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Tariffs, Trade, Markets & Us… A Conservative, Economic case for Free Trade and against Protectionisim

In the past, the US relied heavily on tariffs to fund our government – the concept of free trade is relatively new.

Yet by and large, the majority of mainstream conservative movement leaders support free trade. Why is this? Is it right? And if so, why?

I believe the answer to the above is ‘Yes, it’s absolutely right, the reasons are mainly economic (with some historical and political considerations thrown in), and I’m about to explain the ‘why”

Now, to be clear, when I am talking about free trade, I am talking about the extant system of mutual market-liberation by treaty/agreement, NOT Ron-Paul-style ‘instantaneous, unilateral liberalization’.

Ideologically & Academically, ‘unilateral liberalization’ is the most consistent position for a free-market conservative to hold, HOWEVER in pragmatic, practical terms it would not lead to anyone else opening their markets to us – thus lessening the advantages the US receives from said trade. On the other hand, tariffs and subsidies are universally harmful to the economy (more on that later), so it should be our policy to eliminate them wherever possible. The solution to this conundrum, is the free-trade treaty/agreement system we began using with NAFTA – it creates a framework for all parties involved to safely remove their tariffs & subsidies without fear of non-implementation by other parties to the treaty (similar to Reagan’s nuclear arms control treaties, but in an economic realm).

I’m also not opposed to the use of embargoes/blockades as a ‘Last chance before war’ measure against rogue regimes, so long as they are imposed to punish misconduct (Such as producing nuclear weapons while threatening a US ally with extermination) not obstruct competition. And I see no problem with ITAR-type controls on sensitive military technologies (sorry, we are not exporting ‘UDM’ full-option-package M1 Abrams to Ethiopia – Monkey Models***? We’ll think about it, how well do we trust you today)? Or with requiring that critical/sensitive/classified military hardware be made by US firms or our Tier-1 (‘Empire Club’ UK/CAN/AUS) allies…

<b>So, with that said, let’s start by looking at the arguments AGAINST Free Trade, and where they fall short:</b>

Common arguments against free trade are as follows:

1)  The US relied heavily on tariffs in the past, and we did fine – in fact we had some phenomenal economic growth during that period. Why not go back to that? (Historical Argument)

2) How can the United States compete with (3rd world countries, European democratic-socialist regimes that pay subsidies, Communist state-owned industries)? Shouldn’t we make the market ‘fair’ with tariffs? (The ‘Fair Trade’ Argument)

3) The US is loosing too many jobs to foreign governments, putting Americans out of work – we need to stop this (Perot’s ‘Sucking Sound’ argument)

4) The US needs consumer manufacturing for national security purposes, thus tariffs are warranted to protect ‘manufacturing infrastructure’ that may be needed in a potential future war (The WWII/National Security Argument).

All of these have critical flaws – so let’s look at them and see where the flaws lie:

1) The Historical Argument

The problem with the historical argument is two-fold:

A) The ‘Not-So Good Old Days’ issue (Correlation-Causation Fallacy):

This one shares quite a few similarities with the ‘Historical Argument’ for a gold-standard – ‘Things were good way back then, why not bring it back’.. The immediate counterpart, is that correlation does not imply causation – that it is quite possible (and in the case of ‘Free Banking’/Gold-era (Jacksonian-Democrat) monetary policy, <b>absolutely certain</b>) that we grew & prospered IN SPITE of our economic policies, not because of them.

Further, ‘Success’ in those days amounts to a quality-of-life worse than our welfare-collecting poor enjoy today. The standard of living was low, wages were low, products were expensive, and (thanks to the gold standard and Jackson’s abolition of the Bank of the US) the economy was extremely unstable. We were a relatively poor and weak country, with an uneducated populace, limited infrastructure, and significant internal problems. Contrary to the ‘Good Old Days’ argument, it WAS NOT a better life, or a better country than what we have now.

However, unlike the gold-standard, tariffs were NOT always destructive (to contrast, there is absolutely NOTHING good about a pegged currency, and there never was). There was a valid case for them at one time, which leads to the next (and more significant) issue with the historical argument:

B) The Context Issue

In the beginning, when Alexander Hamilton (A founder I tend to agree with on most things) was pushing tariffs as a vehicle for economic development, the world-order was extremely different.

The overwhelming majority of the world’s trade was controlled by the Colonial/Mercantilist economic system implemented by Old Europe, and enforced by the military might of the European Empires. The US faced a very real threat of being re-colonized if we did not develop an economic AND monetary system independent of any European power – but especially independent of Britain.

The US was essentially incapable of defending itself militarily – while our troops fought bravely in the Revolution and scored some brilliant victories, the relative indifference of Britain towards retaining the American colonies (We were an expensive experiment, compared to far more profitable colonies such as India), and the timely intervention of Britain’s European enemies (the French, for example) also contributed significantly to this achievement.

However, that aside, our economy was still locked in the British mercantilist system (of trading raw materials to Britain in exchange for finished goods, while the British held protective tariffs to keep finished goods from the colonies out of domestic markets) & if we did not break free, the threat of an economically growing United States being re-colonized by the British (or simply growing so economically integrated that we eventually rejoined the Empire by choice) was very, very real. Further, remaining on the mercantilist system ensured a complete lack of economic development, by making raw-materials-production and basic agriculture (the least profitable & least innovation-driving industries) the only profitable industries other than shipping and banking.

In this CONTEXT – with little military means to defend ourselves, a newly formed & relatively weak national government, and the threat of losing our independence through economics – Hamilton’s tariff made sense. It forced us to achieve economic independence from Britain, and helped make us ‘not worth bothering with’ to the great powers, by removing us from any one Empire’s colonial trade network. Further, even if we had desired free trade, we could not have achieved it then – Europe set the terms of international trade due to the old imperial regimes massive superiority in wealth & firepower.

The problem with the ‘Historical Argument’ in a context sense: <b>WE ARE NOT THE WEAK 3RD-WORLD NATION WE WERE WHEN HAMILTON WAS ALIVE.</b>

The context has now changed – we are the ‘Imperial Power’ – many times stronger & more dominant than any of the European nations were at the time of our founding. We command the world’s most potent conventional military force, and our nuclear arsenal is also second-to-none (mainly due to the higher reliability rate of US weapons over Russian or Chinese designs)… We also absolutely OWN the world economy, as our currency has replaced gold as the standard international medium of exchange, and the majority of ‘International Financial Institutions’ (such as the World Bank and IMF) are either run by or controlled by US interests. Rather than being a weak, underdeveloped nation on the verge of losing it’s independence & being locked into a self-destructive cycle of raw-materials-and-food-production for Europe (See Africa for how that ends up), we are now a dominant world economy. Rather than being an agricultural economy, with the path to growth & power being the development of manufacturing industry, we are a post-industrial economy being held-back by legacy manufacturing interests with excessive political clout (Manufacturing today is what Agriculture was when Hamilton was devising our original economic system).

In the same sense that Agriculture was the ‘Industry of the Past’ and tariffs were the vehicle towards developing manufacturing, the ‘Industry of the Future’…

Consumer Manufacturing – particularly the variety that employs large numbers of human workers – is the ‘Industry of the Past’ *NOW*, and the ELIMINATION of tariffs, is the vehicle towards developing the ‘Industries of the Future’.

The advantageous trade pattern is no longer ‘resources in, finished goods out’, but rather ‘finished consumer goods & resources in, designs/inventions, complex/expensive products, services & paper-money out’

Alexander Hamilton was a brilliant man and a great Patriot (regardless of what his Jeffersonian rivals had to say about him)- and he had a dream – a dream that one day the US would rival if not exceed Britain as a world power – and further he had a vision for how to accomplish it. Tariffs played a central role, as a sort of ‘economic training wheels’ for the young American nation, developing it’s first independent economy (like a kid with his first 2-wheeler). Well, now we’ve traded the 2-wheeler for a Goldwing, and the training wheels just get in the way…

The Context has changed – It’s time we change with it. And principally for that argument, history does not present a valid case for tariffs.

2) The ‘Fair Trade’ Argument

In essence, this is a fairly simple argument – It’s not fair that other countries can operate government-owned firms, use prison labor, have lower environmental/safety/wage regulations, or simply be less developed & have populations willing to work for low wages – and the US should thus ‘help’ our companies compete with these firms.

The last of those 3 categories is often the focus of LIBERAL arguments for protectionism (It’s the Left that coined the term ‘Fair Trade’ and built a carbon-credit-style sham-industry around it – something especially visible on the Left (er West) Coast in such establishments as ‘Cost Plus World Market’, and the presence of ‘Certified Fair Trade’ products (eg, ‘We promise we overpaid our workers to make this’)) – that we should attempt to force foreign countries to adopt a US-style regulatory state through tariff policies that eliminate any advantage in not doing so. Like most liberal arguments, it falls apart when we look at it in context – the libs would have levied the same punishments on our economy, back when WE were a cheap-labor industrial state (and would love to see it levied against any future Conservative USA, should we finally shake the regulatory monkey (er gorilla) off our national backs). And it’s for this reason that few conservatives use the ‘low-wage’ portion, preferring to focus on the economic abuses of Communist China & the European penchant for subsidizing industries.

The FIRST problem with this argument, is that even WITHOUT the few remaining socialist regimes that have state-owned industries, pay heavy subsidies, or use prisoner labor to produce products for the international market, there are enough underdeveloped nations with low costs of living. Essentially the ONLY REAL ‘Fair Trade’ argument is the liberal one, because the only thing that enacting measures ONLY against the Chinese and Europeans would do is CHANGE <b>WHERE</b> we get our cheap foreign-made goods from. It’s a simple supply-and-demand problem: The supply of people capable of doing Fordian manufacturing is so HUGE that the VALUE of that economic activity is almost non-existent. Market wage for unskilled manufacturing is measured in single-digit dollars-per-<b>day</b>, not double-digit dollars-per-<b>hour</b> required to survive in the US economy.

This leads to the most significant failure of the ‘Fair Trade’ argument – the false premise that the US <b>should even be trying to compete with the 3rd-world in the first place</b>. One of the major functions of pricing in a market-based economy, is to efficiently allocate resources. The common term you have probably heard is “Creative Destruction’. The point of ‘Creative Destruction’ is to allocate and SPECIALIZE the resources of markets, for maximum efficiency. This is why, according to market principles (and all Conservative-minded schools of economic thought) the proper course of action for a firm that is priced out of a market is to LEAVE THE MARKET.

Not ‘Lobby the government for help’, but ‘LEAVE THE MARKET’.

Weather this means go out of business, or find a new market to compete in depends on the company.

However, the notion that the US needs to compete in EVERY MARKET is not only absurd, but inefficient and wasteful – it’s like Microsoft trying to make cell phones (and at this point, sacrificing their mainline products to try and ‘force’ adoption of their abysmal cell phone platform), or GM selling satellite TV and home mortgages. When you try to be a jack of all trades, you become master of none.

So instead of trying to compete with China over flatware & trash cans, let that stuff go – leave those markets because they are not profitable in the American economy. We lose nothing economically (is there any advantage to a US-made butter knife?), and our economic resources can then be focused on markets where the Chinese cannot compete with us – markets that require innovation (not just copying and reverse-engineering, but the creation of *new* things), a highly educated work force, and other American strengths the Chinese culture, government & economy prevents them from mastering.

3) The ‘Sucking Sound’ Argument – Job Losses

The most famous advocate for this position, was one Ross Perot… Of course, all he managed to accomplish with it was getting us a President who’s first initials also correspond to his most famous Executive achievement… But this was Ross’ drum & he beat it like a rented mule…

Closely tied to the (2) argument, the claim is that outsourcing of jobs ‘harms’ America, and that government should take action to prevent ‘American Jobs’ from being lost to overseas firms. This argument not only opposes true imports of foreign products, but usually also seeks to punish American firms from operating production facilities outside the US, on the contention that US firms have some sort of ‘responsibility’ to employ Americans.

There is a Conservative ideological problem with this argument, but also an economic one.

<i>First, the ideological issue:</i>
Tariffs for the purpose of ‘saving jobs’ are a tax on successful Americans with marketable job skills, in order to create ‘McGovJobs’ for those Americans who for whatever reason failed to learn a marketable job skill. Essentially, the ‘Sucking Sound’ rationale is IDENTICAL to the one used by the Obama Administration to justify ‘creating’ jobs through public employment & infrastructure/pork projects. Now, rather than just outright spending income tax revenue (and the income and payroll taxes comprise 95% of federal revenue, so it IS income tax money) to create public-sector jobs, the use of tariffs in this manner ‘dresses up’ the socialism in a free-market suit… But in the end (thanks to the economic fact that no company ever pays a tax or price increase), the mechanism is exactly the same:  ‘Producers’ are forced by government to pay more for goods (because tariffs raise prices on domestic as well as foreign products, by altering the price-setting functionality of market competition), and that money is used to pay ‘Non-Producers’ wages for working a job that has been entirely created by government intervention.  It’s WELFARE disguised as WORK.

<i>Second, the Economic issue</i>

This has been raised in the prior sections, but mainly because it is a valid issue with all arguments for protectionist trade other than the Historical one.

Tariffs enacted to ‘Save Jobs’ HARM the economy because they impede and in some cases eliminate Creative Destruction & market efficiency functionality. In a tariff and subsidy-free market, the DEMAND for a specific product – in this case, for various labor-skills – determines how many sellers enter or leave the market.

Now, in the 2nd case, this was illustrated with regard to firms deciding weather to enter the market for consumer products. In this case, the problem is with WORKERS deciding what skills to develop, and what market to sell their labor in.

When you ‘protect jobs’ with tariffs or punitive income taxes, you impede or eliminate the market’s ability to allocate skills through supply and demand.

If there is little demand (or, as is the case with manufacturing today, excessive supply) for buggy-whip makers, then few people will become buggy whip makers.

If there is huge demand (or insufficient supply) for computer technicians (think 1995-1998), then a high-school student who just learned how to assemble a PC can start a business as an IT consultant (‘Old Me’ – Today, ‘Old Me’ wouldn’t get his foot in the door (or we’d make him L1 phone support). Fortunately, ‘Today’s Me’ has a Bachelor’s & has been in the business since… 1995).

When you ‘protect’ jobs with a tariff, you stop this process, and create an artificial demand for certain less-marketable (and usually less intellectually demanding) work skills.

This creates a diversion effect, where individuals who would have been forced by the free market to learn a more intellectually demanding (and more economically valuable) skill had there been no tariff, are ‘diverted’ by the artificial availability of an easier-to-obtain job – not only harming their future income potential, but harming the over-all aggregate skill set of the nation.

In the same way that Hamilton’s tariffs encouraged Americans to break out of their traditional agricultural ways (which Jefferson and the Physiocrats opposed, claiming that manufacturing was ‘morally inferior’ to agriculture – <b>in the same way that today’s re-Industrialists claim that white-collar work is ‘morally inferior’ to ‘making things’</b>), free trade encourages Americans to break out of old-line manufacturing and into new, economically viable industries.

4) The ‘National Security’ Argument

This argument, essentially claims that manufacturing – the sector most often seen as ‘threatened’ by free trade – is essential to our national security. It often contains an element of the Historical argument – referencing an overly romanticized view of how the US handled the 2nd World War, and claims that we need to ‘protect’ our civillian manufacturing firms ‘in case we need to do that again’.

The problems with this are many.

First off, World War II is extremely romanticized in US culture – perhaps because it’s the last war that all segments of the US political spectrum (Save for the lunatic fringe) regard as a ‘good war’. We destroyed 2 aggressive empires, stopped systematic and pervasive attempts at genocide, and established ourselves as the preeminent world power. HOWEVER, WWII was also a war we entered STUNNINGLY UNPREPARED TO FIGHT. Rather than setting the example for future generations, WWII stands as an example of WHAT NOT TO DO in war. The story of America ‘manufacturing our way to victory’ is one of a shameful waste of blood and treasure, brought about by the refusal to maintain an adequately sized and equipped standing military force. Through the perseverance of our troops, and some brilliant leadership, and the stunning arrogance/incompetence of our enemies (Germany opening a 2-front war against the Soviets without accounting for winter (hello, NAPOLEON anyone?), Japan believing we would immediately negotiate peace & withdraw from the Pacific if they sunk a few ships (That will be an entire empire & 2 home-cities, thank you…)) we manged to win in spite of our incredible initial handicap. But it cost us 500,000 American lives.

Read that again: FIVE HUNDRED THOUSAND – and that was against the relatively primitive weapons of the 1940s… In an era where the loss of 1,500 (Afganhistan) or 3,000 (Iraq) causes a significant political outcry for ‘Peace Now’, a strategy that cost 500,000 lives is a recipe for defeat. The American People do not have the stomach for fighting a war by way of open factory doors, long draft lines, and ships full of flag-draped caskets…

Since our strategy must be shaped by the political reality that constrains our commanders, we MUST adopt a strategy of smaller numbers and powerful ‘wonder-weapons’ that emphasize survivability and firepower over mass-production numbers and low cost.

This leads to the point that invalidates this entire argument:

Civilian manufacturing capacity is now ALMOST ENTIRELY USELESS for defense purposes. Whereas in WWII, auto assembly lines could be used to make planes & tanks, and Singer made guns instead of sewing machines… Now all but the most basic defense products (personal firearms, sewing of uniforms, etc) must be made by specialized expert-firms. Super-weapons such as the F-22/F-35, M1A3 Abrams (it’s under development now), and whatever we make when we finally field a next-generation artillery piece (cancelling the Crusader was a mistake, btw) require such a specialized knowledge-base & facilities, that they MUST be made by a dedicated defense industry – something we have (on a best-in-the-world level).  Re-purposing a factory that built 2-ton SUVs to build 70-ton tanks just isn’t happening. Even if it could, how much experience does your average auto-worker have in assembling uranium-ceramic-steel-composite armor properly, so as to maintain it’s ability to take 125mm KE hits?

A final point on this issue, is that modern war moves to fast to ‘develop and manufacture new products after the fact, using civilian industries’. It’s a ‘run what ya brung’ sort of affair – just look at the (relatively basic) war we’ve been fighting since 2001 – by the time production of new vehicles is ramped up (say, up-armored HMMWVs) the enemy has already countered the new weapon & we have to begin producing another one (Gen 1 MRAPs), which is then countered before it’s fully fielded, and the cycle repeats… If the production cycle (note: not production capacity, but rather the time to develop and begin mass production of a new weapon) can’t keep up with the combat cycle in a counter-insurgency war, how is it EVER going to keep up with a full force-on-force 3rd generation maneuver slug-fest?

<b>So, that’s great, you say… You’ve pointed out flaws in the arguments for tariffs – when are you going to make an argument FOR free trade – and specifically for treaty-based free trade?

Right here, right now:</b>

1) Free Trade is consistent with the Conservative demand that government NOT ‘pick winners and losers’, and the associated criticisms we levy against the Obama administration for their ‘Stimulus’ and patronage policies.

The use of tariffs to alter the market is subject to the same lines of logical attack that we use against Obama for Soylindra, for ObamaCare, and for the stimulus. The fact that it is an indirect tax-increase/’Soaking of the Rich/Middle’ doesn’t make it right, and supporting protectionism while decrying welfare & social-spending is just a tad hypocritical.

2) Free Trade acts as a ‘purifying fire’ for our national economy, allocating resources efficiency & encouraging American businesses and individuals to advance & develop, while preventing the creation of non-competitive ‘Zombie Firms’.

Free Trade unleashes the power of competition & market resource-allocation on all sectors of the economy. This results in a stronger, more skilled workforce, better & more sound firms that can compete without bailouts, and thus improves all aspects of the economy.

Ironically, most of the problems people cite with free trade are actually due to ‘tariff withdrawal’ – they are symptoms of the weakness created by protectionism, that simply become clearly evident when the government training-wheels come off… By avoiding protectionism in the first place, market forces will encourage companies to either stay competitive or refocus on new industries where they can be competitive – without the need for government help.

To contrast, protected trade creates ‘Zombie Firms’ like GM, Chrysler, and “Big Steel’ – firms that are ‘walking dead’ financially, overrun with exorbitant pay/benefits for workers & outsized prices for supplies (due to the tariff artificially raising prices & thus altering negotiation criteria for labor and raw materials), and thus fall flat at the first sign of serious competition.

3) Free Trade allows us to take advantage of world market conditions to raise the American standard of living, while preserving Dollar hegemony & exporting American values alongside our money.

Right now, the world market conditions favor America over our ‘economic colonies’ that make our finished goods. Whereas there are countless nations full of marginally skilled workers with a low cost of living & high unemployment, there is only one USA – only one global cash-cow (Europe tried to grow their own, but thanks to their socialist policies it’s going up in smoke right now).

As noted in the ‘Historical’ argument section, the advantageous relationship for a ‘Great Power’ in today’s economy, is to import manufactured goods from low-cost-of-living locales, and to export money, services, ideas, and sophisticated heavy-industrial products (weapons, aircraft, precision instruments, etc) that the 3rd world cannot reliably produce.

4) Free Trade forges economic relationships that can be manipulated to advance American interests without the need for military measures.

The term here is ‘Mutually Assured Economic Destruction’ -  and the idea, is that the US can exert influence on producer trade-partners via the threat of embargo & alternate-sourcing.

For example, there are many countries other than China that offer a large pool of marginally educated workers willing to work for American companies – as employees or contract producers – if we were to embargo China as a trade partner (for political/military reasons – not for ‘job-saving reasons’)…

However, the Chinese cannot just go find another source of US Dollars for their economy – nor is there any viable competing currency with the Euro falling apart… If we pull out, they fall flat on their face. And that right there is POWER. While most folks were crowing about how much US debt China holds (btw, it’s around 12%), the most telling statement of the entire recession came from the Chinese leadership, <i>when they complained that Americans were not buying enough Chinese goods – that they were being adversely impacted not by US government debt levels, but by a lack of US personal consumption</i>.

If we were to adopt the ‘Walled Garden’ approach and ‘protect’ US industries, we would quickly find ourselves isolated from these relationships, and thus unable to use them to manipulate the world to our advantage.

 

THUS, FOR ALL OF THE ABOVE REASONS, FREE TRADE IS THE RIGHT CHOICE.

 

** The term ‘Monkey Model’ is used in military discussion circles to refer to less-capable ‘Export versions’ of powerful weapons systems. For whatever reason, it just so happens that the Soviets marked some of their for-export equipment with an ‘M’ suffix (eg T-72M – the variety of tank the Iraqis sent against us in the 1st war), which further ‘fits’ the moniker… The US, for example, sells the rights to produce a ‘Monkey Model’ M1 Abrams to Egypt – it looks like one of ours, but you wouldn’t want to fight one of my unit’s M1′s in one of those… Short & explosive end to that scenario (weaker armor, weaker ammo, just to start)…

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