Remove Trade Barriers

December 25, 1961

So many strands have become twisted and tangled together in our discussion of foreign-trade policy that a first task is to unravel a few for separate consideration.

1—The President deserves the fullest support in his advocacy of greater freedom of trade. But we must be clear concerning precisely why freer trade is desirable. The chief reason is that free trade maximizes the economies and efficiencies of world production. When each country devotes itself to producing what it can produce better and cheaper than any other, world production and consumer satisfactions are maximized.

2—From the standpoint of each country, the only direct advantage of foreign trade consists in the imports. It is through these that a country obtains the things it either could not produce at all, or produce only at a greater cost than the cost of what it exports to pay for them. As John Stuart Mill insisted, it is what a country obtains from foreign trade, not what it parts with, that constitutes the real gain to it. At points in his speech to the NAM, Mr. Kennedy recognized this: “We need those imports to give our consumers a wide choice of goods at competitive prices.” But more often he talked as if the real gain were in greater exports. Thus when he quoted favorably the “British” (unfortunately also the Hitler) slogan “Export or Die,” he forgot its basic meaning. The meaning was that unless a manufacturing country exported enough to pay for its necessary imports of foodstuffs and raw materials, it would die.

3—In the long run, the number of “jobs” is irrelevant to the height of trade barriers. The real difference is that when trade barriers are high production is less efficient and real wages are lower. If lower trade barriers give more jobs in export industries, they may take away a corresponding number of jobs in industries hurt by imports. It is a sudden raising or lowering of tariffs that disrupts the balance of industries and creates unemployment. As changes either way are unsettling, they should be infrequent and gradual.

4—Sweeping and sudden tariff changes are therefore to be avoided. More study should be given to gradualism. Even if it is decided, for example, that an ad valorem duty of 60 percent on some import ought to be completely abolished, it might be better to reduce it by 1 percentage point a month over five years than with an ax. The worst way of making such an adjustment is by subsidies to home industry. These would breed discrimination, favoritism, and corruption, and tend to be self-perpetuating. They would nullify the very purpose of lower tariffs.

5—Today tariff levels are among the least rather than the most important barriers to international trade. One of the worst barriers is the import quota system, as on petroleum and sugar. Import quotas are discriminatory, arbitrary, inflexible, and an instrument of political favoritism. A first step should be to abolish them and substitute a non-discriminatory tariff, which would at least permit price and efficiency competition among individual importers and exporters.

6—If the Administration favors freer foreign trade, its policy must be consistent. It must abandon such efforts to discourage imports as the drastic reduction of duty-free tourists allowances. It must abandon its short-sighted discouragement of American foreign investment, or its attempt to force such investment into the areas where it thinks it should go rather than where investors want to put it. It must abandon its efforts to dump our agricultural “surpluses” (created by government policy) onto foreign markets. It must stop subsidizing raw cotton exports and penalizing the American textile industry.

7—Finally, it should halt the inflation which is making it increasingly difficult for American manufacturers to compete abroad. It must change the legal and political setup that encourages excessive wage rises. Mr. Kennedy, in his speech to the NAM, promised to “stress” the need for wage restraint in addressing the AFL-CIO, but merely expressed a “hope” that was dashed the next day by his Secretary of Labor’s insistence that there was “plenty of room” for further wage increases and that the Administration did not “propose in any way to restrict the ability of collective bargaining” to get them.