All Commentary
Wednesday, July 1, 1992

The Fair Trade Myth

Professor Kamath teaches economics at California State University at Hayward.

The siren song of managed “fair” trade is once again in the air as the 1992 election nears. Cries of “buy American” fill the newspapers and TV news programs. Japan-bashing is in; free trade is out.

The common argument advanced in favor of “fair” trade is that trade deficits (excesses of imports over exports) cost American jobs. But this is a myth. Over 15 million new jobs were added between 1982 and 1989 as the U.S. ran up huge trade deficits. And the majority of these jobs paid rather well, contrary to the “McJobs” myth. Job growth was mainly in those sectors that were largely unprotected against foreign competition: computers and data processing, telecommunications, petroleum and chemicals, pharmaceuticals and health-related areas, scientific and photographic equipment, entertainment, leisure and recreation, hospitality and tourism, and the service industries.

Meanwhile, protectionist measures were failing to save American jobs. Quotas against Japanese autos (euphemistically called “voluntary” export restraints) imposed in the early 1980s didn’t prevent the loss of over 200,000 jobs in the U.S. auto industry, and General Motors recently announced massive new layoffs. The record in steel, textiles, dairy products, shipping, and meat packing is much the same. These industries shrank while protective tariffs and subsidies were lavished on them to save jobs.

Another common myth about “fair” trade is that Japan severely restricts imports. In fact, Japan’s formal and informal trade barriers are lower than those in America and other industrialized nations. For example, Japan’s average tariff on industrial products was 2.9 percent in 1987, compared with 4.3 percent in the U.S. and 5.8 percent in the European Community. Nontariff barriers in Japan such as quotas and licenses were found by a World Bank study to be no more significant than those in the United States.

Japan was the world’s third largest importer in 1990, taking in $235 billion worth of goods and services. Imports have grown 85 percent since 1985. In terms of imports per person, the average Japanese spent $372 on American products in 1990 while the average American spent $357 on Japanese products. During 1986-91, U.S. exports rose by 91 percent, while Japan’s exports grew by only 17 percent. American exports to Japan were especially strong during this period, doubling to $46.1 billion by the end of 1990.

In fact, it can be argued that the United States is the unfair trader. James Bovard points out in The Fair Trade Fraud (reviewed on page 282 of this issue) that America has over 8,000 tariffs, 3,000 clothing and textile import quotas, and a variety of quotas and other nontariff barriers for steel, autos, sugar, dairy products, peanuts, cotton, beef, machine tools and other industrial products. For example, America limits imports of ice cream to the equivalent of one teaspoon per person each year, and foreign peanuts to two per person. Such restrictions reduce competition, raise prices, decrease variety, and cost American consumers $80 billion per year, or $1,200 per family.

The strongest argument against “fair” trade is the existence of globally integrated multinational corporations such as IBM, AT&T, and Procter & Gamble, and the interdependence of the inhabitants of our “global village.” It is estimated that over 40 percent of world trade is carried out by more than 2,000 multinational corporations that have no national identity and that produce and distribute through a globally integrated network. Today, anyone wishing to “buy American” may have to buy a car with a nameplate like Honda or Mazda rather than Chevrolet, Dodge, or Ford.

Logic and hard evidence dictate that we resist the calls for “fair” trade if we wish to maintain and enhance our standard of living in an interdependent world. Free trade is still the best option for promoting American prosperity. “Fair” trade can only lead to an ever-escalating cycle of retaliation and counter-retaliation, putting the world trading system at risk. Our future depends on keeping our borders open and the goods and services flowing.