Category Archives: International

Bastiat on Trade and National Security

From page 86 of the Liberty Fund edition of Frederic Bastiat’s collected works, Economic Sophisms and “What Is Seen and What Is Not Seen”:

“What will we do in case of war,” [French] people say, “if we are subject to England’s discretion with regard to iron and coal?”

Monopolists in England, for their part, unfailingly proclaim:

“What would become of Great Britain in time of war if she were dependent on France for her food?”

We tend to disregard one fact, which is that this type of dependence resulting from trade and commercial transactions is mutual. We cannot be dependent on foreigners without them being dependent on us.


Restating the Case for Free Trade

The case for free trade needs to be restated frequently. Politicians keep pushing the same protectionist policies, as though maybe this time the results will be different. President Trump copied Herbert Hoover’s Smoot-Hawley tariffs. President Biden is copying Trump’s trade policies. They do this in part because voters want them to. As economist Bryan Caplan has documented, most people have anti-market bias and anti-foreign bias, and vote for candidates who cater to those biases.

That means that year after year, market liberals need to keep making the case for free trade’s benefits for prosperity, peace, and its importance for resiliency against crises and shortages. Lasting change comes from the bottom up, not the top down, so that’s where we need to focus our efforts. The latest attempt at popular persuasion, “The (Updated) Case for Free Trade” by the Cato Institute’s Scott Lincicome and Alfredo Carillo Obregon, is worthy of its task. It consists of both a paper and a fantastic website that is worth a scroll.

They hit on several fronts, first by making the economic case for free trade: “The payoff to the United States from expanded trade between 1950 and 2016 was $2.1 trillion, increasing GDP per capita by around $7,000 and GDP per household by around $18,000.” With an economy still feeling the effects of COVID-19 and inflation at a 40-year high, trade’s benefits are essential for millions of families.

They then make the geopolitical case for free trade, as have thinkers from Montesquieu in the 18th century to former Secretary of State Cordell Hull during World War II. Countries that trade with each other rarely go to war with one another. This, not boosting GDP, was the animating principle behind the post-war rules-based international trading system anchored by General Agreement on Tariffs and Trade and then the World Trade Organization. Deep trading relationships are also essential for building diplomatic alliances, which are needed today against Russia and China.

Most importantly, they make the moral case for free trade. Too many economists ignore trade’s moral goodness; Lincicome and Obregon emphasize it. Post-WWII trade liberalization was a significant factor in reducing worldwide extreme poverty from 2.2 billion people in 1970 to 705 million in 2015. That’s a two-thirds reduction in absolute terms, even as global population roughly doubled. In percentage terms, the change is even starker. Extreme poverty was 42.6 percent of world population in 1981 and 8.6 percent in 2018. That’s a four fifths reduction in the proportion of people in extreme poverty, in less than 40 years. Never in human history has anything like this ever happened before, and trade is one of the engines behind it.

That progress is measured in dollars, but it’s not really about money. It’s about reducing infant mortality, and sending kids to school instead of to work in the fields. It’s about access to sanitation, electricity, and medical care. It’s about each generation finally living better than the one before it, even in the poorest places on Earth. Hans Rosling’s book Factfulness shows how deeply trade-enabled growth has improved people’s lives. Trade gives people hope, opportunities, and progress.

The authors then make the case against protectionism, which has guided trade policy for both the Biden and Trump administrations. In addition to puncturing myths about manufacturing, the balance of trade, and self-sufficiency, they point to good policies that policy makers should adopt.

Free trade is about more than removing obstacles. It is about creating an institutional structure under which people—not politicians and special interests seeking protection—can cooperate, compete, and resolve disputes in ways that they choose.

Cato’s web team put together an excellent website summarizing the case for free trade; Lincicome and Obregon’s paper is also a good read.

These are not the only resources for people interested in the case for free trade. Iain Murray and I wrote the report “Traders of the Lost Ark” a few years ago. Pierre Lemieux’s What’s Wrong with Protectionism?is a fantastic short book. The magnum opus of America’s complicated relationship with free trade is Doug Irwin’s Clashing Over Commerce, the paperback edition of which blurbs my review on the back cover.

Trade, Mission Creep, and the Indo-Pacific Economic Framework

President Biden announced this week a major economic agreement with a dozen countries in the Indo-Pacific region, to be called the Indo-Pacific Economic Framework (IPEF). Its goal is to provide a larger diplomatic and economic counterweight to China and increase America’s presence in Asia.

At first glance, it seems like an odd move. President Obama had already negotiated the Trans-Pacific Partnership (TPP) with many of the same countries in IPEF. President Trump pulled out of the TPP when he took office, but all the other member countries continued on without U.S. involvement under the renamed Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Negotiating costs for rejoining TPP/CPTPP would likely be minimal, while the economic benefits of more open trading relationships will help offset America’s high monetary inflation. As a political bonus, President Biden would be undoing a major part of the Trump trade agenda. So why is Biden starting with a new agreement from scratch? I argue that it’s part of a long-term evolution in how governments are treating trade policy.

One difference is that IPEF has a different regional focus. The TPP/CPTPP focuses on the Pacific Rim, so it has members in South and Central America, not just Asia. IPEF focuses on China’s neighbors, most significantly India. America is IPEF’s only non-Asian member. So, the different diplomatic focus explains part of it.

Another factor for choosing IPEF over rejoining TPP/CPTPP is political: It will not require Senate confirmation. That is a large hurdle at any time, but with Republicans likely to take over the Senate, they would be unlikely to give President Biden a victory, despite their sharing a protectionist trade outlook.

But the broader reason, about which I am more concerned, may be mission creep. I will hold off on further judgments on IPEF until more details become public, but the point about trade policy’s loss of focus on trade is important enough to discuss now.

The North American Free Trade Agreement (NAFTA), which went into effect in 1994, was accompanied by side agreements on non-trade issues, specifically environment and labor. This was a first for major trade agreements. Those side agreements are why CEI originally opposed NAFTA. Our analysts at the time favored the free trade parts of the bill, but they did not like the precedent set by the trade-unrelated side agreements. They had a point. In the years that followed, trade-unrelated issues took on greater prominence in new agreements, and their page lengths ballooned accordingly.

By the time President Trump replaced NAFTA with the United States-Mexico-Canada Agreement (USMCA), NAFTA’s non-trade side agreements were folded into the main agreement, which is now more than 2,000 pages long. During the Obama era, trade agreements began to lose the word “free” from their names. President Trump took it even further. As I pointed out at the time, “USMCA’s name does not contain the words ‘free’ or ‘trade.’ This is symbolism, but also important.”

It also accurately reflected the contents. This shift in emphasis is why Iain Murray and I came out against USMCA. We liked that it would mostly preserve NAFTA’s zero-tariff relationships with Mexico and Canada, but those were already in place, and all the new trade-unrelated provisions meant more net burdens and more opportunities for cronyism.

IPEF represents the next logical step in that process. Again, details to come. But the administration’s early remarks make it seem that rejoining TPP is not on the agenda and that IPEF will have little to do with trade. At least TPP treated trade relations seriously. USMCA’s bad precedent has likely borne bad fruit.

We’ll soon see what IPEF contains. But if it is a multi-issue thicket of ideological wish list items and special favors for politically connected interest groups, its member countries may end up bickering about small provisions when they should be cooperating on the big picture of building together a counterweight to China.

One Way to Block Reforms: Capture the Lawyers

From p. 23 of Richard McGregor’s 2010 book The Party: The Secret World of China’s Communist Rulers:

“About one-third, or 45,000, of the 150,000 registered lawyers in China as of May 2009, were party members. Nearly all law firms, about 95 percent, had party committees, which assessed lawyers’ pay not just according to their legal work, but to their party loyalty as well. Far from being a weakness, the Party considers its penetration of the legal system to be a core strength.”

Economists often write of regulatory capture, in which regulated industries capture the agencies that regulate them, and use that relationship to feather their each other’s nests. It turns out this can also happen in the opposite direction, and governments can capture industries.

Steel, Aluminum Tariffs to Remain Above Pre-Trump Levels

It is not asking much to undo President Trump’s doubling of U.S. tariffs, which are a major contributor to today’s supply network crisis. But apparently even this is asking too much from an administration that largely shares Trump’s economic views. While the weekend’s news about the easing of steel and aluminum tariffs against the European Union was welcome, it is too small to do much good. Nor does it treat root problems.

The tariffs will actually remain in place. The U.S. will simply allow 3.3 million metric tons of EU-made steel into the U.S. duty-free before charging tariffs. For context, U.S. producers made 72 million metric tons of steel in 2020, so the exemption will have only a small effect on steel prices. Shipments beyond 3.3 million metric tons will still be charged a 25 percent tariff. In addition, the EU agreed to not enact new retaliatory tariffs that were scheduled to take effect on December 2.

Not imposing new tariffs is different from lowering existing ones. It also has a much effect. Under the new agreement, all other existing trade barriers will remain in place. Total U.S.-EU trade barriers will remain higher than they were four years ago. This is bad news for consumers and producers on both sides of the Atlantic, at a time when prices are rising and supply networks are strained.

The agreement even adds new trade restrictions where there were none before. The New York Times reports:

The agreement will also place restrictions on products that are finished in Europe but use steel from China, Russia, South Korea, and other countries. To qualify for duty-free treatment, steel products must be entirely made in the European Union.

Tariffs mean higher prices. The new exemption’s small size means that steel and aluminum prices will remain above pre-tariff levels. Cars, construction, and other steel-using industries will continue to have shortages and higher consumer prices.

The exemption will also do little to relieve strained supply networks. For example, there is now a shortage of truck trailers, called chassis, used for hauling shipping containers to and from ports. Chinese-made chassis are currently subject to 220 percent tariffs, which makes them unaffordable for many smaller trucking companies. Washington’s goal is to have them buy American-made chassis instead.

The trouble is that those tariffs also allow U.S. chassis producers to keep their prices high. They don’t have to worry about truckers turning to competitors—which is ironic in a time of rising antitrust enforcement. While that goes straight to the chassis makers’ profit margins, it harms everyone else. Ports stay clogged, truckers can’t do much to help unclog them, and consumers face higher prices and shortages. About the only winners are domestic steel producers and their labor unions, which is likely the point.

The U.S.-EU trade dispute also remains unresolved. This agreement is more of a cease-fire. A law of tariffs, rediscovered during the Trump era, is that other countries nearly always retaliate in kind against new tariffs. What happened here is that the U.S. is partially rolling back one of its new tariffs, and the EU is rolling back its retaliation. Nothing has been liberalized on net. Other long-running disputes over aerospace subsidies and other issues remain in play.

COVID-19 is still hampering the economy and supply networks are still in crisis. Now would be a good time for actual trade liberalization, rather than merely preventing another round of protectionist escalation. But on trade, as with many other issues, the Biden administration is difficult to tell apart from its predecessor.

Peter the Great’s Tax Policy Innovations

From p. 401 of Peter K. Massie’s 1980 biography, Peter the Great: His Life and World:

The Tsar’s demands for money were insatiable. In one attempt to uncover new sources of income, Peter in 1708 created a service of revenue officers, men whose duty it was to devise new ways of taxing the people. Called by the foreign name “fiscals,” they were commanded “to sit and make income for the Sovereign Lord.” The leader and most successful was Alexis Kurbatov, the former serf of Boris Sheremetev who had already attracted Peter’s attention with his proposal for requiring that government-stamped paper be used for all legal documents. Under Kurbatov and his ingenious, fervently hated colleagues, new taxes were levied on a wide range of human activities. There was a tax on births, on marriages, on funerals, and on the registration of wills. There was a tax on wheat and tallow. Horses were taxed, and horse hides and horse collars. There was a hat tax and a tax on the wearing of leather boots. The beard tax was systematized and enforced, and a tax on mustaches was added. Ten percent was collected from all cab fares. Houses in Moscow were taxed, and beehives throughout Russia. There was a bed tax, a bath tax, and inn tax, a tax on kitchen chimneys and on the firewood that burned in them. Nuts, melons, cucumbers were taxed. There was even a tax on drinking water.

Money also came from an increasing number of state monopolies. This arrangement, whereby the state took control of the production and sale of a commodity, setting any price it wished, was applied to alcohol, resin, tar, fish, oil, chalk, potash, rhubarb, dice, chessmen, playing cards, and the skins of Siberian foxes, ermines, and sables. The flax monopoly granted to English merchants was taken back by the Russian government. The tobacco monopoly given by Peter to Lord Carmathen in England in 1698 was abolished. The solid-oak coffins in which wealthy Moscovites elegantly spent eternity were taken over by the state and then sold at four times the original price. Of all the monopolies, however, the one most profitable to the government and most oppressive to the people was the monopoly on salt. Established by decree in 1705, it fixed the price at twice the cost to the government. Peasants who could not afford the higher price often sickened and died.

And from p. 402:

No matter how much the people struggled, Peter’s taxes and monopolies still did not bring in enough. The first Treasury balance sheet, published in 1710, showed a revenue of 3,026,128 rubles and expenses of 3,834,418 rubles, leaving a deficit of over 808,000 rubles. This money went overwhelmingly for war.

In the News: Facebook’s Antitrust Case

I’m quoted, in French, in Paris’ Le Monde newpspaper about the FTC’s revised antitrust complaint against Facebook:

La FTC « joue sur les mots », abonde Ryan Young du think tank Competitive Enterprise Institute. Pour lui, l’autorité s’est juste « arrangée pour exclure TikTok, Twitter, Clubhouse, Discord, et d’autres de ce marché »« Tout marché est un monopole si vous le définissez de façon suffisamment étroite, et c’est la seule chose que la plainte de la FTC prouve réellement. »

An English-language version of the same story in Techxplore says:

But Ryan Young of the Competitive Enterprise Institute countered that the FTC complaint “relies heavily on wordplay” to define Facebook as a monopoly.

“It argues that Facebook dominates the market for ‘personal social networking services,’ then defines that term in just such a way that excludes TikTok, Twitter, Clubhouse, Discord and others from that market,” Young said.

“Any market is a monopoly if you define it narrowly enough, and that is the only thing the FTC’s complaint successfully proves.”

A Better Approach to Tariff Diplomacy

In diplomacy, carrots tend to be more effective than sticks. Yet, two consecutive administrations have used tariff threats to try to achieve their objectives. Former President Trump did four rounds of back-and-forth tariffs against China, and President Biden is trying it now to counter proposed digital taxes from six mostly European countries. The strategy has yet to work. Over at National Review, I take a look at a better way: Rather than threaten new tariffs, promise to remove old ones as a sweetener.

Why not scrap Trump’s steel and aluminum tariffs in exchange for scrapping proposed digital taxes? Carrots are often more effective than sticks.

The metal tariffs will also likely be an issue at this week’s United States–European Union summit. European leaders want a December 1 deadline for ending them. In return, they would end the retaliatory tariffs they immposed in response. A digital tax moratorium should also be part of the deal.

Here at home, the metal tariffs are slowing the COVID recovery by raising auto and housing prices, which were already at record highs. They are also causing needless diplomatic frictions with allies. Removing them is a win-win.

Even if the diplomatic goal fails—there are no guarantees in foreign policy—the lower tariff would still help the U.S. economy. Read the whole thing here.

Boeing-Airbus Dispute Remains Unsolved: Tariffs Gone, Subsidies Stay

The European Union and the United States eagerly announced today that they had resolved their 17-year dispute over aerospace subsidies. They exaggerate their claims. It is good news that both sides are standing down on tariffs for at least five years. But the reason for the dispute in the first place was over subsidies to Boeing and Airbus. Those will remain in place.

The tariffs that each side levied on the other had the explicit goal of stopping the subsidies. The World Trade Organization even allowed tariffs on each side to go through, on the theory that these wrongs were intended to make a right. But as usually happens with tariff-based diplomacy, it didn’t work. As a result, industries from cheese and wine to motorcycles had to deal with tariffs for years over a dispute they had nothing to do with. And now that the tariffs are going away, they didn’t accomplish their actual goal.

Why are the U.S. and EU suddenly OK with each other’s aerospace subsidies? China. China’s aerospace sector is heavily subsidized. Both Europe and the U.S. feel it is better to work together to counter China than to squabble with each other.

Their fears may be exaggerated, though. Industries that rely on subsidies and are essentially government enterprises tend not to be very competitive in the long run. Yes, China’s aerospace market share is increasing, but subsidized and protected industries grow soft. Their corporate cultures are closer to the Post Office than to Silicon Valley startups. So are their rates of innovation.

Still, for the sake of argument, assume that China’s model of government subsidies and control does work in the long run, and Boeing and Airbus become also-rans. Relatively poor Chinese taxpayers would essentially foot the bill for relatively wealthy American and European airlines and travelers. This is income redistribution in reverse. Even this unlikely best-case scenario is unwise policy from China’s perspective.

Most of the 20th century’s economic history showed that state planning doesn’t work. Even if Boeing, Airbus, and their captured politicians think the short term looks scary, there is no reason for this current instance of state capitalism to be any different in the long run.

This week’s decision to remove the Boeing-Airbus dispute tariffs was a wise one. But if the goal is to make the aerospace industry more competitive, President Biden and European leaders did not do that. They need to end subsidies that make companies soft and dependent. The best way to counter China’s state-run enterprises is not with our version of the same thing. It is with actual enterprises.

Some of my earlier commentary on the Boeing-Airbus dispute is here. My papers on the Export-Import Bank, whose billions of dollars in annual assistance to Boeing played a starring role in the dispute, are here and here.

Science, Openness, and Peace

From pp. 352-353 of Richard Holmes’ immensely enjoyable history of science in the early Romantic period, The Age of Wonder:

On 2 November [the British chemist and forefather of anesthesia Humphry] Davy received the Prix Napoléon (worth 6,000 livres) from the Institut de France in Paris. He knew that accepting the award might be unpopular in wartime England, but followed [British scientist and explorer Joseph] Banks’ line at the Royal Society that science should be above national conflicts. He told [tanner and essayist] Tom Poole: ‘Some people say I ought not to accept this prize; and there have been foolish paragraphs in the papers to that effect; but if the two countries or governments are at war, the men of science are not. That would, indeed, be a civil war of the worst description: we should rather, through the instrumentality of men of science, soften the asperities of national hostility.’

Montesquieu’s doux commerce thesis is that trade promotes peace and prevents war. Here, Humphry Davy, who is not as famous as he should be in the history of science, makes the same argument for science. When ideas and discoveries cross borders, it is less likely that soldiers will. This is an important point in today’s political climate of growing nationalism.