The Unfairness of Fair Trade

The Bush administration has been slipping into a familiar trap, making ominous comments about the perfectly normal rise of imports that invariably accompanies every economic expansion.

Imports always grow most rapidly when U.S. manufacturing is expanding, and shrink only when U.S. industrial production declines. One reason is that U.S. industries are this nation’s biggest importers. Industrial supplies accounted for 24.5 percent of all imported goods in the year 2000, and capital goods for another 28.5 percent. From January to December 2001, imports of industrial supplies fell from $27.1 to $18.3 billion, or 33 percent. Imports of capital goods fell from $28.8 to 22.5 billion, or 22 percent. Far from reduced imports being a boon to U.S. manufacturers, falling imports mirrored falling world demand for manufactured goods.

The only proven way to reduce U.S. imports is to push the economy back into recession. A few folks in the government seem eager to do just that, always in the name of keeping trade “balanced” or “fair.”

U.S. manufacturers need imported supplies and equipment to produce much more valuable products. Manufacturing suffers whenever politicians attempt to raise the cost of imports with tariffs, though industries with the most lobbying clout may gain. Tariffs on sugar, nuts and dairy products raise the cost of production for U.S. manufacturers of breakfast foods and candy; tariffs on steel raise costs for U.S. manufacturers of autos and appliances; tariffs on leather raise costs for U.S. manufacturers of shoes; tariffs on fabrics raise costs for U.S. manufacturers of clothing; and so on. And tariffs raise the cost of living for consumers, reducing their ability to buy other goods and services (most of which are unprotected and unsubsidized).

Past administrations often allowed themselves to become unduly concerned about the unavoidable reality that the economy and imports rise together. That futile anxiety sometimes inspired policy mistakes that proved economically and politically painful, as I showed in a previous column. Neither Congress nor the White House has yet fallen into this abyss lately, but both have been dancing close to a slippery cliff.

Treasury Secretary John Snow first tripped by publicly lecturing Japan and China about their exchange rate policies. Commerce Secretary Don Evans then stumbled by badgering China on “fair trade” even more publicly, in a Wall Street Journal article.

“If you believe in free trade,” he wrote, “you must also insist on a level playing field.” On the contrary, anyone who insists on defining conditions under which this country will practice free trade cannot understand much less believe in free trade. Free trade means tearing down our own tariffs and import quotas, period. Tariffs and quotas restrict competition, restrict supply and raise prices. If you don’t think restricting competition and raising prices is bad for America, you do not believe in free trade.

The notion that tariffs make trade more “fair” pretends that if tariffs allow a U.S. company to charge higher prices, then the managers will supposedly use this ripped-off booty to hire more workers. But comfortably protected managers are more likely to beef up their own staff and perks, and then import more labor-saving equipment so the resulting job losses can persuade gullible legislators the industry deserves even more protection.

Evans claims “free trade and open markets only work if both economies operate under the same rules.” Seditious rubbish. Free trade and open economies benefit all countries that practice those virtues, regardless what other countries do. If you want to see what life is like with unfree trade and a closed economy, take a look at North Korea.

Free trade does not mean the U.S. government should tolerate foreign counterfeiting of U.S. trademarks. But adherence to the rules of free trade does mean that dealing with any such company-specific crimes must never involve threatening to impose special taxes on U.S. consumers for a wide variety of perfectly legitimate imports from China.

Aside from counterfeiting, what other Chinese rules are so intolerably different from ours that a top Cabinet official would point to Senate threats to embargo our economy just to make some point? “There is no economic justification for the loans extended to unprofitable businesses in China,” writes the secretary. “Nonperforming loans account for as much as half of China’s lending portfolios.” When did we start worrying about competing with any country because it has a lot of unprofitable businesses and bad loans? Doesn’t that description fit the past dozen years in Japan?

A Senate bill (S.1586) proposes to reduce imports in the way that worked so well in the 1930s — by slapping a horrific 27.5 percent tariff on everything imported from China unless that country somehow forces it currency to “float” in only one direction — sky high. Evan thinks this “should serve as ample warning to the Chinese government.” I think it should serve as ample warning to U.S. voters that a half dozen senators are so eager to appease the protection lobby they are threatening to slap a 27.5 percent tax on some of your favorite goods.

What accounts for all this trade hysteria? China accounted for only 10.75 percent of U.S. imported goods last year, according to the St. Louis Fed. And that was largely at the expense of imports that used to come from other countries. A decade ago, Japan accounted for more than 20 percent of U.S. imported goods, but Japan’s share is down to 10.4 percent. Trying to reduce U.S. imports from China would just shift the source of imports to other countries, like Japan or South Korea. This is also why it makes no sense to talk about exchange rates between just two currencies as having anything to do with the overall U.S. trade deficit.

Snow explained to the Senate Banking Committee that the United States has a current account deficit because investment is rising faster than savings. A falling dollar could only “help” the trade deficit by inflating the dollar costs of commodities and credit, and thus shrinking business and residential investment. That’s called a recession.

That brings us back to the point we started with: Imports always rise when manufacturing output speeds up, and fall only when U.S. industry declines. If some senators and Cabinet officials are as upset about imports as they sound, they had better devise a plan to toss the economy back into recession.

That may not be the intent of all the protectionist rhetoric and legislation floating about, but if that talk ever degenerates into actual trade warfare, the results would soon turn ugly.