DOOMED DIPLOMACY

Essay at the Japan America Society of Chicago, Inc.
Evanston, Illinois
November 14, 1995

It truly represents a sorry paradox. At the very moment in history when the triumph of free markets is nearly global—at the very moment in history when mankind has discarded the manifesto of Karl Marx in favor of the principles of Adam Smith—at the very moment of our success with GATT and NAFTA—at this same moment in human history, the staunchest champion of market-driven economic order has suddenly reversed course.

As stock exchanges spring up throughout the Socialist world, as American corporations invest billions of dollars in nations where they could never before sell their wares, as central planning has become a bankrupt concept, there are those within the capitol of free market economics who are demanding industrial policies, protectionism, and tariffs. The philosophical incongruity of this phenomenon is difficult to comprehend. What 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?

Surely our memory cannot be so short-lived 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 helped plunge the world into the great depression of that era.

One of the biggest foreign policy hurdles confronting the nation is educating "ignorant" lawmakers about the global economic challenges the country faces, says former Undersecretary of Commerce Jeffrey Garten.

Those who again advocate government interference with free market economics suggest that the United States has been taken for a ride by nations who do not play fair in the international arena of trade: that we must draw the line with respect to unfair competition; that we must come to the aid of American industries that have been unduly hurt by protectionist policies of trading partners. Such rhetoric is guaranteed to strike a popular cord. And there is much truth to it. There exist a network of protected industries that take advantage of American free markets. Few countries are without sin in this respect. Protectionist policies are certainly exercised in Japan covering a wide range of commercial enterprises. Such actions are the cause of the image Japan has earned. But there is nothing new about that. And what of it? American free market philosophy is not dependent on other nations embracing our beliefs. It is designed to benefit our people and our nation. And it has. That our way is better needs no validation.

Those who advocate that our government come to the rescue of American industries say that unfair trade practices have cost us jobs and have created U.S. trade imbalances. To get even, they propose to apply tariffs. In other words, they advocate the use of bankrupt policies utilized by our unfair competitors to force our will.

For example, Presidential candidate, Patrick J. Buchanan, would overturn the economic order pursued by Republican and Democratic administrations for 50 years and violate the country's trade accords with its biggest economic partners—accords Mr. Buchanan says must be scrapped anyway because they undercut America's ability to control its own economic destiny—as he brazenly advocates industrial policies and other forms of economic planning.

Is this how we proved to the world our system was better? The whole point of winning over Communist central planning was that our economic order was far superior to theirs. We beat them because our markets were open. Will embracing a policy of trade management by government create American jobs? Herbert Stein, the American Enterprise Institute scholar, calls such a notion "best selling fiction." As Milton Friedman explains, "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."

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 devastating effects and cost jobs in the economy as a whole. By saving jobs through trade protectionism in (say) the computer chip industry or the automobile industry, it will be at the expense of jobs in manufacturing or electronics. The Wall Street Journal correctly stated that political management of trade is a dangerous business, and is very likely to rebound against the would-be manager. Consider that Japanese airlines have traditionally preferred Boeing Co. aircraft. What if they suddenly switch to the European Airbus. The Japanese also buy U.S. soybeans, but there are other nations that produce farm products. And what about the fact the Japanese are a predominant buyer of American debt. Besides, the cars not imported from Japan might prove to be a boom to car manufacturers of other foreign domains. Whatever happens in the end, Americans are unlikely to notice any benefits to their pocketbooks. And even if they do, the price they will pay by virtue of the resulting long-range damage to a global free market will far outweigh any immediate benefits.

The rationale for protectionism and tariffs, however, is unencumbered by the truth; it is often built upon false assumptions, inaccurate impressions, and demagogic sentiments. It is politically cool to call the Japanese unfair traders. This is, however, a clouded accusation. While Japan is clearly not without guilt, it is on the whole not much different than other industrial countries. It has higher tariffs than the U.S. in certain products and industries, and lower tariffs in others.

These truths are not well understood or publicized in the United States. Indeed, sophistry and demagogic polemics are very effective tools, especially in a political year. Executives of the American automobile industry would have us believe that the problems occasioned by their industry are not caused by competitive value comparisons on the part of American or Japanese consumers, but are the result of a Japanese government plot, one that has caused the current U.S. trade deficit. Maybe so, but just maybe this is an example of sophistry in commerce which, as Adam Smith described in The Wealth of Nations, has been applied by merchants and manufacturers throughout the ages to advance their own special purposes in the guise of a national necessity.

Quite naturally the citizens of our respective countries generally support their own government's actions. Americans are conditioned to believe that Japan has been getting away with unjustified protectionism, while the Japanese are tired of being blamed for American trade imbalances. However, as the Wall Street Journal pointed out, in this dispute Japan has been oddly cast as the champion of free markets. Its assertion that the U.S. government is intervening in private commerce and advocating numerical targets is very close to the truth.

Our president, and even many prominent Republicans, believe there is nothing to lose by being tough on Japan. Indeed, politically the threat of tariffs have increased the President's chances in the next election of carrying Michigan, Missouri and Ohio, the three states where the auto industry is critical to local jobs. But the risk of bringing down the World Trade Organization (WTO), which the U.S. fought so valiantly to create, was also very real. If President Clinton had gone ahead with unilateral imposition of sanctions, the United States would have broken commitments made at the end of the Uruguay Round. The WTO was supposed to exclude the possibility of any nation taking unilateral action. . . . President Clinton's threat of prohibitive tariffs on selected Japanese autos was the first fundamental challenge to the WTO, which was supposed to outlaw unilateralism and renegade nationalism. When the U.S. backed down on June 28, the World Trade Organization was saved from having to rule against the United States.

Indeed, the world has found the U.S. actions quite troubling. Admittedly there is something hypocritical about Europeans coming the defense of Japan and free trade—on the whole they have many more restrictions on Japanese imports than does the U.S—still, WTO chief Renato Ruggiero was correct in stating that Washington is not living by the new global trade rules that it advocated and drafted. Leon Brittan of the European Commission was quite blunt in his condemnation of U.S. actions, stating that U.S. tariffs would break the trading rule of the World Trade Organization.

There was also great concern among many about what this action will do to the broader U.S.-Japan relationship, which has helped give Asia an era of peace and prosperity. "We're alienating our principal ally in the Far East,(1)" warns Zbigniew Brzezinski, former President Carter's national security advisor. Most important, what Americans dare not fail to recognize is that the Pacific Century has dawned. It is this geographical region that has the potential of becoming the world's leading market force in the 21st Century. China has already exploded into a global export power. China already produces half of the world's toys, most of the world's bicycles, lamps, power tools, sweaters, and two-thirds of its shoes. And China imposes huge tariffs, averaging 40%, to protect domestic producers. It protects inefficient banks, retailers, transport companies and the like with oppressive restrictions on foreign competitors.

Is it really in our best interest to teach this region that the U.S. embraces principles of managed trade and that our free market philosophy can be corrupted by protectionist practices?

Indeed, with a population ten times greater than North America, six times greater than Europe, and a faster growth rate than either region, Asia has the potential to overtake the other two regions economically before very long. Additionally, in India and China, Southeast Asia has the two single most populous countries in the world as neighbors and potential trading partners. In the not-too-distant future, Asian countries will become more dependent on each other than on the West.

Says Merton Miller, the 1990 Nobel laureate in Economics, regarding the current American policy toward Japan, "This was outright protectionism, export support for big contributors. I'm sorry and saddened that they're lending themselves to this, because it could have not only short-run consequences but unpleasant long-run ones as well."

And who was the winner in the recent Japan/U.S. automobile trade dispute after months of tension, heightened by extreme rhetoric and hysterical press analysis? It is hard to tell. Certainly not the U.S. There was no Japanese commitment to quantify targets for increased automotive parts purchase; and there was no Japanese government official guarantee that Japanese automotive industry forecasts would be carried out. In fact there was no formal agreement. Instead the two sides issued a set of "Joint Announcements."

Allow me quote Undersecretary Jeffrey Garten again: "I have been extremely disappointed in the level of understanding in both the House and the Senate. I think that what we face here is one of the biggest challenges in just educating the members about what this world is like. Economic and commercial issues are what is most important to virtually every other country in the world. Unless we can relate to them on that plane, we will lose enormous influence."

We have also forgotten that the American free market policy was not instituted for the benefit of foreign nations. Its primary principle was to benefit the American consumer and provide him with the cheapest and best products from wherever they may stem. This policy resulted in providing the U.S. population with the highest standard of living. The policy should not be dependant upon whether other nations follow our lead.

We know that protectionism has popular appeal. 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 the past half century be diminished? Dare we allow the protectionists of the 1990s to lead us down the Smoot-Hawley path of the 1930s? Protectionist diplomacy is destined to boomerang.

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     (1) "U.S.-Japan Trade Flap Intensifies as U.S. Sets Early Date for Tariffs," Wall Street Journal, 17 May 1995, p. 1

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