Douglas Irwin – Free Trade Under Fire, 4th Edition
Excellent, except for the carbon tax proposal at the very end. Knowledge problems and incentive problems doom that idea. Otherwise, while a bit long for an introductory text, this book is about as good an intro to arguments for and against free trade as there is. It is also a good guide to institutions such as the WTO and the recent move towards multilateral, bilateral, and regional trade agreements.
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The Competitive Enterprise Institute’s new agenda for Congress, “Free to Prosper,” is out. It has an entire chapter devoted to trade, which will be a busy issue for years to come. To cut to the chase, here are our specific recommendations:
President Trump’s doubling of tariffs has already cost the economy almost 1.8 percentage points of growth. That means 2018’s 3.4 percent third quarter growth could have been 5.2 percent instead. If the economy veers into recession in the near future, President Trump’s trade policies will likely have played a major role. Congress needs to act as soon as possible to prevent further damage.
Our trade policy recommendations follow four general themes that have bipartisan appeal—important in a newly divided Congress.
The first theme is that the executive branch has grown too powerful. Only Congress has the rightful authority to tax. The president has abused the tariff-making authority Congress delegated back in the 1960s and 1970s with Sections 232, 201, and 301. The time has come for Congress to take back that power so no president cannot further abuse it.
The second theme is to move on from the “reciprocity” model for tariffs—the idea that America will only lower its tariffs if other countries also lower theirs. American tariffs hurt American consumers and producers regardless of what other countries do. To paraphrase the renowned Cambridge economist Joan Robinson, when other countries dump rocks into their own harbors, the solution is not to dump rocks into our own harbors.
Not only have America’s higher tariffs failed to convince other countries to lower their trade barriers, our trading partners have raised their in retaliation. American consumers and producers are being hit twice as hard—once by our own tariffs, and again by other countries’ retaliations. That’s more rocks and less harbor. Congress needs to do some dredging, and quickly.
Third, Congress should work with the executive branch on liberalizing trade with other countries. New agreements with the United Kingdom and European Union should emphasize not just lower tariffs, but the concept of regulatory equivalence. Basically, this means that if a product is deemed safe for people in the UK to use, then the U.S. government should automatically deem it safe as well. Such a policy would reduce compliance costs for each country’s domestic producers, reduce frictions to international commerce, and serve as a positive foreign policy gesture to boot. Note that this is different from regulatory harmonization, in which countries agree to have identical regulatory policies. Instead of harmonization’s uniformity, equivalence has an ethos of “if it’s good enough for you, it’s good enough for me,” while allowing countries to continue to experiment with new policies that might be more effective.
China is more complicated. President Trump pulled the U.S. out of the Trans-Pacific Partnership (TPP), which still has 11 member countries, with more likely to join. The binding agreement commits China to make many of the reforms the Trump administration has unsuccessfully been pressuring China to make via higher tariffs. It is not too late for the U.S. to rejoin the TPP.
The fourth theme is that future trade agreements should stick to trade issues wherever possible. This policy horse left the barn long ago, but it is important to remember for when unintended consequences come to pass in the future. In the short term, it can be expedient to add trade-unrelated labor provisions to buy union support, or environmental provisions to buy support from green energy companies and activists. It is a legitimate question whether the agreements could pass without the support such provisions can purchase. But it is just as easy to add poison pill-style trade-unrelated provisions that could torpedo an agreement. If the long-run goal is to create more wealth for more people—and it should be—trade agreements should stick to trade issues, and separate issues should be treated separately.
For more, read CEI’s “Free to Prosper: A Pro-Growth Agenda for the 116th Congress.” Previous posts in the Agenda for Congress series:
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Daniel Griswold – Mad About Trade: Why Main Street America should Embrace Globalization
Dan, a former colleague, takes a thorough, human-centered approach to trade that is also based on sound economics. One of the best single-volume “principles of” books in the trade literature. Highly recommended. I should have read this years ago, frankly.
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Note: Since I wrote this post, Rep. Sean Duffy (R-WI) has announced that he will sponsor the bill.
A forthcoming bill, the U.S. Reciprocal Trade Act, written by “Death by China” coauthor Peter Navarro and other presidential advisers, seeks to expand the president’s tariff-making powers. Its goal is to encourage Beijing to open China’s markets to U.S. producers. The White House is currently seeking cosponsors for the bill, and President Trump is expected to promote it during his upcoming State of the Union address.
Congress should reject the bill. President Trump already has the power to raise tariffs without congressional authorization. While only Congress has taxing power under the Constitution, it delegated some of that power away to the president in the 1962 and 1974. The specific provisions were unused for decades until last year, when President Trump used them to roughly double tariffs.
These are the powers President Trump invoked to enact the steel and aluminum tariffs, and levies on more than $200 billion worth of Chinese goods. Further actions are possible in the near future against foreign automobiles, as well as an increase on the China tariffs.
Congress should affirm the separation of powers by rejecting the U.S. Reciprocal Trade Act’s presidential power grab. It should also take back the tariff-making powers it already granted. President Trump’s tariffs have not only raised U.S. trade barriers, they have caused other countries to raise theirs. If the tariff’s strategy’s goal is to open markets for U.S. producers, it has failed.
The correct response to a policy failure is to change it, not double down on it. In this case, the Trump tariffs have already cost the U.S. nearly 1.8 percentage points of GDP growth, raised consumer prices, caused billions of dollars of economic losses, and thousands of layoffs. GM alone is laying off 14,700 workers.
That’s bad for everyone. As for members of Congress, the GOP brand currently owns the tariffs. Re-branding is not only sound policy, it is wise politics for Republican members fresh off a 40-seat loss in the House.
Politicians of all stripes are typically reluctant to go against a president from their own party. Rejecting the U.S. Reciprocal Trade Act is a way to stand up for sound policy as well as basic principles of American government, such as the separation of powers. Congress should do more than simply decline to give the president more of its taxing power. It should take back the power it has already given away. Several bills to do this were introduced in the previous Congress, though none passed.
With the economic and political lessons learned in the previous two years, reforms stand a better chance this time around. Either way, voters deserve to know how interested Congress is in leading, rather than following.
The U.S. Reciprocal Trade Act is not the only trade bill the White House would like to sign. Navarro and other White House advisers have also drafted legislation to pull the U.S. out of the World Trade Organization, though it has not yet been introduced. As a sign of the gravitas with which the White House is treating trade issues, it is called the FART Act.
For more on what Congress should be doing on trade, see chapter 2 of the Competitive Enterprise Institute’s new “Free to Prosper” agenda for the 116th Congress.
Peter Frankopan—The Silk Roads: A New History of the World
A pan-Eurasian history. The first half is especially strong, ranging from ancient times through the fall of Rome and Byzantium, through the Renaissance. Instead of focusing just on Europe, Frankopan gives proper attention to central Asian nomads, the pre- and post-Mohammed Arab world, Russia, and India and China. Moreover, he emphasizes their interconnectedness. Each was influenced by all the others, and they all acted to enrich and impoverish each other.
The book falls apart in the second half, focusing almost exclusively on colonialism and energy geopolitics. Frankopan’s sudden switch from a pluralistic to a hyper-materialistic focus excludes the more interesting, and ultimately more important forces of culture, interconnectedness, openness versus nationalism, and peace and trade versus war and protectionism. These forces, not newspaper summaries and phone call transcripts from the Iran-Contra scandal, are what will guide Eurasia’s fortunes in the centuries to come.
The first half of this book alone is worth the price of admission, but readers are best served by putting the book down when it reaches the 19th century or so.
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At noon today, the 116th Congress convened. Over at Fox Business, Iain Murray and I look at what the coming year has in store for the new Congress on trade. The two biggest items are the NAFTA/USMCA vote, which isn’t a big deal, and China, which is:
For Congress, the most important 2019 trade priority is reclaiming the tariff-making authority it delegated away in the 1960s and 1970s. Under the Constitution, only Congress has taxing power. Tariff delegation has long since served its purpose, and should have come back to Congress long ago.
The trade damage done in 2018 will take years to undo. The new NAFTA doesn’t matter much either way, but abandoning a failed tariff strategy is crucial.
The executive branch should rejoin the Trans-Pacific Partnership and engage the World Trade Organization’s dispute resolution process to encourage reform in China. But Congress has plenty to do, too. The time to start is now.
Read the whole thing here.
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Roger Crowley – City of Fortune: How Venice Ruled the Seas
Covering roughly 1200 to the mid-15th century, Crowley covers Venice’s rise and fall as one of the world’s major maritime trading powers. He writes vividly, quotes often from primary sources, and evokes an outward-looking, freewheeling, audacious cultural attitude in Venice–very different from the rest of Europe at that time.
That culture, more than a key geographical location, is a major reason why Venice was the richest city in Europe during this period. It fought with Genoa for that honor, sometimes violently.
Crowley also develops an important East-meets-West theme. Venice was involved in the Fourth Crusade, which resulted in the sacking of Constantinople in the early 1200s. To give an idea of the Crusades’ bumbling nature, Constantinople was a Christian city at the time.
Tragic comedy aside, Venetian traders were some of Europe’s only ambassadors to the Near and Far East during this time. They brought back spices, fabrics, and other goods, sadly including slaves. By the 1400s, as the neighboring Byzantines were falling to the Ottomans, Venice found itself dealing with a new commercial and political rival.
Meanwhile, as the rest of Europe cracked open the Great Chain of Being and the Renaissance encouraged more modern attitudes to commerce and progress, Venice entered a period of relative decline as other cities began to catch up and even outshine it during the Renaissance.
Ronald Coase and Ning Wang – How China Became Capitalist
China’s post-Mao transformation has been incredible, but suffers from a lack of policy certainty. Fits and starts, stops, and reverses happen at seemingly random times and places, making long-term investments extremely risky. More importantly, China’s growth is ultimately limited by a lack of a viable marketplace of ideas, both in politics and in business. If China liberalizes, its future is bright. if not, then not.
Coase was 101 years old when this book was published. He was a fully contributing coauthor; his intellectual fingerprints are all over this book, from pointing out the limitations of blackboard economics to his love of Adam Smith’s Theory of Moral Sentiments. An incredible accomplishment, and a useful one for this analyst.
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Review of Clashing over Commerce: A History of U.S. Trade Policy by Douglas Irwin (University of Chicago Press, 2017).
Douglas Irwin’s magnum opus, published at the end of 2017, is already a classic. Given the prominent role trade is playing in politics right now, it is also very timely. At almost 700 pages, “Clashing over Commerce” looks intimidating. But once you start reading, it isn’t. Irwin tells a coherent story that spans generations, showcasing the prominent personalities in the great trade debate, their larger philosophical and economic arguments, and the legislation and policies they fought over. It hits on all levels.
At the same time, Irwin’s chronological structure also makes it easy to focus on one area of interest. So readers, take advantage of the index and the table of contents if you don’t care to read the whole thing.
Interested in how tariffs contributed to the Civil War? Turn to chapter 4. Interested in the Depression-era Smoot-Hawley tariff? Go to chapter 8 (Irwin also wrote a whole book, “Peddling Protectionism,” on Smoot-Hawley). The World Trade Organization and the bi- and multi-lateral trade agreements in today’s controversies get their due in later chapters.
One of Irwin’s biggest takeaways is that the trade debate’s basic arguments haven’t changed much over the years. President Thomas Jefferson embargoed British trade for both economic and national security reasons, and the policy was a failure. The current administration can learn from the precedent in its ongoing scrap with China.
The industrializing North’s advocacy for tariff protection against foreign competition was one of the 19th century’s biggest rent-seeking stories, and added to North-South tensions both before and after the Civil War. There are important lessons here for tamping back today’s corporate welfare and cultural divisions. The period also spawned the wonderfully-named 1828 Tariff of Abominations.
“Infant industry” protection arguments were as wrong for the 1890s tinplate industry as they are for today’s technology and green-energy industries.
Franklin Roosevelt’s Secretary of State, Cordell Hull, argued that if goods do not cross borders, soldiers will. His words are as wise today as they were when World War II broke out. Cordell’s sentiments also guided a postwar trading system that emphasized peace as much as growth. That system sharply reduced tariffs worldwide until last year. It is an important reason why absolute poverty is now below ten percent of world population for the first time, and war and other forms of violence are continuing their long-run decline.
Irwin identifies another larger theme that applies to issues far beyond trade and tariffs: mission creep. Tariffs were originally intended only to raise revenue. Protective tariffs were strictly forbidden. Of course, a tariff is a tariff, no matter the reason. Alexander Hamilton was one of the first advocates of a national government-directed industrial policy, and tariffs played a major role in his vision.
His proposals were mostly shot down, but as the years went by, more and more people followed Hamilton’s lead. Some were rent-seeking opportunists using Hamilton’s arguments as fig leaves. But other protectionists were sincere, espousing everything from nationalism, anti-foreign sentiment, and economic imperialism to arguments about economic efficiency and saving on transportation costs.
The process continued even after the 16th Amendment passed in 1913, and the new income tax displaced tariffs as the primary federal revenue source. Today, even after Trump’s doubling of tariffs, they raise less than one half of one percent of federal revenue. Tariffs are now strictly for tilting the economic playing field.
Today, the mission creep has gone global. Tariffs have become a brinksmanship tactic—I won’t lower my tariffs unless you lower yours first. This is folly, of course. As the economist Joan Robinson said, if your trading partner dumps rocks in his harbor, the solution is not to dump rocks in yours.
Trade agreements have also become a negotiating tool, and have creeped beyond just tariffs. It is now standard procedure to add trade-unrelated provisions to trade agreements, such as labor, environmental, and regulatory policies. Activists and rent-seekers both find fertile ground here.
In a classic Baptist-and-bootlegger dynamic, labor activists advocate adding expensive labor regulations to trade agreements to hobble foreign competition, though they publicly cite the need to improve foreign working conditions. Environmental activists are often willingly played by rent-seeking green energy producers to advocate for windfall environmental standards and other lucrative non-trade clauses. Steel and other manufacturing industries play to peoples’ nostalgia and patriotism to get their own special favors added to agreements.
All this is a far cry from the original neutral-revenue tariff. This continuing development is why Irwin divides his book into three main eras—revenue, restriction, and reciprocity. Revenue raising became protectionism, and now tariffs are a reciprocal weapon in international negotiations. When the Trump trade war cools down, Irwin will need to add an especially eventful chapter to an updated edition. Hopefully future years will inspire a fourth era—one of openness, peace, and free trade.
Previous posts in the Best Books of 2018 series:
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Donald J. Boudreaux – Free Trade and How it Enriches Us
This 2018 Institute for Economic Affairs monograph is right in Don’s wheelhouse: a clear and principled primer on the economics of trade, and how it benefits people in ways both big and small. Don focuses on the core areas; specialization, comparative advantage, employment, and the trade deficit. If you have only an afternoon to learn trade policy, this is the place to go. For bite-size daily doses of economic education on trade and other economic issues, Don’s Cafe Hayek blog is one of the best in the business.
Inertia Wins! 