Free Trade and Foreign Wars; S. Husbands, Jr.

SamH.Husbands,J~ FREE TRADE AND FOREIGNWARS IT is my purpose to show that though the principles of free trade and no entangling alliances on which the nation was founded were unique and sublime, we find that economic fal lacy, misplaced patriotism, and po litical compromise have combined to undermine the legacy of those principles. In his first annual address to Con gress in 1790, George Washington said "Observe good faith and justice toward all nations. Cultivate peace and harmony with all ... The na tion which indulges toward another an habitual hatred or an habitual fondness is in some degree a slave. Mr. Husbands of San Francisco is a member of a national investment banking firm. He is a Trustee and past Chairman of the Board of The Foundation for Economic Education. This article is from his address at the Fall Meeting of the Board and guests at the Foundation, December 5,1982. It is a slave to its animosity or to its affection, either of which is suffi cient to lead it astray from its duty and its interest ... it is our true pol icy to steer clear of permanent alli ances with any portion of the foreign world."

In his first inaugural address in 1801 Thomas Jefferson stated that among his essential principles of governing would be a policy of "peace, commerce and honest friendship with all nations-entangling alliances with none." And so it was that the founding fathers understood that for free men to remain free they must remain strong in their defense but avoid meddling in other nations' affairs. The test of that resolution to re main free of foreign wars was to con front Washington and Jefferson in 195 196 THE FREEMAN April the first years of the Republic. A combination of events, including legislation passed as the Merchant Marine Act of July 4, 1789 and the acts of a quartet of Barbary powers were leading the nation to its first experience in foreign intervention, the results of which were as ambig uous as any of the dozen or so adven tures abroad that were to follow to this day. The Merchant Marine The 1789 Merchant Marine Act instituted tariffs for revenue pur poses, but with a tariff differential of 10% on any goods shipped in American holds. The effect in stim ulating the growth of a distinctly American Merchant Marine was startling, for in 1789 the United States was carrying 171/2% of her imports and 30% of her exports.

Within six years these numbers had become 92% and 88%, and yearly tonnage under the American flag had grown from 123,893 tons to 529,471 tons. To advocates of free trade, any re duction in tariffs is good, no tariffs better, but the outgrowth of this se lecti ve tariff dispari ty was the "American" merchant marine. The promotion and protection of its ships and men became a patriotic duty. Just one hundred years later, in 1881, William Graham Sumner con sidered the necessity of a national merchant marine, and wrote: If Americans owned no ships and sailed no ships, but hired the people of other countries to do their ocean transporta tion for them, it would simply prove that Americans had some better employment for their capital and labor. They would get transportation as cheaply as possi ble. That is all they care for, and it would be as foolish for any nation to insist on doing its own ocean transportation, de voting to this use capital and labor which might be otherwise more profitably em ployed, as it would be for a merchant to insist on doing his own carting, when some person engaged in carting offered him a contract on more advantageous terms than those on which he could do the work.

The seizure of American mer chant ships and sailors in the late 18th century by Barbary rulers, and to a lesser extent the harassment of American shipping by the picaroons of the West Indies, brought humili ation to the young nation. The re sulting pressure on its political leaders led the country to embark on a program of rapid construction of six imposing frigates, the 44-gun "United States," "Constitution," and "President" and the 33-gun "Con stellation," "Chesapeake," and "Congress. " The construction of these first ele ments of the U. S. Navy found sup port from Northern ship-owning families, but only disinterest or even animosity from most Southerners, who were not as concerned about what flag flew over the ship that took 1983 FREE TRADE AND FOREIGN WARS 197 their cotton to English and Conti nental mills. The legitimate defense of the ter ritory of the United States may have been a beneficiary of the emergence of the U. S. Navy, but the immediate stimulus to the construction of war ships seems to" have been the ur gency to protect American civil shipping in far off corners of the world. The early adoption of a far flung policing function for the U. S.

government was a precedent which allowed later interventions abroad to come about with less controversy. The Barbary Wars The Barbary· Wars were to last from 1800 to 1815, at a cost of hun dreds of lives and millions of dollars for, at first, tribute and ransom, fol lowed by the expense of construction of ships and naval operations in the Mediterranean. However, direct military intervention is only the most observable of the many ways in which we as a nation became "slaves to habitual hatred or fondness" for the people of other nations. Were man perfectible the concept of nationhood might be obsolete. In the absence of that perfectibility, the nation state is likely to survive though I should hope as only a shadow of its present size. Man's in stitutions, like man himself, are im perfect, and must be vigilantly watched lest they assume unin tended roles. When acts are made in the name of the state which are con temptuous of liberty and the good sense of market economics, and which may in fact lead toward war, they must be exposed for the menace they may present to the Republic.

Rhodes Boyson, Britain's Minister of Education, has likened man to a three-legged stool, one leg being moral or religious, one economic and one tribal. Dark deeds have been done in the name of each of these aspects of man's character, but in this century the tribal and economic ele ments have dominated man's ac tions, at least in the West. Economic fallacy teamed with rampant na tionalism and without moral bal ance has proved to be a terribly costly affair in lives lost, economic depri vation and cultural undermining. And so it is that military conflict stems not only from such obvious causes as pure territorial aggran dizement and gratification of monu mental egos, but often from a mili tary extension of economic fallacies. Economic nationalism is invariably a partner of military intervention. Some of the fallacies and inter ventions that always accompany them, include notions of the neces sity for: (1) A favorable balance of trade.

(2) The protection of domestic industry. A few of the interventions that logically proceed from these falla cies include protective tariffs, im198 THE FREEMAN April port quotas, domestic subsidies, an tidumping laws, and currency controls. Underlying all of these interven tions is the notion that government through fiat actions can cause bene ficial outcomes without offsetting costs. One does not have to be the complete cynic to suggest that what might be argued on the theoretical level in economic terms comes down in fact to a political formula: Can one group of voters be satisfied through a visible handout while another group of voters, affected ad versely, and often unknowingly, by interventionist legislation, be mol lified through dissembling and obfuscation? One of the textbook excuses for tariffs has been that they were nec essary to protect infant industry. Now that has been modified so that we are led to believe we must also protect mature, ailing industry. In fact, it is only with free trade that entrepreneurs are encouraged and noncompetitive enterprises are culled out, and these are two sides of a vig orous, productive and free economy.

There are then the laws which re inforce the notion that exports are better than imports, known as a "fa vorable" balance of trade. Bastiat, the 19th-century French economist, took the favorable balance of trade argument to its logical end, and sug gested that were such a thing so de sirable, the custom agents should record the export of French silks to Britain and hope the ships will founder, since the result would be a recording of, say, 1,000,000 francs as an export and no offsetting import, since the silk manufacturer has re ceived no payment with which to purchase British goods. The result would be a favorable balance of trade, but we needn't envy France for hav ing achieved that goal. Balance of Payments and Balance of Trade Balance of payments refers to the accounting between nations of all goods, services and financial trans fers. On a pure gold standard or pure flexible exchange rate basis, balance of payments tend to balance on a regular basis. Balance of trade is this figure less "invisibles" or cash transfers.

Jacques Rueff demonstrated in his book Balance of Payments that France had an "unfavorable" bal ance of trade with Germany for over 50 years from 1870-1933, with the exception of the four years after the Franco-Prussian War, when France was making reparation payments to Germany. Again, the act which causes the "favorable" balance of trade is obviously not in the interest of French citizens at large, but may only favor certain special interests. The reason for the long period of French-Prussian balance of pay ments situation was, of course, the 1983 FREE TRADE AND FOREIGN WARS 199 result of the dominant French in vestments in Germany. This necessitated a French "unfa vorable" balance of trade in order to offset intangibles such as dividends and interest accruing from French investments in Germany. Milton Friedman has made the observation that the most favorable situation that could visit a people would be that in which we send dol lar bills to Japan in exchange for automobiles, and the exchange ends there. If Japan were a willing part ner to that transaction we could all retire. The absurdity is obvious.

Extending the Logic What difference, in moral or eco nomic terms, is there between aNew Yorker buying an automobile built in California by a naturalized Japa nese-American or an automobile built in Yokohama by a Japanese national? Yes, one is American and the other Japanese, but if that ar gument has merit why not extend it backward and suggest that no New Yorker buy anything not made in New York, or extend it even further, and suggest that it would be in the interest of the denizens of Manhat tan to buy no item not made on the island. One thing, for sure, there wouldn't be much to eat, certainly no bananas. Unfortunately, the Constitutional prohibitions against tariffs did not extend to international trade. One often hears that free trade is fine, but not unfair trade, that being defined variously as everything from foreign government subsidy of ex ports to foreign workers receiving relatively lower wages. "Dumping,"

a useful pejorative, is generally con sidered the extreme variant of un fair trade. Dumping refers to goods being sold in this country at a price below which they are sold in the country of origin. I daresay the net work news commentators would look with favor on an announcement by the British government that it was going to give away 10,000 Rolls Royces to a random group of lucky American citizens, in gratitude for American help in World War II. lt is highly unlikely that even the American automobile industry could rally much of a boycott against such an act, though it would remove those 10,000 individuals as potential cus tomers for Detroit autos. There is no economic difference between such a daft proposal and that act of con structing and operating the Con corde supersonic aircraft, with losses made up each day by French and British taxpayers. Each traveler on the Concorde could consider the ad vantageous speed the aircraft offers as a partial gift by those taxpayers.

However, the United States should have a difficult time working up much of a lather over foreign gov ernment subsidies for their busi nesses when we have such institu200 THE FREEMAN April tions as the Export-Import Bank, agriculture subsidies and Federal insurance on foreign investment. Tariffs for Protection U. S. tariffs were primarily a rev enue-raising device prior to the Civil War. The first tariff passed in 1789 raised half ofthe nation's fiscal needs, and by 1808 duties were providing twice the federal government's ex penditures. By 1816 tariffs were be coming specifically protective and by the 1970s when revenues from du ties only totaled 10% or so of the budget, their nature had evolved al most purely into protectionist devices. Historically, Republicans have been defenders of high duties, Dem ocrats lower duties. At the moment, sympathy for protectionist tariffs seems to be a bi-partisan affair. As mentioned earlier, protectionist tar iffs have always been introduced on the ground that a particular indus try is threatened by foreign compe tition. For the sake of jobs and the longterm future of the country, im ports, under this persuasion, must be selectively restricted. What those advocates fail to point out is that for everyone who benefits from tariffs there are others, perhaps less ob servable, who are being economi cally punished.

The recently passed quotas on the importations of steel, at the behest of domestic steel management and labor leaders, have received nothing but plaudits by the favorably af fected industries and the media, though often couched in terms such as "the act is too little or too late." One would have to seek out journals of economic opinion, and selective ones at that, to find mention of those who suffer as a consequence of those import quotas. Currency restrictions and pegged exchange rates are put in place to cover up governmental overspend ing and inflation, and to exert con trol over citizens in their attempts to make voluntary transactions with others or to avoid government's con fiscation oftheir accumulated wealth. It is a delaying tactic; no matter how severe the penalty, if the free mar ket exchange ratio of two currencies is different from that dictated by government, the pegged price will be undermined by market forces re sulting in sudden and catastrophic devaluation. U. S. laws to make it a felony to move more than $5,000 in or out of the country without report ing it only reinforce those who see it their business to run others' lives.

However, the most melancholy of all these false economic persuasions is autarky or National Economic In dependence. What inevitably fol lows the embracing of this concept is the implied or real expansion of national borders with consequent recourse to military action. One of the major differences that divided 1983 FREE TRADE AND FOREIGN WARS 201 Hitler and his finance minister, Hjalmar Schacht, was over this con cept of economic independence. How unsettling when we have words from Wall Street to Washington that sound so familiarly like those of Hit ler when he suggested the necessity for economic mobilization "compa rable to the military and political mobilization." The Pattern of Controls Though the imposition of Wage and Price controls in 1971 was done in the name of controlling inflation, those controls remaining on oil and gas caused the government to begin to intervene in the classic manner of politicians anywhere who believe in the economic and political benefit of autarky.

The United States is widely re garded as the marginal factor in world production and consumption of oil. The steps that follow essen tially led this country to place a floor under the price of oil not a ceiling over the price of oil as the Depart ment of Energy bureaucracy would have led us to believe. Step 1. 1971-Wage and Price controls instituted. Step 2. Most controls removed in 1973 but kept on oil and gas. Step 3. OPEC raises prices drastically. Step 4. We counter, irrationally, with the "entitlements" scheme en couraging imports, and price controIs, discouraging domestic produc tion. Step 5. We don the national hair shirt of a contrived energy crisis and directly intervene in the auto indus try through mileage requirements and 55 m.p.h. speed limit. Step 6. This forced draft downsiz ing causes extraordinary capital ex penditures and dislocations in the American automobile industry.

Step 7. Japanese and German auto manufacturers find themselves in the fortui tous position of manufacturing automobiles that are now perfect for the American market, this having come about because of their own governments over the years impos ing three times the taxes on gaso line as in the U.S. Step 8. The U. S. government urg ing National Energy Independence through subsidy and tax break, re sulting in unnecessary and uneco nomic allocation of capital to "alter nate" fuel sources. Step 9. All of this resulting in a disabling of the domestic automo bile and steel industries and immea surable costs to all the Western world. One frequently hears that our presence in the Middle East is nec essary to protect "our" oil. The im plication is that in our absence, the oil would necessarily fall into un friendly hands and those parties would then embargo exports to the United States. Ironically, Business 202 THE FREEMAN April Week reports on November 8, 1982, that "Standard Oil of California and Texaco are reportedly trying to min imize their take of Saudi oil in favor of cheaper Russian and Mexican oil."

In fact, another "lubricant," ball bearings, owes its existence to the importation of chromium ore. Ninety per cent of what is used in this coun try comes from abroad, the Soviet Union being one of the largest sup pliers. Does our dependence on importa tion of chromium or other exotic minerals require government's in tervention to insure supplies? I would suggest quite the contrary, for it is the reliance on the market place and individual initiative which will in sure our supplies. As Hans Lands berg, Senior Fellow at Resources for the Future, says in a Forbes article of November 22, 1982: "We preach belief in market forces but we aban don reliance on them too easily." Intervention Policies at Home Lead to Conflict Abroad Each step we take to insure Na tiona 1 Economic Independence car ries us ever closer to military con flict. Our Middle Eastern com mitments have now grown to the point that troop strength assigned to the Rapid Deployment Force is 230,000 soldiers, sailors and ma rines, that number to double in com ing months. Its assigned area of op erations will cover 20 countries in the Middle East, excluding Israel.

The force, it is reported, will take on responsibility with the objective of strengthening friendly nations po litically and militarily. How far re moved that notion is from those ad monishments of George Washington at the founding of the Republic! A logical step that follows the no tion of economic independence is the use of sanctions and embargoes. It is with these acts that we skate close to the pitfall of war. The problem is that sanctions by definition inhibit the market and precipitate reac tions from perceived or real enemies which may have been unnecessary in their absence. Pinpointing the root cause of any war is precarious. A colleague no ticed some graffiti in San Francisco around Columbus Day which said: "World War III started when Co lumbus took away the land from the Indians." Of course, using that logic, the apple would be at the core of all our problems. One can, nonetheless, wonder whether the oil and steel embargo of Japan and the resulting fall of the Konoye government in October, 1941 did not in turn lead to the controversial exchange of the Greater East Asia Co-Prosperity Sphere for Communist hegemony throughout a major part of the Far East. The resultant loss of lives made the earlier Rape of Nanking appear an almost minor tragedy of this tragic century.

1983 FREE TRADE AND FOREIGN WARS 203 Steps for Survival But what steps should the United States take to insure its survival in what can be a most unfriendly world? It first must insure its priorities are right from the perspective of its uniqueness as a liberty loving, free market, limited government exam-: pIe to the world. Free trade is an inherent part of that profile. The maintenance of the military neces sary to defend the country from ag gressive acts can only be consistent with the American ideal of choice if it is maintained by voluntary enlist ment. One hears much about one's obligation to make a "fair share" contribution to causes. There is a rule of thumb that in voluntary associa tions, 20% of the members contrib ute 80% of the time and money nec essary to keep the effort going. Any notion that even with a draft there is an even sharing of responsibility for the defense of the country falls in the face of the evidence that few soldiers in any war are in line oper ations, and one study shows that fewer than 50% of those actually fire at the enemy.

Ronald Reagan said in a letter to Senator Mark Hatfield on May 5, 1980 that "draft registration may actually decrease our military pre paredness, by making people think we have solved our defense prob lems when we have not .... But per haps the most fundamental objec tion to draft registration is moral. Only in the most severe national emergency does the government have the claim to the mandatory service of its young people. In any other time, a draft or draft registration destroys the very values that our society is committed to defend." Milton Friedman in a debate with a U. S. general at Stanford Univer sity defended the pro-volunteer Army position. The General scoffed that he did not want to be defended by "an army of mercenaries." "Would you rather," Friedman replied, "be de fended by an army of slaves?" With the exception of President Reagan's implication that there might be emergencies in which the draft was desirable, I would other wise agree with both in abhorrence of the use of force to conscript people to defend the country.

Defensible Action The full-time job is the nourish ment of the precepts of liberty at home and noninterference with other nations' affairs abroad. There will always be good men and women who will come to the defense of such an arrangement. If foreign intervention tends to erode domestic liberty-as I would contend-there may still be in stances where American citizens wish to put in with others they per ceive to be suffering. The repeal of the legal inhibitions, including the Logan Act, preventing individuals 204 THE FREEMAN from aiding those in other nations would expand free choice with no perceived risk to a nation bent on limiting its government's role. Obviously, it is the understanding of and the willingness to stand by the principles of free choice which underlie the maintenance of a free society. What could be better than a rereading by veterans of free mar ket theory or a first reading by a novice of Bastiat's works, or Henry Hazlitt's Economics In One Lesson or Leonard Read's "Conscience on the Tariffs and Dumping Battlefield" to make certain the ar gument on behalf of freedom re mains articulate and principled?

Above all else it is vital that if the case for liberty is to prevail, the dangers of war posed by imposition of foolish economic theories be rec ognized and free exchange be ap plied to international as well as do mestic trade. The saying is as true today as it was a century ago, "If goods do not cross borders, soldiers will." , IDEA...') ON LIBERTY THE term dumping carries a fairly definite impression to most people, but to define it is not easy. When goods from one country are sold in another at prices below the cost of producing them, the process is com monly called dumping. Presumably it doesn't m~tter whether it is an individual or a firm or a government that does it; it is still called dumping. The argument against dumping is that domestic producers cannot meet "unfair" competition from abroad. The remedy often suggested is to raise a tariff wall against these products by an amount equal to the difference between what foreign producers are willing to sell for and their costs of production. Sometimes the comparison is even made with our costs of production.

Since when has the cost of production been the determining factor of the selling price? This idea is based on the labor theory of value, rather than on the market theory. Using this same argument, local tariffs should be levied against all domestic businesses which, for any reason, offer their products for sale at a price below the cost of production. Of course, the advocates of this argument demand that the government be given the power to determine the "true" cost of production. And don't laugh this off as ajoke because it has been seriously proposed more than once. The proposal may be in the form of a subsidy rather than a tariff, but the reasoning is the same. W.M. CURTISS, "The Tariff Idea"