The MIT Press, 55 Hayward Street. Cambridge, MA 02142 • 1988 168 pages • $16.95 cloth
In recent years, some economists have been lured away from the profession% traditional attachment to the principles of free trade. Instead, they advocate “strategic trade policies” in which governments subsidize favored domestic firms to help them gain an international advantage.
However, one who hasn’t lost his moorings, Jagdish Bhagwati of Columbia University, has written a strong defense of the laissez-faire line.
Although some passages in his book are a bit cryptic, he generally avoids technical jargon. Indeed, the book is a delight to read, for in addition to being salted with Bhagwati’s wisdom, it is peppered with his wit.
Bhagwati begins by discussing the growth of trade and economic development since World War II. Under the auspices of the General Agreement on Tariffs and Trade (GATT), several series of multilateral negotiations have dramatically reduced tariff barriers.
The author poses an intriguing question: does economic growth cause trade—or vice versa? In part, the answer depends on one’s point of view. From the perspective of macro-economics, the chain of causation runs from growth to trade, for, as people become more prosperous, they tend to purchase more imports.
In the context of micro-economics, however, the relationship is reversed: opening up trade (as the U.S. and Canada have recently done) permits increased specialization which yields more efficient use of resources, spurring economic growth and raising living standards. And since economic growth makes it easier to adjust to problems caused by increasing imports, it becomes easier to strike down the barriers which inhibit trade, in the author’s felicitous phrase, we have a “virtuous circle” of tariff reductions, trade expansion, and economic growth.
With the success of GATT, protectionists have had to resort to new tactics. Although their arguments are generally fallacious, they often have a convincing ring. Just as it appears that the sun revolves around the earth, so too many people with a myopic economic outlook see only the job losses that result from the competition of imported goods. It takes a broader view to understand that consumers benefit from the lower prices that free trade brings, that flourishing export industries provide new job opportunities, and that the overall benefits of free trade swamp the losses.
Capitalizing on the failure of many people to take this broader view, protectionists have argued that we should impose tariff barriers to offset similar restraints imposed on our exports by foreign countries. Bhagwati points out, however, that as far back as Adam Smith, economists have spumed this approach on the grounds that the harm outweighs the good.
Unable to rely on tariffs to achieve their ends, protectionists have advocated quotas and “voluntary” export restraints to curb imports. Such non-tariff protection, Bhagwati notes, is usually “porous,” since foreign producers can usually devise ways to evade it by relocating facilities to other areas (as Hong Kong producers have shifted apparel production elsewhere) or by slightly altering their products (as the Japanese have switched to larger automobile models in the face of export limits). Yet we still have a distortion of resource use which violates the fundamental principles of sound economics.
Often, American producers complain that their foreign rivals are being unfairly subsidized or are selling their products below cost. Yet we, too, often subsidize our producers (such as farmers and the merchant marine), and as Bhagwati caustically notes, forbidding all producers from selling below costs would effectively prevent post- Christmas sales!
Bhagwati is encouraged by the fact that our government’s executive branch has generally taken a pro-trade stance and that in recent years it has been particularly emphasizing the need to open up foreign markets for agricultural products and services, items for which the U.S. has a comparative advantage. However, there is also a dark side to the stress on export markets.
Some people contend that we should have trade balances with each and every country, and even in specific items such as textiles. Yet no one would suggest that a nurse should maintain a trade balance at her local supermarket by checking the temperature and blood pressure of the clerk who runs up her bill. Nor do we expect Maryland to have a trade balance with Oklahoma. Is anyone alarmed about our banana deficit? Then why should a deficit with Japan alarm us? We do, after all, have offsetting surpluses with such countries as The Netherlands, which is as it should be.
Finally, Bhagwati rejects the argument that “manufacturing matters.” We need not, he notes, rely on manufacturing to be technically progressive; just look, after all, at the many improvements in medical services. Nor is it true that only manufacturing jobs are character-forming. Is a steelworker morally superior to a dentist?
Yet poking fun at these arguments may not suffice to deflate them. Bhagwati argues that, if we want the idea of free trade to triumph over the pressure of special interests, we must reform our institutions. For example, when the International Trade Commission investigates charges that foreign firms are dumping products in our markets, it considers only the harm being done to domestic firms. Bhagwati suggests that the Commission look at both the costs and the benefits of providing relief to our firms. Taking a more balanced and reasonable approach would likely result in fewer barriers.
So long as some economists can present such lively arguments in defense of free trade, there is reason to hope that we can turn back protectionist pressures that would greatly reduce all the world’s living standards.
Professor Shannon teaches in the Economics Department, Clemson University.