Why Managed Trade Is Not Free Trade
Free Trade Is the Application of Laissez Faire across International Borders
AUGUST 01, 1997 by ROBERT BATEMARCO
The British historian Thomas Babington Macaulay observed that free trade, one of the greatest blessings which a government can bestow, is in almost every country unpopular. Indeed, sound economics often makes for unsuccessful politics. That free trade is a great benefactor is one of the most convincingly established truths of economic science. The economic case for free trade is essentially the case for voluntary exchange in general: no one freely enters into an exchange, whether as buyer or seller, unless he expects to emerge better off as a result of that exchange. Furthermore, the ability to exchange a single product one has produced for the many things one would like to consume makes possible the division of labor and the manifold expansion of production capacity that it permits. There is no economic reason why these gains do not apply equally to potential traders on different sides of national boundaries.
The political liabilities associated with free trade stem from the vigorous competition it promotes. Competitors who do not provide the best deal for consumers fail. Far from sugarcoating this unwelcome fact, free trade demonstrates it in no uncertain terms. Rather than looking to improve their own shortcomings, many of the losers in the competitive process seek to derail the process. They seek to ensure that they provide customers the best deal not by improving the package they provide, but by getting the government to hamper the ability of their competitors to provide a better deal. Foreign competitors make an especially easy target for such government restrictions.
Thus, government restrictions on international trade are of a piece with domestic restrictions on competition. They share the same goal: to redistribute income from the many to government’s chosen few and to substitute its own preferred allocation of resources for that of the market. Indeed, by restricting trade with foreigners, governments close off an important means of mitigating the impact of their domestic restrictions. This is what John T. Flynn had in mind when he said, The first condition of a planned economy is that it be a closed economy.
Free Trade: The Real Thing
In establishing a free economic system for the United States, the Framers mandated free trade among all the states in the union. They spelled this out in Article I, Section 9, of the Constitution:
No tax or duty shall be laid on articles exported from any state. No preference shall be given by any regulation of commerce or revenue to the ports of one State over those of another: nor shall vessels bound to, or from, one State, be obliged to enter, clear, or pay duties in another.
At 54 words, this was the original North American Free Trade Agreement. As we shall see, the 1994 agreement that goes by that name makes a travesty of free trade.
The damage done by restrictions on international trade became clear to most people during the debacle of the 1930s. Once World War II had ended, the popularity of free trade surpassed Macaulay’s fondest hopes. Yet in many ways truly free trade was not in keeping with the tenor of the postwar times. Free trade requires neither complex laws nor ponderous bureaucracies. With the establishment of the United Nations, the World Bank, and the International Monetary Fund, the world was moving in the opposite direction. So postwar governments sought managed trade rather than free trade. While the establishment of the proposed International Trade Organization was avoided, free trade was not restored.
While far from the ideal, the managed-trade regime that followed World War II was a measurable improvement over the beggar-thy-neighbor protectionism which preceded that conflict. For a while even, the international bureaucracies that managed trade seemed to move the world in the right direction, generally lowering tariff rates. Managed traders seemed to resemble free traders. However, as memories of the folly of Smoot-Hawley faded, politically well-connected firms sought shelter from the cold winds of international competition. As bureaucrats reverted to empire-building form, managed trade became a fig leaf for protectionism. A rundown of the major vehicles of managed trade illustrates this.
Mechanisms of Managed Trade GATT
The General Agreement on Trade and Tariffs (GATT) came about largely by default. Established on an interim basis, to be superseded by the International Trade Organization, it ended up lasting four decades when the proposed ITO failed to muster the votes to be passed by Congress. GATT basically provided for tariff reduction based on multilateralism. While it did achieve a number of piecemeal steps in the direction of freer trade, its weak link was that it played into the popular notion that unilateral relinquishing of trade barriers was at best a mixed blessing. The idea that a country should not give up its trade barriers shifted the focus to striking a deal and away from the merits of free trade itself.
The North American Free Trade Agreement (NAFTA) is the quintessential managed-trade vehicle sold under the rubric of free trade. The first tip-off should be its size. While we earlier saw how 54 words in the U.S. Constitution established free trade among the states of the Union, NAFTA weighs in at over 2,000 pages, 900 of which are tariff rates. (Under true free trade, there is one tariff rate—0 percent.) The agreement does have trade-liberalizing features, to be sure. Consisting of a 10 percent reduction in tariffs to be phased in over 15 years, however, they are all but buried under the profusion of controls NAFTA also establishes.
In the first place, the benefit from those tariff reductions are jeopardized by the agreement’s snap-back provisions. Those permit pre-NAFTA tariff levels to be restored against imported items which cause or threaten serious injury to domestic industry. In other words, NAFTA supports free trade as long as it does not promote international competition which is too hot for favored domestic firms to handle. In addition, NAFTA’s rules of origin are designed to divert trade from the world’s most efficient suppliers to North America’s most efficient suppliers. This hobbles the international division of labor instead of expanding it, as true free trade does.
The importance of NAFTA clauses that keep out foreign goods came to light as U.S. clothing manufacturers railed against the import of wool suits from our NAFTA partner Canada. The suits in question were made from third-country wool not covered by NAFTA rules of origin. Since Canadian tariffs on foreign wool were lower than U.S. tariffs (10 percent vs. 34 percent), Canadian suits sold for less and soon claimed a large share of the U.S. market. The fact that the entire discussion of this issue centered on closing this loophole in NAFTA rather than on lowering the injurious U.S. tariff on wool should prove how devoted NAFTA’s supporters are to free trade.
Free trade does not depend on international bureaucracies, yet NAFTA creates several of them. Its Commission for Environmental Cooperation was set up to enforce the environmental aim of sustainable growth. One tactic it uses is to prevent countries from trying to create a friendlier environment for investors by relaxing any extant environmental regulations. Such rules are to be enforced by trade sanctions and fines, with the latter to go into a slush fund for environmental law enforcement. NAFTA also created a Labor Commission, whose purpose is to level the playing field between trading partners with regard to labor costs. To repeat, free trade this is not.
The crowning jewel of managed trade is the World Trade Organization. Instituted to replace GATT, its 29,000-page treaty is a bureaucrat’s dream come true. Its driving force comes from those who see government’s job as civilizing the market (which they believe would otherwise operate as the law of the jungle). While those 29,000 pages say little about deregulating trade, they say a great deal about regulating everything else. Whereas GATT had been a voluntary forum for nations seeking mutual agreements to lower tariffs, the WTO has enforcement powers, with trade sanctions chief among them.
The treaty and other enabling legislation creating WTO overflows with such Orwellian verbiage as systematic denial of worker rights in order to gain a competitive advantage is an unjustifiable trade barrier. In other words, people in poor countries are allowed to participate in international trade as long as they don’t offer to sell goods cheaply enough that anyone would desire to purchase them. Indeed, many within the WTO bureaucracy support extending minimum-wage protection to poor nations in which they would wreak even more havoc than they do in the advanced nations where they are already in force.
The WTO agreement also expands the reach of anti-dumping laws, another favorite tool of entrenched multinational corporations to shield themselves from the competition of Third World upstarts. Technically defined as exporting goods below costs, the very concept of dumping is problematic, given costs’ subjective nature. Any determination of a firm’s costs by one not involved in the decision-making process must by definition be arbitrary.
The concept of harmonization is another buzzword beloved by the managed trade mavens of the WTO. The idea here is to achieve uniformity of labor laws, environmental and health regulations, and a host of other such restrictions on enterprise. And surprise, surprise—achievement of this uniformity is to come by countries with the least restrictive measures ratcheting them up to the level of the most restrictive (known as upward harmonization). Clearly, the goal is not worldwide free trade based on the division of labor, but rather of a worldwide welfare state based on the faith that bureaucrats know best how to run businesses in which they themselves have no stake.
Free trade means the ability of producers to exchange their wares with anyone on the globe for other goods without some government standing in the way of some of those exchanges due to the country of origin of the goods involved. It requires no more laws or institutions than are necessary to provide standard protection of the property rights of all involved in the exchange. It is the application of laissez faire across international borders: nothing more, nothing less.
Multivolume documents paying lip service to free trade but forbidding transactions by parties whose competitive advantages are considered by some to be unfair are the antithesis of free trade no matter how many times the words free trade appear in their pages. That managed trade proponents hide the nature of their policy preferences under the cloak of free trade reveals their utter shamelessness. It also suggests that the free trade side is winning the battle of ideas.
- Cited by Lindley H. Clark, Jr., The GATT Struggle Continues, the Wall Street Journal.
- A compendium of the successful refutations of economic theories which purported to find exceptions to the general benefits of a free trade regime can be found in Douglas Irwin, Against the Tide (Princeton, N.J.: Princeton University Press, 1996).
- Cited by Llewellyn H. Rockwell, Jr. in Who Killed Free Trade? The Free Market 14, April 1996, p. 2.
- The Smoot-Hawley Tariff was passed in 1930 supposedly to prevent the loss of American jobs to foreigners. It raised tariff rates to unprecedented levels and ended up crippling world trade and contributing to the severity of the Great Depression.
- James M. Sheehan, Nafta—Free Trade in Name Only, the Wall Street Journal, September 9, 1993.
- Christopher J. Chippelo, Fight Looms over Canada’s Suit Exports, the Wall Street Journal, August 7, 1996, p. A2.
- For example, article 1114 forbids relaxing environmental regulations as an encouragement for establishment, acquisition, expansion or retention in its territory of an investment or investor. Sheehan, ibid.
- Matthew C. Hoffman and James M. Sheehan, The Free Trade Case against NAFTA (Washington, D.C.: Competitive Enterprise Institute, 1993), p. 3.
- William H. Lash III, Labor Rights and Trade Policy, The Journal of Commerce and Commercial, May 17, 1994.