James Leroy Wilson's blog

Monday, March 05, 2007

Is Free Trade To Blame?

I agree with Pat Buchanan's column from last week on free trade that the picture isn't glorious. It seems to me that the American economy doesn't do much beyond producing unwanted goods and financial services. Twenty-five years of trade deficits, 75 years of almost continuous budgets deficits, and a negative personal savings rate suggest to me that America is now a nation that consumes more than it produces, and that can't last forever without some devastating shock. I thought the trade deficit was supposed to "even out" at some point, as foreigners collecting the surpluses will eventually want to dump their dollars in the only country they can spend them, America. When is that going to happen?

I also agree with Buchanan that NAFTA hasn't worked. Unlike Buchanan, however, the scandal of NAFTA to me isn't necessarily that we've created a half-trillion dollar trade deficit with Mexico since 1994, it is that this has apparently utterly failed to provide Mexicans with opportunity. If NAFTA is so good for Mexico, why has immigration from Mexico to the U.S. rapidly increased post-NAFTA?

But I don't think low tariffs are the problem. Other writers have pointed out the differing taxation regime in the U.S. puts it at a disadvantage. If America went into a Value-Added Tax (VAT) system, products for export would be untaxed in America, whereas imports would face the VAT. This is how other countries do it. America can't afford this uneven playing field, and should either join the crowd and adopt the VAT or an even less onerous tax system, or pull out of its trade agreements.

Another point where Buchanan is not entirely wrong, but exposes his own values and priorities, is when he says this:
For contrary to free-trade mythology, every nation that has risen to pre-eminence and power – Britain before 1860, the United States from 1860-1914, Germany from 1870-1914, postwar Japan, China today – has pursued a mercantilist or protectionist trade policy.

Economic nationalism is the policy of rising powers, free trade the policy of declining powers. For great powers have ever regarded trade as an arena of struggle in the clash of nations.

But isn't it expansion and imperialism (not to mention coal), rather than mercantilism, that defined the rise of great powers of the 19th century? Wasn't it superior quality that allowed Japan to capture foreign markets in the latter half of the 20th century? The difference between imperialist Britain in its mercantile age and imperialist Britain in its free trade era, is that free-trade Britain had no war with a major power from 1860 to 1914. Can we seriously claim that Britain was in decline during this time?

In the end, free trade makes war unaffordable. Countries on whom we have grown accustomed to imposing economic sanctions are countries we are more eager to go to war against. Where free trade gets the edge is not is not always in national economic statistics, but, as Bastiat put it, in the unseen. That is, in the savings of untaxed goods rather than taxed goods, the savings from wars prevented rather than the costs of wars started.

Free trade dogmatists shouldn't use selective data to present a rosier trade picture for the United States than is actually the case. On the other hand, it doesn't make sense to blame low tariffs as the cause. There are just too many structural problems with the American economy - relating to taxes, government interference, and government spending - that hinders America's competitiveness. Before imposing tariffs and viewing other countries as rivals/enemies, we should look in the mirror.

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