The Trouble With Trade

Two centuries later, it's clear that David Ricardo was right. It is silly to get worked up about solving our trade problems, when the only "problem" we have is that we don't have enough trade! The hand-wringers worry about our big trade deficits. Look at it this way (which is the way economists would look at it, I might point out): The bigger the trade deficit gets, the more it means that workers and consumers in the rest of the world are subsidizing our people right here at home. Do the Japanese want to live in tiny houses, so that their extra savings can finance big factories that make high-quality goods for us? Fine! Keep 'em coming! Do the Koreans want to work for suppressed wages to give us lower-cost semiconductor chips? A grateful America should give its thanks. All these exporting countries get for their efforts is little pieces of paper--dollar bills, IOUs for America. To redeem them they ultimately have to spend them back here in the US of A. Problem solved.

Moreover, anything except the laissez-faire approach goes against a long track record of failure in state-planned economies. If planning and control are so great, why are the Japanese in a six-year recession? Why do the Germans and French envy the job creating power of the American economy? Why are economies around the world dismantling controls? At just the moment of the crowning success of the idea of freedom, it would be folly--and tragedy--to lose our faith in that same vision here at home.

Let buyers buy what they want, and sellers sell, and producers produce. A billion individual decisions will make the world a safer place than it is now--and as prosperous as it possibly can be. Doing anything else would run the risk of tragic trade war!

The economic theories we learned in school are great--as theories. What they tend to leave out is the real histories of actual companies, countries, and economies in the real world. The reason today's professors skip past yesterday's histories is that the history is embarrassing to them. What it shows is that countries that have grown rich--all of them--have refused to put their faith in Ricardo's laissez faire. They used tariffs, industrial policies, aggressive trade strategies, and a hundred other tricks to bring industries within their control. Think of the pattern: the British made themselves the world's leading industrialists through the most protectionist system the world has ever seen. Remember the history classes about the "Navigation Acts" and other restrictions the British slapped on the North American colonies? They were irritating to Americans but they helped do the job for British commerce. The Germans did the same thing in developing their industry. And as for the Japanese. . . it is only those who refuse to look at the evidence who imagine that industrial policy was not a key to their development.

What about America? We "all" believe in Ricardo now, but until the end of The Second World War we "all" believed instead in some version of Alexander Hamilton's theory. Hamilton's famous "Report on Manufactures" early in the nineteenth century laid out a kind of master plan for developing industry in the young nation. It was based on the common-sensical idea that having an industry, which is a source of current earnings and future wealth, is better than the short term benefit of having a cheaper product made by somebody else. As your predecessor Abraham Lincoln once put it, "When we buy the product from the foreigner, we've got the product and they've got the money. When we buy it at home, we've got the product and the money too."

Your challenge, Mr./Mrs. President, is to be the Alexander Hamilton of this age. Every other nation is run under a policy that cares a little about world-wide freedom of trade--but cares very seriously about jobs, security, and meaningful work for the people of their own country. We have to do the same. This means an explicit "Buy American" policy for government purchases--computers, hospital equipment, subways, other capital goods. When America built its railroads a century ago, it could have saved money by buying cheap British rails. Instead it built a steel industry by buying domestically. We can learn from that strategy.

We need tough tariffs too--on economic, environmental, and simple "results oriented" grounds. If other nations want to pillage their environment or exploit workers, fine--but we don't have to impoverish our own workers in head-to-head competition that way. If other nations want to try to run gigantic, chronic surpluses with us--that is not fine, because it will erode our employment base in the long run. We'll just impose tariffs until they see the wisdom of opening their markets as much as we've opened ours.

The worriers will start fretting immediately about a trade war, Mr./Ms. President. Don't listen to them. The entire period since the Second World War teaches the opposite lesson. When the United States shows that it is serious about trade, everybody--the Japanese, the Koreans, the Chinese, the French, the Mexicans-- suddenly sees the wisdom of opening their markets. When we're not serious neither are they.

The people who elected you wanted some security in their own employment. Even more, they want hope for their children. Give it to them, much as Hamilton gave it to the nation of the previous century.

Our trade concerns have a curiously short-sighted nature. At the moment, it is annoying to have a shrinking-but-still-enormous trade deficit with Japan, and a sizeable-and-rapidly-growing deficit with China. But if we have learned anything, as individuals and as a nation, it is that time changes many perceptions. Right now, the Chinese feel they have to industrialize like crazy, which means building factories to export everything to everyone. The Koreans felt that way three or four years ago. The Japanese did twenty years ago. The French or Germans or Italians did sometime in their national past.

But riches contain the seeds of their own undoing. As the middle class grows, and grows more comfortable, it changes its outlook in two crucial ways.

First, it is less willing to tighten the belt, bite the bullet, keep its nose to the grindstone, and do whatever other clichéd activity we can think of to help the nation export. They want to live! They want to enjoy! It happened to us in the 1960s, and it will happen to everyone else.

The other change involves politics. To be an export powerhouse, a country can't really be a democracy. It needs a cadre of powerful bosses, either from big cartels or from the government, to keep people in line and bend their efforts to the nation's export will. Students must study! Families must save! Prices must be kept higher than in the rest of the world. This worked, most notably in Japan and Korea, during their come-back years. It is noticeably crumbling in both places now.

George Bush thought that his greatest achievement was to liberate Kuwait. (Now there is a cause that will live in history!) In reality it was to start the "structural impediments" talks, designed to convince the Japanese to change their protectionist ways. The plan worked slowly--but eventually it will prevail, because history is on its side.

The world is becoming more democratic, more market-minded, less governmentally controlled. Put yourself on the side of this unstoppable trend, Mr./Ms. President. Make minor, short-term complaints when there are trade problems, but remember that time will heal them all. You can afford to be above the fray because with each passing day our trade problems come close to solving themselves.

What many Americans know about trade begins and ends with the Smoot-Hawley Tariff of 1930. That tariff didn't really do what most people think it did--that is, it didn't cause the Great Depression. The Depression had been underway for several months by the time Smoot-Hawley was passed. But it did make the world's economic problems worse, and it reminds us now that the worst mistake we could make about trade is to try to solve our problems "unilaterally." A bunch of whining complaints from the United States, enforced by the United States, is much worse than a concerted, international effort to solve problems collectively.

Are the Chinese flouting all standards of intellectual-property protection? Well, yes they are. But is the right way for the United States to strong-arm them? Not at all. The Chinese will play divide-and-conquer, "punishing" us by buying airplanes from the French, telling the Japanese and Indians and Thais that the white Western world is again picking on the formerly colonized nations. In the long run the logic of trade is to make nation-states less and less significant. We are, or should become, citizens in an interdependent world. Unilateral action just encourages the divisive, beggar-thy-neighbor mentality that delays this time of integration.

Instead, whenever you talk about the problems or promises of trade, you should refer to the World Trade Organization. President Clinton fought hard to get this body approved, and it is up to the United States to show that the W.T.O. can be a powerful, effective body for resolving disputes. Think how much happier the world would have been through the twentieth century if Woodrow Wilson had fought harder to make the League of Nations a forum for resolving diplomatic disputes!

The rest of the world is of theoretical importance to the United States. Our neighbors in the Americas have real, immediate, practical impact on our quality of life. If Mexico prospers, we will never have a security problem in this hemisphere. If Mexico's economy deteriorates, that country will have problems--and so will we. Immigration; instability and violence; the drug-trade; spillover corruption: these problems and others will affect Mexico and therefore will afflict us.

Your predecessor James Monroe wisely made a distinction between America's distant interest in the world at large and its quite specific interest in this hemisphere. This should be the logic of your trade policy too. The world is dividing up more and more clearly into regional trade blocs. The Japanese and Chinese are competing for control of East Asia. The Europeans are locking up Europe for themselves. Our destiny, and our greatest hopes, lie in our own region. Make sure--with free-trade zones, with investment strategies, with every possible means to make Mexico prosper before it's too late--that we fulfill our proper role in this region.