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Wednesday, October 27, 2010

The American Thinker on Trade Policy

The post from which this material is quoted was published some little time ago, maybe as long as a month. The whole thing is worth reading. Not that I agree with every jot and every tittle, but it is worth your time.
In the trade war between the mercantilist countries and the U.S., China and the other mercantilists intervene in our markets by manipulating the price of the dollar, as compared to their currencies, so that our goods are overpriced and their goods are underpriced in world markets. In the meantime they keep our products out of their markets through various tariff and non-tariff barriers.

There are three positions on trade when a country is being punched-out by mercantilists:

1. Unilateral Free Trade. This is the Republican establishment's pacifist strategy of just taking the punches to afford an example to the rest of the world. This has been U.S. policy for three decades.
2. Protectionism. This is liberal Democrats' "industrial policy" strategy of protecting government-preferred industries with tariffs and subsidies. Pres. GW Bush did it with respect to steel and was forced by the WTO to back down. Pres. Obama did it with respect to tires produced in China and succeeded in enforcing it.
3. Balanced Trade. This is the conservative pro-free-market strategy of balancing exports with imports in order to defeat the mercantilist strategy of maximizing exports and minimizing imports. It takes advantage of a special WTO rule that lets trade deficit countries impose import duties or limitations in order to bring trade into reasonable balance. China, the largest of the mercantilist countries, only lets its people buy 27¢ of American products for every $1 we buy from them. They use a variety of tariff and non-tariff barriers to keep out American products, forcing American companies to locate their factories in China in order to sell to the growing Chinese market.
I don't think the writer has it exactly right here, but he makes the fundamental point, one that I have been making over and over again since I first began to read about this issue:

Free Trade, as envisioned by so may libertarian-leaning economists, does not actually exist. It is strictly a theoretical construct. Other countries find ways to protect their markets. Personally, I am dead set against subsidies, but tariffs--I did think it mildly amusing that the writer seemd to think "tariffs" were "bad" and "import duties" were okay, despite them being much the same thing. Shoot, I think they are exactly the same thing, and there is nothing, per se, wrong with them.

I am not unaware that tariffs/import duties come with certain problems. My personal preference would be to institute the Fair Tax, which would have much the same effect as tariffs when it comes to trade, that is, it would create a massive tax advantage to manufacturing in the United States, but it should allow us to avoid some of the problems commonly associated with tariffs. However, if I can't get the Fair Tax, enacting tariffs (accompanied by big cuts in income tax rates) would be far preferable to what the writer calls "unilateral free trade." That is just wishful thinking masquerading as a trade policy.

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