North Coast Xpress - - Aug-Sept 97

FREE TRADE AND PROTECTIONISM

(Your Job and Your Way of Life)

Despite the passage of NAFTA and other recent free trade victories in the United States, Alfred Eckes, a former chairman and commissioner of the U.S. International Trade Commission, warns that these developments have a dark side. American officials generously opened the domestic market to imports but tolerated foreign discrimination against American goods. American consumers and corporations gained in the resulting global economy, but many low-skilled workers have become casualties.

Roughly half of world trade is now controlled by large corporations. They traverse the global marketplace, move as-sets around, benefit from produc-tion factors in all corners of the world, and take advantage of the most flexible of all the factors of production-wages. The little people who are not so flexible have absorbed the burden of this adjustment. As capital goes overseas with state-of-the art plants, what we're seeing is the downward harmonization of wages for unskilled workers.

The free trade system probably benefits professionals-those with flexible skills who can move from job to job-but many others are nervous about their jobs; many have moved into service jobs, many need several jobs to maintain their former level of income. For those who don't have transferable skills, it means frequent job dislocations. We see a lot of redundant workers in all our large cities. We see them in Appalachia where I live in southeastern Ohio.

Where do people with very limited skills gain a job that has opportunities? It used to be they could go into a factory job and move up the ladder and gain a middle-class standard of living. This is no longer possible for the relatively unskilled. In effect, the free trade world is transferring wealth from the poor in rich countries to the rich in poor countries who are able to benefit from it.

Free trade theorists talk about factors of production like land, labor, capital. They draw demand and supply curves, and dazzle uninformed observers, but they're arguing in a deductive way from a set of interlocking consistent propositions. I don't dispute their deductive line of analysis, but the real world behaves differently from an academic model. For example, economic theory assumes that trade is handled at arms' length among unrelated buyers and sellers. Actually, 43% of the goods imported into the United States and about 36% of goods exported from the United States involve transactions among units inside large multinational corporations.

International economists all emphasize the advantages of efficiency, but many nations assign high priority to other goals-preserving families, communities, and cultures. Certainly, when our nation was taking off in the 18th and 19th centuries, George Washington and the leaders who followed him were very sensitive to defense considerations, to the need for a balanced economy so that we wouldn't be dependent on foreign markets to obtain goods or to sell them.

Actually, we did quite well before we discovered the gospel of free trade. In the 19th century, when America practiced protectionism and had high tariff barriers that averaged between 40% and 50% on dutiable goods, our economy outperformed that of Great Britain, which practiced unilateral free trade. Our growth rate was literally double that of theirs, and 60-70,000 British workers each year came to the United States for better working conditions.

In the 1840s, Britain removed the corn laws and opened its market to American exports. During that period, we were rapidly industrializing and essentially operating the way Japan, China, and the East Asian newly industrialized countries have in more recent times: that is, we feasted on an open market and enjoyed enormous export growth while our home market was closed to imports that might compete with domestic manufactures. As a consequence, we developed new technologies. We developed export-competitive, capital industries. By the turn of the 20th century, America's steel and machine industry was state-of-the-art, the best in the world, and quickly penetrating world markets and overcoming the inferior competition of Great Britain. We gained behind those high tariff barriers the advantage of large scale production, and we also learned how to produce quality goods at affordable prices.

In the 19th century, all the Republican leaders from Abraham Lincoln through and including Herbert Hoover, endorsed the protective tariff. The Democratic Party was rooted in the agrarian South, which was eager to import goods and to export raw materials to Europe, so it tended to have a low tariff outlook. But Democrats still favored a 20% tariff for revenue only.

The Smoot-Hawley Tariff was said to have caused or exacerbated the Great Depression, but when one looks at the facts and goes into the archives and reads the record, one comes to a quite different interpretation. How could the passage of the tariff in June 1930 somehow have spooked the stock market in October 1929? Furthermore, Smoot-Hawley really wasn't much higher than the previous tariff. Two-thirds of U.S. imports under Smoot-Hawley came in duty-free, and when the tariff was enacted, more items were added to the free list than were taken from the free list and made dutiable. Nonetheless, the conventional wisdom is that it raised the American tariff to a record level. That's not supported by the data.

In the long debate over Smoot-Hawley, there are some fascinating analogies to the present controversy over the budget. Partisanship was at an all-time high, Congress was deadlocked in a stalemate. The business community-uncertain about the future-wasn't fearful of protectionism; it was fearful of deadlock, gridlock: ultimately the stock market reacts to the fear that government can't govern.

After the passage of Smoot-Hawley, both the imports that bore higher duties and the non-dutiable goods fell roughly the same amount over the next two or three years, suggesting that it was the Great Depression itself, the decline in aggregate demand, not enactment of the tariff, that had the principal effect. If one looks at the other side of the proposition-that foreign governments, angry about perception of higher tariffs in the United States, retaliated-that should show up in our export figures. But there's little evidence that American exports were affected by Smoot-Hawley. Exports fell to countries that were not impacted by the tariff as well as to countries that were impacted by it.

It is true that legislators who voted for Smoot- Hawley were defeated by an angry public a year or two later. But if one looks particularly at the two authors of that tariff, Reed Smoot and Willis Hawley, yes, they were defeated, but for reasons totally unrelated to the higher tariff. In fact, some of their constituents wanted higher, not lower tariffs.

The big change came in 1934 when Cordell Hull became Secretary of State in the Roosevelt administration. A Southern Democrat, he was eager to strike down foreign trade barriers to benefit export agriculture, but he was also sensitive to creating a new political coalition involving organized labor and export-competitive industry, such as automobiles and machine tools. What we had in effect was a new export coalition that would dominate American trade policy until recent years. The whole philosophy was to open the U.S. market and essentially trade off industries that were not competitive with imports in return for access to foreign markets for our high value-added exports. The problem is, over time other nations became quite competitive with automobiles, machine tools, and consumer goods, and increasingly developed even better products in some cases than we did. Moreover, the deals we negotiated during this period proved in retrospect quite one-sided. We allowed tariffs and quotas and even devaluations to deny us the full benefit of negotiated bargains.

The nations of East Asia-particularly Japan, S. Korea, and China-have proven that through government intervention, through industrial policy, it is possible to influence a nation's competitive advantage. For example, the United States was very concerned at the end of World War II that Japan not go communist. Its traditional markets had been in Southeast Asia and in East Asia, so the Eisenhower administration in 1955 negotiated a one-sided bilateral trade agreement with Japan that threw open the U.S. market to relatively cheap Japanese goods, textiles, footwear, and other labor-intensive items. When we politely suggested that the Japanese might want to import American machine tools, and automobiles, items in which we had a comparative advantage, the Japanese said no. As a matter of national policy, Japanese negotiators said in effect, "We have decided to build up those industries because if we follow your interpretation of international trade, Japan would be destined to export tuna fish and textiles and to import automobiles."

I wouldn't want my words to be interpreted as a blanket endorsement for protectionist measures. All the major countries that industrialized rapidly, did so by going through a protectionist phase, but many others tried that route and failed-perhaps they didn't have adequate savings, perhaps because they had inadequate or small markets, or perhaps because they didn't have the social discipline and educated work force needed to carry it off. In short, if you have a certain minimum size, 40 to 50 million people, and an adequate domestic market from which to build, protectionism seems to be the way to gain wealth and to develop a strong nationally competitive industry.

Our great problem is not with western Europe or with Canada-countries that have roughly the same living standard. In fact, we already have free trade in effect with Canada and with western Europe. Our problem is with countries like China that have abysmally low wages and working conditions, and at the same time have an enormous potential for producing exports for sale in the U.S. market, while restricting our imports. One of our larger bilateral trade imbalances at the moment is with China. It will be about $40 billion this year and is rapidly rising. Within a year or two, it may exceed the bilateral imbalance with Japan.

What can be done about it? We might impose a wage equalization tax. If you took a rough average of wages and converted it on the basis of exchange rates, some sort of tax might force exporting nations abroad to raise their wages at home. We might also impose a sanction on nations that don't provide equivalent access to their markets.

But while we might be able to impose a wage equalization or social tariff on goods from China, which is not a member of the World Trade Organization, in order to impose such a tariff on members of the World Trade Organization, we would have to effectively withdraw from our commitment. Frankly, I think we've gotten in over our heads in the last few years. We need a good pause, and we should probably renegotiate some of those agreements to escape the implications of binding dispute resolutions in star chamber-like proceedings.

If the public favors a more nationalistic trade policy, the President could announce that we no longer adhere to our obligations under the WTO. That would start global trade negotiations in about ten minutes. Over the long term, if we developed a more stable market at home, it might create better job opportunities and security for our low-skilled workers.

Alfred E. Eckes, Jr., is Ohio Eminent Research Professor in Contemporary History at Ohio University. His books include The United States and the Global Struggle for Minerals and A Search for Solvency: Bretton Woods and the International Monetary System, 1941-1971. His most recent book is Opening America's Market: U.S. Foreign Trade Policy Since 1976.

Material for this article was excerpted and edited by NCX, with permission, from Jerry Brown's interview of Alfred Eckes, Jr. on the "We the People" radio program.

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