who oppose lowering trade barriers simply on self-interested grounds, can gain allies by appealing to patriotism.
This response is not a new phenomenon. The U.S. government has a long history of attempting to force open other countries' markets by raising its own trade barriers. And it has a long history of failure.
In 1890, the United States enacted the McKinley tariff, which raised duties on wool, wheat, corn, and many other things. It also empowered the president to retaliate against countries that refused to lower their tariffs. The result: higher tariffs and a trade war with Europe.
In 1922, the United States substantially closed its markets again. Congress enacted the Fordney-McCumber tariff, which raised duties as much as 400 percent on wool, sugar, wheat, iron, steel, dishes, and children's toys, among other things. The president was again given retaliatory power similar to that in the 1890 tariff.
Fordney-McCumber wasn't followed by more-open markets anywhere. If anything, it encouraged economic nationalism abroad. Mussolini promoted his "Battle of Wheat"—trade restrictions aimed at helping Italy become self-sufficient in grain. Germany erected higher trade barriers and created 2,500 cartels. Finally, Fordney-McCumber encouraged economic nationalism in Latin America, especially Argentina. Frustrated by U.S. trade restrictions, Argentine exporters promoted the popular slogan Comprar a quien nos compara: "Buy from those who buy from us."
The theory of retaliation failed again in 1930, when the United States enacted the Smoot-Hawley tariff. It raised duties an average of 58 percent on 25,000 agricultural commodities and manufactured goods. Far from forcing open foreign markets, Smoot-Hawley infuriated people everywhere. They reacted by closing their markets with higher tariffs, import quotas, and exchange controls.
Angry Swiss consumers boycotted American-made tires, adding machines, typewriters, washing machines, household appliances, and building materials. Swiss car owners specified British or Dutch gasoline. The Swiss insisted on meat from Argentina or Uruguay rather than the United States. American exports to Switzerland dropped 45 percent between 1930 and 1932.
Similarly, after Smoot-Hawley throttled imports of Italian olive oil, Italians reacted angrily against the United States. The Royal Automobile Club publicized the names of "unpatriotic" Italians who owned American-made cars. The U.S. trade commissioner reported: "Windows were broken, the cars spat upon and otherwise befouled when left without an occupant. Italian drivers of American cars were hailed as 'Americano' and made to feel as if they had betrayed their country in purchasing a foreign car." American car sales in Italy plunged 91 percent within a year.
Smoot-Hawley erected barriers against Spanish cork, and the Spanish government retaliated with the Wais tariff, which raised duties 50 percent on American tires, 66 percent on American movies, 100 percent on American cars, 500 percent on American sewing machines, and 700 percent on American safety razor blades. American exports to Spain plummeted 96 percent by 1932.
Our Canadian neighbors wanted revenge after Smoot-Hawley doubled the tariffs on fish and many agricultural products. Conservative leader Richard Bennett declared: "When your greatest competitor shuts the door in your face, when men walk the streets hungry, when our provisions grow old in storage warehouses, when the whole machinery of trade is smashed by an alien, what does the leader of the Government do?" Bennett demanded an aggressive policy of "Canada first, United States second." In August 1930, he became prime minister, and Canada imposed retaliatory tariffs against American iron, steel, fruits, vegetables, grain, and dairy products. By 1932 American exports to Canada had plunged 74 percent. Despite worldwide retaliation against the United States, Smoot-Hawley remained in effect—and is still on the books, with amendments, to this day.
Over the last five decades country after country has opened its markets without pressure from the United States. Finding themselves with economic problems brought on by trade barriers and oversized government, these countries have been driven by their own self-interest to remove trade restrictions.
Through it all, the United States' biggest role has been to serve as a model of a relatively open economy. In Chile, for example, markets were unilaterally opened after an almost total economic collapse. The Marxist politician Salvador Allende had pursued economic policies that led to 600 percent annual inflation, chronic shortages, and stagnation. In 1973, his successor, General Augusto Pinochet, began removing trade barriers, investment restrictions, and business subsidies. Chile's GNP is now growing 10 percent annually, more than five times the Latin American average. It was self-interest, not economic sanctions, that forced these changes.
Nor did American retaliatory threats have anything to do with the deregulation of Japanese financial markets. During the mid-1970s, soaring budget deficits forced the Japanese government to issue far more bonds than the nation's heavily regulated financial markets could handle. To finance its deficits, the government had to chop away red tape binding financial institutions. As part of this program, it abolished most exchange controls, permitting capital to move freely in and out of the country for the first time since World War II.
For years, Mexico pushed economic nationalism as far as any country, with its economy a jungle of restrictions and subsidized, nationalized enterprises. But falling oil prices precipitated a crisis in 1982. Having exhausted its credit, the government began to create a somewhat more hospitable environment for foreign investors. Mexico signed a tariff-reduction deal with the United States, and maquiladora, factories owned by American companies, began to thrive near the U.S. border. Today, northern Mexico is growing 6 percent annually—almost as fast as Japan.
To strengthen the rest of its economy, the Mexican government has abolished most import quotas since 1987 and cut tariffs to an average of about 10 percent. Imports climbed 50 percent in 1988. And Mexican companies are being forced to become more competitive.
Again, in Turkey, trade liberalization followed severe economic crises. In 1983, economist Turgut Ozal promised some free-market reforms, and he was elected president. He phased out import quotas, lowered tariffs, and abolished most price controls. He lifted many investment restrictions, and foreign investment soared. The result was an economic revival. Turkey, which once imported nails, now exports cars and refrigerators.
For years, Australia was mired in a stagnant, protectionist swamp. Since Robert Hawke was elected prime minister in 1983, he has promoted a more open market. He cut government spending, eliminated foreign-exchange controls, liberalized foreign investment policies, deregulated financial markets, and lowered tariffs on manufactured imports.
Neighboring New Zealand had also substantially isolated itself from world markets with steep tariffs, import quotas, and subsidies. And its economy stagnated just as Australia's did. But in 1984, Finance Minister Roger Douglas introduced a series of invigorating reforms. He phased out foreign-exchange controls, deregulated financial markets, lowered tariffs, and abolished import licenses and agricultural subsidies. Productivity is up, and the economy is reviving. U.S. retaliatory threats didn't produce these welcome trends.
During the past decade, probably the most dramatic events have involved the economic collapse of the Communist Bloc and resulting pressures to open up or fall further behind market economies. It would be absurd to claim that American retaliatory threats contributed to reforms in China or the Soviet Bloc.
When one country unilaterally opens its market and prospers, other countries may begin exploring ways to open their markets—not because of retaliatory threats, but because they see that open markets are in their self-interest. No one wants to be left behind.
Of course, not every country will emulate free-market successes and unilaterally open its markets. But when one compares the results of unilaterally dropping trade barriers with the results of economic sanctions, it's no contest: Although there are no guarantees, the best way for a government to open up foreign markets is to eliminate its own trade barriers.
This is true even though access to foreign markets usually isn't the main reason people open their own market. Most countries remove their trade barriers so they can buy lower-cost, higher-quality goods. The subsequent opening of foreign markets is just a pleasant by-product. If Americans really want to tap foreign markets, we should pressure our government to eliminate the trade barriers it has already erected. Consumers would gain access to new and less expensive products, businesses would pay less for raw materials and equipment, and the federal government could even cut its deficit a little bit by dismantling the bureaucracy that enforces all those trade restrictions.
The resulting increase in our own prosperity might make people in other countries demand that their governments get rid of trade restrictions. And even if other governments didn't change, we would still be better off.
Jim Powell is the author of The Gnomes of Tokyo: Why Foreign Investment is Good for Us.