SCOURGE OF MARKETS IN
THE NEW WORLD ORDER
at the Chicago Mercantile Exchange and Chicago Board of Trade
Fourth Annual International Finance Symposium,
April 8, 1992.
different than intervention in exchange rates and other forms
of government interference with free market processes—represents
a dangerous and slippery slope. Such endeavors often come unannounced
in small insidious increments, sometimes in the form of sophistry
and fallacious reasoning. If we are not vigilant in our opposition
to these man-made encroachments to market-driven economic order,
they will take us down this slope and snatch defeat from the
jaws of victory.
is noteworthy that U.S. Senator Phil Gramm thought so highly
of this address that he entered it into the Congressional
Record on May 5, 1992 (Page S-5933).
represents a paradox of unimaginable proportion. At the very
moment in history when the triumph of free markets is nearly
global—at the very moment in history when market-driven economic
order is embraced in such unlikely places as Moscow, Sofia, and
Prague—at the very moment in history when the Communist world
has discarded the manifesto of Karl Marx in favor of the principles
of Adam Smith—at this same moment in human history, some of the
staunchest champions of a liberal world economy, free trade,
and uninhibited competition have suddenly developed a severe
case of second thoughts.
as the bust of Lenin unceremoniously disappears from every pedestal
in the Communist world, even as endless teams of economists from
Eastern Europe travel to America to study market-driven economic
order, even as central planning becomes a ridiculed concept throughout
the former Soviet Union, some within the bastions of free market
economics in the United States and Europe are talking of industrial
policies, protectionism, and tariffs. The philosophical incongruity
of this phenomenon is difficult to comprehend. It would be comical
were it not so tragic.
happened? Have we lost our faith? Our nerve? Or have we simply
lost our memory and are condemned, as Santayana suggested, to
repeat past mistakes?
our memory cannot be so short that we have forgotten Senator
Reed Smoot of Utah and Congressman Willis Hawley of Oregon who
together devised the so-called Smoot-Hawley Tariff Act of 1930,
the Act that resulted in a trade war and according to most economists
helped plunge the world into the great depression of that era.
who suddenly again question our liberal global economic philosophy
suggest that the U.S. has been duped in a world that does not
operate according to classic economic principles. That we are
naive fools in a cut-throat competitive world that has few rules
and that is ruthlessly unfair to nice guys. No question some
of this has the ring of truth. There exist areas of unfair global
competition. There exists a network of protected industries that
take advantage of American good will. But there is nothing new
about that, nor is the U.S. itself free from unfair trade practices.
While we must be unrelenting in our efforts to erase such sins,
they are meaningless in the sum total of our successful global
course over the last half century. What has brought the protectionist
voices to the fore has been the special economic circumstances
of current vintage—principally the long and difficult American
recession. It has created an emotional environment, one based
on fear and distrust; it has created an atmosphere fertile for
sophistry and demagogues.
anti-liberal economic theorists advance two major myths to support
their views: that protectionism is justified by U.S. trade imbalances
and that protectionism saves jobs. Both myths are false. They
have again come into fashion, as Daniel Oliver the former Chairman
of the U.S. Federal Trade Commission observed a few years ago,
by virtue of special interests in America; i.e., some
industries adversely affected by foreign competition have invented
a national problem in order to advance their own self interests.
protectionism will create jobs is a claim that Herbert Stein,
the American Enterprise Institute scholar, has characterized
as "best selling fiction." While it is true that a protectionist
policy will create jobs in the particular industry being protected,
it is equally true that it will have a devastating effects and
cost jobs in the economy as a whole. By savings jobs through
trade protectionism in (say) the machine tool industry or the
computer chip industry, it will be at the expense of jobs in
manufacturing or jobs in electronics. Because when a foreign
country cannot export its products to the protected country,
it has less money to spend on imports from the protected country.
The protected country will thus lose some other export market
that will force some other corner of its industry to reduce its
labor force. As Milton Friedman told us in Free to Choose, "The
gains to some producers from tariffs and other restrictions are
more than offset by the loss to other producers and especially
to consumers in general."(1)
the myth about the U.S. trade deficit negatively affecting the
U.S. economy is simplistic and equally untrue. As should be obvious
but is often misunderstood, a trade deficit (the so-called current
account deficit) is not something that is good or bad per
se. It is merely the counterpart to a capital account surplus.
Exports are not by themselves good nor are imports bad. A favorable
balance of trade basically means exporting more than we import; i.e.,
shipping goods abroad of greater total value than the goods we
get from abroad. In other words, sending more than we receive.
If the reverse occurs—when we receive more than we send—strange
as it may seem, it creates an unfavorable balance of trade.
the 1970s, for instance, the U.S. had a trade surplus and a deficit
in the capital account, partly because of large U.S. investment
overseas. Was that good? In the 1980s, the U.S. began running
a surplus in its capital account; the favorable climate for investment
in the U.S. was causing an influx of foreign capital. This was
used to partially finance a major retooling of American production
capacity. Is this bad? If the rest of the world is to invest—on
net—in the U.S., the U.S. will necessarily run a trade deficit.
As most economists and scholars will tell you this is neither
good nor bad. Nor does the trade deficit take away jobs as protectionist
rhetoric in guise of national concern will attempt to tell us.
For instance, during the 1980s, even as our trade deficit continued
to mount to record levels, the United States continued to produce
new jobs at a very high rate. As everyone in Japan is aware,
the brunt of the current protectionism attack has been directed
at this country. Japan's economic miracle of the past several
decades has made the rest of the world envious. Thus, the tapestry
of free trade is shamelessly being rewoven into something called
fair trade, a buzz word for protectionism; an America-first syndrome,
the equivalent to a fortress-Europe mentality, is disgracefully
trampling on the sacred precepts of global competition; the time-honored
principles of a market-driven economy are outrageously attacked
in favor of short-term solutions, political expediency, and emotional
rhetoric. Japan has become the whipping boy for the world's economic
anyone care to listen to the truth. For instance, although the
U.S. 43 billion trade deficit with Japan is blamed for the American
recession, in truth its impact on the American economy is relatively
small—equal to 2 day's worth of U.S. output. Excluding autos,
the U.S. deficit with Japan is not much more than it is with
China. In fact, the U.S. total trade deficit—66.2 billion in
1991—fell below the 100 billion mark for the first time in 8
years. At the same time, U.S. exports surged to a record 422
billion and the U.S. captured a greater share of worldwide manufactured
exports than Japan. Indeed, the U.S. exports more to Japan than
it does to Germany, France and Italy combined. Conversely, Japan
imports more per capita from America and at a higher percentage
of its gross national product than the U.S. imports from Japan.(2)
truth, the U.S. export picture has been the one bright spot in
the American economy; if a recession or an economic slowdown
is occasioned by U.S. trading partners or if protectionism has
its way, the American economy will be hit even harder.
the rationale for protectionism and tariffs is unencumbered by
the truth; it is built upon false assumptions, inaccurate impressions,
and demagogic sentiments. For instance, Japan is said to be an
unfair trader. This is an erroneous accusation. While Japan is
not without guilt, it is on the whole no different than other
industrial countries. In fact, on average, Japan trade barriers
are lower than other industrial nations. Its average tariff for
industrial products is 2.6%—compared with 3% for America—and
its non-tariff barriers, such as quotas and licenses, are similar
to those in America.(3)
facts are not well understood or publicized in the United States,
nor are they sufficient to offset the frustrations resulting
from our long and deep recession, unemployment in excess of 7%,
and an ongoing U.S. election process. This combination of circumstances
has created a climate ideal for those motivated by self-interests.
Indeed, sophistry and demagogic polemics are very effective tools
in times of economic stress, especially in a political year.
Take the American auto industry as an example. Some of their
executives would have us believe that the problems occasioned
by their industry are not caused by competitive value comparisons
on the part of U.S. consumers, but are the result of a Japanese
government plot, one that has caused the current U.S. trade deficit.
Consequently, the problem, they argue, is of national concern.
course there is nothing new about the use of such sophistry by
merchants and manufacturers to advance their own special purposes
in the guise of a national necessity. Sophistry in commerce has
been applied throughout the ages. It was best described by Adam
Smith in 1776, in The Wealth of Nations:
every country, it always is and must be the interest of the great
body of the people to buy whatever they want of those who sell
it cheapest. The proposition is so very manifest, that it seems
ridiculous to take any pains to prove it; nor could it ever have
been called in question had not the interested sophistry of merchants
and manufacturers confounded the common sense of mankind. Their
interest is, in this respect, directly opposite to that of the
great body of the people.(4)
Milton Friedman will tell you, "These words are as true today
as they were then." It is always in the best interests of the
vast majority of the people to buy from the cheapest source and
sell to the dearest.(5) Yet,
sophistry, motivated by special interests, will attempt to tell
you that this is not the case and that there are national priorities
at stake. The national priorities just happen to coincide with
the special interests of the merchants and manufacturers Adam
Smith wrote about.
is protectionism, sophistry and demagogic polemics exclusive
to the United States or Europe. Such endeavors know no geographic
boundaries. Here in Japan, the same or similar political expediencies,
sentiments and actions are exercised covering a wide range of
commercial enterprises including protecting domestic industries
at the expense of international trade, exclusive arrangements
among Japanese companies, keiretsu transactions, and
even the blaming of the futures index market in Osaka for falling
stock prices in Tokyo. Such actions are the cause of the unwarranted
image Japan has earned. For instance, the proposed Japanese restrictions
on derivative trading activities can be assessed by financial
markets as an attempt to punish the profitability of foreign
brokers— primarily U.S. institutions. Is this other than protectionism?
Is it not sophistry to suggest that such measures will correct
the perceived problems in Japanese markets? Similarly, when a
Japanese official recently stated that American workers are "lazy
and illiterate," his words were not only a disservice to the
cause of free trade, they were blatantly false.
Japanese do have more working hours than Americans—225 hours
per year more than U.S. workers—American workers rank second
in the number of work hours of any nation in the industrialized
world. Americans work about 320 hours more per year than workers
in Germany or France. Indeed, working hours in the U.S. have
increased substantially over the past twenty years. From the
end of the 1960s to the present, Americans' work hours have increased
by about 160 hours (or nearly one month per year). This is true
for women as well as men.(6)
it is a fallacy that the productivity of American workers has
fallen. The level of productivity of the U.S. worker has more
than doubled since 1948. And as for leisure time, American and
Japanese workers on average receive the same 10 days vacation
time—well behind the thirty days of vacation for Swedish or Austrian
workers, or the twenty-five days in France, or the twenty-two
days in the U.K., Switzerland and Spain, or the eighteen days
while the negative comments about American workers were probably
made for domestic rather than foreign consumption—possibly to
forestall the growing pressure from Japanese laborers to reduce
working hours (just as many of our negative comments about Japan
are made for domestic U.S. consumption)—they nevertheless can
cause serious difficulties for the relations of our two nations.
It therefore behooves public officials on both sides of the Pacific
to bear this in mind. That particularly during times of recessions—as
the U.S. has endured, as most of Europe is experiencing, and
as may yet be felt here in Japan—it is imperative that the voices
of our public officials be less shrill and that they not unwittingly
lend ammunition to those who have a special protectionist agenda.
we know that protectionism has popular appeal. We know that in
times of economic strain protectionism can gain a following.
But we also know that protectionism is the scourge of markets
everywhere. We know its consequences are devastating and ubiquitous.
Dare we allow the near global triumph achieved by free markets
in recent years be diminished? Dare we endanger the new world
order we have fought so long and valiantly to achieve? Dare we
allow the protectionists of the 1990s to lead us down the Smoot-Hawley
path of the 1930s? Sophistry and demagogic polemics can snatch
for us defeat from the jaws of victory. We, of free markets,
must not allow this to transpire.
and Rose Friedman, Free to Choose (1980).
News & World Report, March 12, 1992.
Economist, January 11, 1992; World Bank.
Smith, The Wealth of Nations (1776).
February 17, 1992.
by permission. Excerpted from Melamed on the Markets, by Leo
Melamed. John Wiley & Sons, 1993
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