Monday, November 13, 2006

What Do Patrick Buchanan And The New Democratic Congress Have In Common?

Answer: An antipathy towards free trade.

As Buchanan makes clear here, he remains a staunch opponent for free trade, disguising his economic philosophy with a flag of patriotic nationalism. He asks:
But if the free-trade era is over, what will succeed it?

A new era of economic nationalism. The new Congress will demand restoration of its traditional power to help in shaping trade policy. When the U.S. trade deficit for 2006 comes in this February, it will hit $800 billion, pouring more fuel on the fire.

A rising spirit of nationalism is evident everywhere in this election, not simply in the economic realm. Americans are weary of sacrificing their soldier-sons for Iraqi democracy. They are weary of shelling out foreign aid to regimes that endlessly hector America at the United Nations. They are tired of sacrificing the interests of American workers on the altar of an abstraction called the Global Economy. They are fed up with allies long on advice and short on assistance.

Other leaders in other lands look out for what they think is best for their nations and people. Abstractions such as globalism and free trade take a back seat when national interests are involved.

We are entered upon a new era, a nationalist era, and it will not be long before the voices of that era begin to be heard.

Free trade was, in a sense, the "stealth" issue of the recent elections, as it received little public attention and yet is perhaps the foreign policy issue on which Congress can have the most effect. And while few candidates made trade their main issue, there is a lot of evidence that many of the new Congresspeople share Buchanan's opposition to free trade. For example, Jacob Weisberg writes in Slate:

Many of the Democrats who recaptured seats held by Republicans have been described as moderates or social conservatives, who will be out of synch with Speaker-to-be Nancy Pelosi. The better term, with props to Fareed Zakaria, is probably illiberal Democrats. Most of those who reclaimed Republican seats ran hard against free trade, globalization, and any sort of moderate immigration policy. That these Democrats won makes it likely that others will take up their reactionary call. Some of the newcomers may even be foolish enough to try to govern on the basis of their misguided theory.

...An even harder-edged nationalism defined many of the critical House races, where Democrats called for a moratorium on trade agreements, for canceling existing ones, or, in some cases, for slapping protective trade tariffs on China. These candidates also lumped illegal immigrants together with terrorists and demanded fencing and militarization of the Mexican border. In Pennsylvania, Democratic challengers Chris Carney and Patrick Murphy defeated Republican incumbents by accusing them of destroying good jobs by voting for the Central American Free Trade Agreement and being soft on illegal immigration. "Fair trade" candidates also won back formerly Republican seats in Ohio, Indiana, Iowa, North Carolina, and Wisconsin. Jerry McNerney, who defeated 14-year Republican incumbent Richard Pombo in California, says on his Web site: "I am deeply worried about the way this nation is plunging head-long into the global economy without a plan or a national consensus."

Sebastian Mallaby of the Washington Post echoes Weisberg's fears on trade, writing:

During their long years in the wilderness, Democrats lashed out against trade and globalization, even though denying the economic case for trade is like pretending that tax cuts pay for themselves. Now that they have won Congress, the Democrats must prove that they are more than the mirror image of their opponents. This means reviving the pro-market centrism of the Clinton era -- a spirit that lives on in the form of the Hamilton Project.

...During the recent congressional campaign, Democratic candidates mostly had the right diagnosis and the wrong prescriptions. They saw that middle-class and poor Americans have not experienced wage gains during the past five years of growth, and they saw that families are one health crisis away from financial hardship. But the Democrats' remedies -- bashing Wal-Mart, railing against globalization -- offered little more than symbolism for the poor and middle class while promising damage to the economy.

Why is trade is a critical issue? Because protectionism, even when garbed with the much nicer "fair trade" moniker, can create devasting economic inefficiencies. For example, Walter Williams points out:

The Washington-based Institute for International Economics has assembled data that might help with the answer. Tariffs and quotas on imported sugar saved 2,261 jobs during the 1990s. As a result of those restrictions, the average household pays $21 more per year for sugar. The total cost, nationally, sums to $826,000 for each job saved. Trade restrictions on luggage saved 226 jobs and cost consumers $1.2 million in higher prices for each job saved. Restrictions on apparel and textiles saved 168,786 jobs at a cost of nearly $200,000 for each job saved....

A lot is at stake for those in the sugar industry, workers and bosses. They dedicate huge resources to pressure Congress into enacting trade restrictions. But how many of us consumers will devote the same resources to unseat a congressman who voted for sugar restrictions that forced us to pay $21 more for the sugar our family uses? It's the problem of visible beneficiaries of trade restrictions, sugar workers and sugar bosses, gaining at the expense of invisible victims -- sugar consumers. We might think of it as congressional price-gouging.

It gets worse. Not only is protectionism an unabashed economic loser, it also most hurts the very people the Democratics typically claim as their constituents. From Edward Gresser's Toughest on the Poor in the Nov/Dec issue of Foreign Affairs:

Tariff policy, without any deliberate intent, has evolved into something astonishingly tough on the poor. Young single mothers buying cheap clothes and shoes now pay tariff rates five to ten times higher than middle-class or rich families pay in elite stores. Very poor countries such as Cambodia or Bangladesh face tariffs 15 times those applied to wealthy nations and oil exporters.

Last year, the U.S. Customs Service collected $18.6 billion in tariff revenue on $1.1 trillion in goods imports -- meaning the effective U.S. tariff rate is 1.6 percent. But the low overall average masks something more troubling. Tariffs on industrial imports are not just low but extremely
low. For expensive consumer goods such as cars, appliances, and televisions, rates are also generally low and are further reduced in practice by trade agreements with Mexico and Canada. But for light consumer goods, the story is different. Tariffs on these products (with a few
exceptions, such as toys and furniture) remain at levels other industries last saw in the 1960s and 1970s: for instance, 8.7 percent for cutlery and tableware, 13.8 percent for suitcases and handbags, 10 percent for bicycles, and 11.4 percent for shoes and clothes, the largest category of consumer imports for the United States. In effect, the United States now has two tariff systems.
One, for low- tech consumer goods, has an average rate of 10.5 percent. The other, for everything else, has an average rate of 0.8 percent.

Cheap sneakers valued at $3 or less per pair carry tariffs of 48 percent (a rate, incidentally, far above that of any product on the administration’s steel list). Virtually none of these shoes is made in the United States. Last year, the United States imported 16 million pairs of these sneakers, at a total cost of $35 million. Thus the average price at the border was $2.20 per pair. The Treasury Department then collected $17 million in tariffs, adding another $1.06 per pair to the buyers’ cost. The extra dollar and change is then magnified by retail markups of around 40 percent and state sales taxes of about 5 percent to raise the final consumer price of the sneakers from about $3.25 (without tariffs) to $4.80 per pair (with tariffs).

Such tariff-based overpricing exists, though at less dramatic levels, in store aisles stocking baby clothes, T-shirts, silverware, and other typical family products. Because it is most pronounced on the cheapest shoes and clothes, its effect falls most heavily on single-parent families.
Incomes for these families are very low: at an average of about $25,100 per year, they are about 40 percent of a typical two-parent family’s income. But single-parent families face shoe and clothing bills nearly as high as those of wealthier families. In total, the average singleparent
family spends nearly $2,000 a year on clothes and shoes. Depending on the mix of purchases, as much as $400 of this total may simply be price inflation due to tariffs. Budgets for other tariffed goods, though smaller, are still a larger expense relative to income for poor families than for rich families. And so single-parent families lose much more of their income to tariffs than do other

Average tariffs on European exports to the United States -- primarily cars, power equipment, computers, and chemicals -- now barely exceed one percent. Developing countries such as Malaysia, which specialize in information-technology products, get rates just as low. So do natural- resource exporters such as Saudi Arabia and Nigeria. Middle-income exporters that ship a broader variety of goods, such as China, Thailand, and Brazil, face rates typically between two percent and four percent -- above average but still not exorbitant. The least-developed
Asian countries, however, take it on the chin. For Bangladesh, Cambodia, Nepal, Mongolia, and a few others, clothes make up 90 percent of all exports to the United States. So they face average tariff rates of 14.6 percent -- nearly 10 times the world average, and 15 times the rate for wealthy Western countries. Translated into real dollars, the disparities can be remarkable.
As Table 3 notes, the U.S. now collects more tariff revenue from Bangladeshi goods than from French goods, even though Bangladesh exports $2 billion in goods a year to the United States and France $30 billion. Cambodia’s exports to the United States total $900 million and
Singapore’s usually reach $15-$20 billion -- but the U.S. government collects nearly twice as much revenue from Cambodian goods as from Singaporean goods.
What explains the willingness to impose such massive economic costs on the poorest American citizens, the poorest developing countries, and the US and global economy as whole? Trade presents an exceedingly difficult collective action problem that makes those opposed to it much more political powerful than those in favor of free trade. Returning to the sugar example, each US citizen may be $21 more each year due to sugar trade, but that loss is disguised in hundreds or thousands of transactions containing sugar. However, the 2,261 people whose jobs were saved, and would be at risk from free trade have much more to lose. Their potential costs are concentrated and huge. Sugar workers will lobby much louder for protection that will the free traders.

It's still too early to predict that a Democratically-controlled Congress will scuttle free trade. Indeed, just recently leading Democrats declared that there would be no problem admitting Vietnam in to the WTO. But, free trade is far to important to this country, the international political and economic environments (let's not forget the Smoot-Hawley Tariff), and the country's and the world's poor to let it be undermined by economic and political nationalists. For those Democratic voters who did such a great job making your voices heard, don't drop the ball on this one.

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