Dr. Brozen is a Professor of Economics in the University of Chicago School of Business. This is an excerpt from his statement of February 10, 1958, before the Joint Economic Committee.
Some of the major problems we face today are those in the international arena. Among other things, our foreign aid program is directed toward assisting in the solution of our problems in foreign relations. Our agricultural program is bound by restrictions stemming from the necessity of avoiding actions which harm and alienate our allies whose markets are influenced by our policies in this sphere. Everywhere we turn, the international problem intrudes. Even a domestic recession in business and employment has international overtones since "when the United States sneezes, Europe catches cold."
Foreign trade is our most effective device for winning friends, influencing nations, and developing their resistance to Soviet blandishments and threats. Trade has the double advantage of being a device for accomplishing our international objectives, and at the same time increasing the employment and real wage income of American workers.
First, let us look at what trade does in accomplishing our international objectives. We are wooing other nations by many devices — foreign aid, military assistance, treaties of assistance, alliance and mutual defense, information services — all directed toward the end of enlisting their support in maintaining a free world and containing the totalitarian threat. However, our firmest friend in South America is one on whom we have exercised few of these means. Brazil is our staunchest supporter in the Southern Hemisphere. One of the important reasons for the support we obtain from her lies in the fact that we are Brazil‘s biggest customer. We buy more from Brazil than does any other nation, and with the dollars Brazil earns in this way she is one of our more important outlets for American goods. These sales to Brazil are made by our more productive industries which, as a consequence, are able to provide employment at higher wages than workers in these industries could obtain if they were forced to turn to alternative occupations in other industries.
In North America, our firmest friend is Canada. Again, we have a stanch friend and ally for reasons other than foreign aid, since none has been extended. We are Canada‘s biggest customer. The ties arising from this relationship are an important element in creating this mutuality. Because we buy so much from Canada, and U.S. private enterprise invests so heavily in our northern neighbor, Canada is a major customer for the products of U.S. industry, thus supporting employment at high wages for many Americans.
Our ties with the United Kingdom rest in large measure on our trade with her. We buy English products in extensive amounts and, in turn, are enabled to find large export sales.
This list of friends whose regard has been fostered by our purchases could be extended. The important point is that trade creates friendships which are usually firmer than those based on other ties. In trade there is mutual gain to both sides. Where there is a mutual gain, a mutual regard usually follows.
The importance of trade as a means of winning friends and gaining allies has also been recognized by the communists. They courted Egypt by buying her cotton. They wooed India by offering to buy her hemp. They even are flirting with Brazil by making noises as if they might be interested in purchasing her coffee. And even as firm a friend as Brazil is unable to resist a small twitch of interest. The purchase of a country’s goods is a mightier weapon than many appreciate.
This has exceedingly important implications for our trade policy. By reducing barriers to imports, we gain both in terms of accomplishing our international objectives and in terms of increasing wages, employment, and American national income.
The exports whose volume would increase are the very ones produced by the industries which are in trouble now. Machinery and construction and mining equipment — capital goods — are wanted by areas which now lack the means to purchase. These are now among our softest industries employment-wise.
An unappreciated aspect of international trade is the fact that it is our high wage industries which export abroad and compete very effectively with low wage labor abroad. They are the export industries because they are relatively our most productive. Since wages depend on productivity, they are also our high wage industries.
The industries which ask for protection are our relatively less productive industries. Because wage rates are driven up by the competition for labor of the very productive, export industries, the less efficient industries suffer, inasmuch as they are not productive enough to afford high wage rates. By getting tariffs imposed, foreign buying is reduced since foreign dollar earnings are cut down.
The high wage industries are thus forced to cut back and release labor to the low wage industries.
Wage rates in the machinery industry (an export industry) in July 1956 were $91.96 per week. In the leather industry, one which asks protection, wage rates were $56.47 per week in July 1956.
Reduce Defense Burdens
Actions to improve international trade would reduce our defense burdens in three ways. The firmer our allies, the less the level of expenditures for national defense required to provide any given degree of security. Secondly, the higher our national income, the more capable we become in carrying the defense burden, and the greater our mobilization potential in case of war. Thirdly, an increase in trade strengthens our allies and gives them greater defense capability just as it increases our defense capabilities. To this extent, they become capable of carrying a greater share of the mutual defense burden.
If, in the process of reducing our own import barriers, we also succeed in obtaining agreement from other nations to reduce their barriers, then trade will increase all the more and our benefit will be even greater. We would benefit by a unilateral reduction of tariffs. This would pay out for us even though foreign tariffs were not reduced. But bilateral reductions give us even greater yields in trade, friendship, allies, and defense.
Aid through Trade
We can reduce tariffs, simultaneously cut foreign aid, and end by accomplishing more than the present foreign aid program. To illustrate this, we might consider the experience of Sweden after the English repealed their tariffs in the 1840′s.
Sweden, before the middle of the nineteenth century, was an economically backward country whose people lived in circumstances which cannot be described. Suffice it to say that the condition of the average man was one of abject misery. Average income per person per year was much less than $50.00. This may appear to be absolutely unbelievable and shock those who are acquainted with modern Sweden. These statements are well-documented, however, and are common knowledge among Swedish economic historians.
What was it that brought about the economic revolution which occurred in the last half of the nineteenth century? In the 1840′s England repealed her tariffs. At that time, England was the world’s major market. She had a higher national income than any other section of the world. The opening of her markets to Swedish products awakened that country and brought it from feudal misery to the modern, prosperous country that it now is. The opening of trade presented economic opportunities to Sweden which attracted English, German, and Dutch entrepreneurs who sparked an economic renaissance. They converted natural capital in the form of forests and mines into factories, railroads, and power plants. The export of timber and iron to England developed a supply of businessmen who could create productive opportunities for employment and who were enabled thereby to obtain the capital to use in providing equipment and tools with which workers could produce abundantly and earn good wages.
Reductions in our own tariffs would similarly open markets to other areas of the world in need of development. It could similarly provide economic opportunities which would develop business and businessmen. These are the men who will provide the backbone of resistance to communism. If we want economic development abroad in ways which will win allies, this is the way to do it.