Fighting Communism with Free Trade; F. Bubb

If there is one proposition that elicits near unanimous assent from academic economists, it is that free trade is more efficient than protec tionism. And, after decades during which this nation of immigrants viewed immigration as distinctly unpleasant, the idea of open borders is once again starting to become a living issue. One measure of the progress of open border ad vocates is the February 1986 report of the Pres ident's Council of Economic Advisers, which reviewed the findings of several recent studies and concluded that, on balance, immigration benefits native Americans. 4 Another measure is the appearance in several mass-circulation magazines of realistic portrayals of recent im migrants' hard work, entrepreneurial drive, and devotion to American ideals. 5 Frank W. Bubb is chief financial counsel of a Philadel phia-based Fortune 200 company. He resides in Swarth more, Pennsylvania.

Obviously, these ideas have not yet per meated our political culture. While mass opinion always lags behind informed opinion, the lag in this case may partially result from the narrow economic focus of the advocates of freer trade and immigration policies. Economic arguments directed to the self-interest of one's audience are clearly vital, but such arguments tend to be difficult for many people to follow and may not, by themselves, provide strong motivation for supporting greater freedom. This suggests that advocates of freedom should broaden their attack by advancing addi tional arguments that complement the eco nomic analysis already being offered. Put suc cinctly, both open immigration and free trade could be powerful "weapons" in America's worldwide fight against communism, substi tuting in whole or part for unpopular and costly foreign aid and guerrilla warfare programs. By opening its borders to people and goods from the Third World, America would act as a magnet, drawing the people of the Third World away from the false promises of communism and giving impetus to an emerging worldwide free market economy.

Why, one might ask, do I juxtapose open immigration and free trade? How are these two ideas related? As discussed in some detail below, both would have similar effects on eco nomic freedom and attitudes toward commu nism in the Third World. But more fundamen tally, both are aspects of the belief that all people everywhere have inalienable rights, and that the right to property is an individual right, not a group right.

Free trade recognizes the right to engage in voluntary transactions in goods and services across international boundaries; open immigra tion recognizes the right to move across inter national borders in a series of voluntary trans actions. If a person born in Guadalajara or Port-au-Prince buys an airline ticket to Phila delphia, rents an apartment and finds a job, he has violated no one's rights. Hidden beneath the opposing view is the premise that the cur rent inhabitants of each nation collectively own it, so that individual decisions to buy goods from abroad or to deal with foreigners on one's own property are subject to permission from the collective. (Needless to say, whether immigrants should be entitled to become U.S. citizens, vote, or receive welfare benefits are entirely different questions. Clearly, immigrants have no moral entitlement to welfare benefits.) Thus, dismantling U.S. government barriers against trade and immigration would directly increase the freedom of the people involved Americans and foreigners who wish to engage in transactions across borders or face-to-face in the United States. But this article's primary purpose is to explain the indirect means by which such measures would increase freedom in other countries.

In his new book How NATO Weakens the West, economist Melvyn Krauss observes that the principle of comparative advantage applies to competition among nations: "Just because a given strategy works for one person, or nation, does not mean that it will work for another. Different nations have different traditions, in stitutions, and cultures that make them more or less suited to different types of activities. "6 Krauss correctly observes that the American strategy for fighting communism in the Third World has been largely an imitation of Soviet strategy: foreign aid designed primarily to buy the allegiance of local rulers and surrogate war fare using local guerrillas (and, on~ might add, government propaganda directed at Third World audiences). According to Krauss, America's comparative advantage lies in a dif ferent strategy: "The marketplace is this country's strongest institution, and the United States must learn to use it to help the poorer countries of the world develop a vested interest 193 in the capitalistic system. Once capitalism spreads, communism will contain itself."7 Unfortunately, from this breathtaking insight Krauss brings forth a pea-shooter of a policy: bilateral elimination of trade barriers with Ca ribbean nations. If Krauss' insight is correct, then America's comparative advantage in the struggle against communism can be maximized by unilaterally eliminating all barriers to both trade and immigration. The following discus sion will compare these two policies against the alternate policies of foreign aid, surrogate war fare, government propaganda, and taking no affirmative steps against communism.

In making such comparisons, two caveats are in order: (1) Free trade and open immigration cannot be viewed as substitutes for U.S.-backed guer rilla warfare in countries like Afghanistan, Cambodia, Nicaragua, and Angola. Clearly, such nations are "too far gone" for the devel opment of market institutions to serve as a bar rier to communism. At best, free trade and open immigration can help prevent other coun tries from following the same path. (2) The U.S. government's current policies allow the illusion of "targeting." If a country -say, Egypt or Iran-is viewed as strategi cally significant, it may be given more aid. Free trade and open immigration, on the other hand, would take considerably more time to product results, and the country-by-country re sults would be inherently unpredictable. If our leaders were to opt for these liberalizing poli cies, they would be admitting that they cannot "fine tune" geopolitiC'sany more than their in tervention can "fine tune" the economy. They would be saying that such policies are more likely than current policies to win friends for America and for capitalism, but that we cannot predict who these friends will be.

The Pro-Freedom Effects of Open Immigration Open u.s. borders would allow people in the Third World to get a truer picture of the United States and how a semi-capitalist system works. America's most formidable obstacle in the battle for the hearts and minds of the Third World is an often-virulent anti-Americanism 194 THE FREEMAN • MAY 1987 and anticapitalism. America is seen as a rich bully unholding the legacy of colonialism, a system of government-granted privileges for the rich and powerful. Third World inhabitants have almost no understanding of the practical workings of a market economy. Against such entrenched attitudes, contin ually reinforced by the anti-American propa ganda emanating from many Third World gov ernments, U. S. government propaganda is likely to lack credibility. By contrast, Third World residents are more likely to believe what they hear from friends and relatives who emi grate to the United States.

What would they hear? At a minimum, that Americans are not devils and that America is not such a bad place after all. More likely, they would also hear accounts of how a semi-free society which they define as "capitalist" operates. Advocates of the free market have always la bored at a disadvantage. Unlike interven tionists, who can simplistically assert that gov ernment can "make" certain results happen, free marketeers are often asked to explain ex actly how a market system would solve certain problems. Since the actions of free individuals are inherently unpredictable, market advocates are usually reduced to theorizing about how things might work if people were given the proper incentives. For the great majority of people, who have difficulty envisioning hypo thetical alternatives, real life examples of market-based solutions are far more compel ling. Imagine the effect on American attitudes if some of our friends and relatives were to emi grate to a fully free society-one without wel fare, antitrust laws, government roads, or the Post Office. What if Americans could hear first hand that the absence of welfare does not cause starvation, that the absence of antitrust laws has not handed the economy over to monopolists, and that private individuals have figured out how to provide roads and deliver letters?

The same principle applies to Third World emigration to the United States. By comparison to the Third World's government-stuhified economies, the U. S. offers a cornucopia of real-life examples of problem-solving by pri vate individuals. Finally, and even more important than the transmission of facts, immigrants would convey a feeling, a sense of life, to their friends and relatives at home. Time and again, immi grants have luxuriated in their relative freedom, their greater sense of control over their own destinies. To the masses who do not view freedom as one of life's possibilities, the immi grants' message could be powerful indeed. Through immigrants, the supply of freedom in America could raise the demand for freedom in the Third World. By attracting the self-reliant and indus trious from the Third World, America would give Third World governments the incentive to liberalize their economies. An article in Forbes magazine on the rapid growth of the computer software industry in India pinpoints the reason India has become more accommo dating to U. S. firms seeking to set up opera tions there: "The new hospitality is of a piece with the low-key pragmatism of the country's young prime minister, Rajiv Gandhi. India wants to keep more of its brightest graduates at home, rather than seeing them emigrate to the U.S. and elsewhere. Software development can help keep them at home and gainfully em ployed. "8 Software developers in India are not the only people who view the United States as an alter native. It is no accident that America is the pre ferred destination of a large number of the world's brightest scientists, engineers, and artists. Nor is it an accident that, as the Presi dent's Council of Economic Advisers noted, "many immigrants are entrepreneurs.' '9 Leaving familiar surroundings to leap into the unknown is fundamentally an entrepreneurial act. People with the vision and self-reliance to migrate are more likely than most to become entrepreneurs in their new land.

By limiting immigration, the U.S. govern ment is reducing options available to competent and entrepreneurial people all across the Third World. It is allowing Third World governments to exploit such people with relative impunity in the name of egalitarianism; they often have no where else to go. Giving such people the choice of coming to the U. S. would make it more costly for their governments to continue to reFREE TRADE AND OPEN IMMIGRATION 195 strict their freedom. Third World rulers whether or not their statist ideology changes would find themselves compelled to enhance opportunity, to place a more realistic value on competence. But, it might be objected, wouldn't an open immigration policy bleed Third World coun tries of their most competent people, the ones who would be most likely to push for reform if they were forced to stay put? This question misunderstands the politics of Third Wodd countries, most of which are one party systems run by tiny, self-aggrandizing elites. It is unrealistic to expect competent, en trepreneurial-minded young people to throw their lives into political action to alter such a system; they are more likely to end up rotting in a jail cell than changing the system.

On a deeper level, this question is based on the zero-sum premise that humanity's supply of competence is limited. In fact, there is no limit to the development of competence when people are left free to deal with reality. The market process is a discovery process. It gives people the incentive to learn about and adjust to a con stantly changing reality because it allows them to capture the benefits - and bear the burdens -of their own actions. By contrast, socialism thwarts the discovery process both by direct prohibitions and by allowing people to pass onto others the consequences of their actions. We need not worry that an open immigration policy would deprive the Third World of its competent people. If open immigration is ef fective in persuading Third World governments to liberalize, vast numbers of people who would have lived their lives in stagnation and oppression could rise up to become comI?etent, productive members of their societies.

The Pro-Freedom Effects of Free Trade Free trade would increase people-to-people contact. International trade is not just a matter of shipping goods from one place to another. It requires ongoing personal contact on a large scale-to understand the preferences of cus tomers in the recipient country, to establish and maintain distribution networks, and so forth. Exports from one country to another require a cooperative effort among people in both coun tries. Such contacts are qualitatively different from the sort of contacts needed to grant foreign aid or train local military or intelligence organiza tions. Regardless of his personal qualities, the aid official or military adviser or Peace Corps volunteer plays a role that engenders resent ment. He comes as the representative of a "su perior" culture to "help" an "inferior" one. Too often, the government representative re mains painfully ignorant of the local culture be cause he has little personal incentive to under stand it.

The trader's role at least allows the possi bility of a non-resentful response. The trader pays a compliment to the people he deals with by expecting to profit from their relationship. The trader has a personal incentive to learn about the local culture and to cultivate a rela tionship of trust with those in it; if he doesn't, he has no deal. Free trade, like open immigration, would foster the people-to-people contacts needed to give the Third World a truer picture of America and how a semi-capitalist system operates. As Frank Chodorov once wrote: "It is not only that trading in itself necessitates some under standing of the customs of the people one trades with, but that the cargoes have a way of arousing curiosity as to their source, and ships laden with goods are followed with others car rying explorers of ideas; the open port is a magnet for the curious. So, the tendency of trade is to break down the narrowness of pro vincialism, to liquidate the mistrust of igno rance. "10 If we want American ideals to become part of the Third World, we must let its people and goods become part of our world.

Free trade would give Third World govern ments the incentive to liberalize their econ omies. As Krauss explains, foreign aid and lowering U.S. trade barriers have very different effects on the economic policies adopted by other governments: "Consider a candidate for foreign aid that is experiencing economic diffi culties because of faulty domestic economic policies. If the aid is not given, the difficulties 196 THE FREEMAN • MAY 1987 may eventually lead to a policy reversal .. The problem can, and often does, correct itself. But rendering economic assistance to the troubled country removes the incentives for domestic policy reform and perpetuates the status quo. In effect, the continuation of the bad economic policies becomes dependent upon the foreign aid: so long as foreign aid is maintained, bad economic policies persist." 11 One obvious example of this effect is Israel. According to Krauss, "A country that spends almost 50 percent of its public budget on de fense cannot afford the elaborate welfare state Israel has been able to finance because of the economic aid it receives from the United States. Instead of making Israel strong, U.S.

open-ended economic aid has made Israel into the 'Sweden of the Mediterranean.' "12 Two other examples, which are more in structive because they illustrate the opposite ef fects of foreign aid and open U.S. markets, are South Korea and Taiwan. Krauss shows that the conventional argument that U.S. economic aid served as a springboard for these two coun tries' growth "not only is incorrect but is the reverse of what actually happened." U. S. economic aid to. Taiwan through the 1950s helped finance heavy public sector in vestment that was creating a socialist state. In addition, U.S. aid helped sustain protectionist policies. The discontinuance of U. S. aid forced both governments to adopt radically different economic policies in order to generate foreign exchange. " ... foreign and domestic private investment [in Taiwan and South Korea] did not take off until the governments of these countries changed their policy orientation from government-led growth and reliance on foreign aid to more emphasis on private sector growth. " "Korean per capita GNP, for ex ample, grew at an annual average rate of 1.9 percent during this period, compared with figures three times that magnitude after both aid and government size in Korea were scaled down in the 1970s." 13 These two cases illustrate the complementary effects of aid cutoffs and relatively open U.S.

markets: if discontinuing aid is the stick to cause other governments to adopt pro-market policies, open U. S. markets are the carrot. South Korea and Taiwan were able to switch from government -oriented to market-oriented policies even in the face of modest U. S. import barriers. If such barriers were removed alto gether, it would be easier for other govern ments to make the transition to market-oriented policies. The ascendancy of pro-market thinking within the Reagan Administration has led to a new variation on the foreign aid theme: Rather than discontinuing foreign aid, let's make it conditional upon the recipient governments' movement toward more rational policies. It would be difficult to imagine a policy more likely to create resentment against America and capitalism. Instead of having policy changes viewed as an accommodation to reality, this approach would encourage people in the recipient country to view the changes as an accommodation to the wishes of the U.S.

government. Instead of creating the conditions that might allow a consensus for policy change to develop among local ruling elites, this ap proach .seeks to impose the will of a strong na tion on weak ones. Instead of having local rulers take the heat for necessary but unpopular changes, this approach allows such rulers to blame the Yankee imperialists. Free trade would alter the selection process in Third World countries. The above discus sion describes how cutting off U. S. aid and opening U. S. markets could create the condi tions under which existing Third World ruling elites might change their policies. A more pow erful but slower-acting effect would be to change the composition of such elites, to broaden them to include people with pro market and pro-American views. F. A. Hayek's The Road to Serfdom contains a wonderfully insightful chapter entitled' 'Why the Worst Get on Top. "14 According to Hayek, a socialist society, organized along military lines, will select in favor of a very different sort of person than a liberal society.

What sort of person rises to the top in a Third World society that receives U.S. economic or military aid, or that is the subject of a guerrilla war supported by the U.S. government? What sort of person would rise to the top in such a society if U. S. trade barriers were eliminated?

FREE TRADE AND OPEN IMMIGRATION 197 How does the process of rising to the top af fect the character and outlook of those who do? What sorts of moral compromises must they make with the powerful? What sorts of skills do they develop? Where do their vested interests lie? What is their vision of the proper society? Most Third World countries are tightly con trolled by small self-aggrandizing elites. Such oligarchies tend to shut off all routes of ad vancement for the vast majority of people. For those few to whom advancement is possible, the only route is to curry favor with the ruling elite. This particular means of advancement se lects in favor of those who are more adept at amoral political maneuvering than at dealing with reality. It selects in favor of-and rein forces-a zero-sum view of reality in which one person's gain is another's loss. And it se lects in favor of people with a strong vested in terest in the maintenance of the same corrupt system through which they rose.

Foreign economic aid, going as it does di rectly to governments, helps entrench local ruling elites. It strengthens their comparative advantage versus other avenues of advance ment. It gives them favors to dispense, helping local cronies at the expense of would-be inde pendent businessmen. Foreign military aid has a similar effect, strengthening an unproductive and usually authoritarian military at the ex pense of the private sector. The Reagan Administration's policy of aiding anti-communist rebels should also be analyzed from the standpoint of Hayek's in sight on selection processes. As noted earlier, free trade and open immigration cannot be viewed as alternatives to V.S.-backed guerrilla warfare in countries like Afghanistan, Cam bodia, Nicaragua and Angola. However, if Hayek is right, surrograte warfare is of little use in creating free societies (as opposed to merely pro-V. S. governments.) By providing materiel and training for local guerrilla groups, the V. S. government opens up another avenue of advancement in the recipient society (assuming the guerrillas win). Even if such guerrilla groups begin with a liberal orien tation, the selection process within a military organization strongly favors authoritarian per sonalities who have little personal contact with marketplace activities. If the guerrillas are fortunate enough to emerge victorious, the most likely result would be the replacement of one authoritarian regime by another.

By contrast, lowering V. S. trade barriers would tend to open another avenue of advance ment in Third World countries. An open V. S. market would select in favor of competent busi nessmen' who in turn would select in favor of competent employees, suppliers, and so forth. Such people would tend to be oriented toward the real world of production and trade, rather than a life of political maneuvering. By en gaging in wealth-creating activities, they would be more likely to adopt the positive-sum view of existence which provides a critical underpin ning for a pro-market viewpoint. And finally, they would develop a vested interest in their particular means of advancement-the market place and ties with the United States. To understand the power of V.S. markets to generate social change in Third World coun tries, one need only look at the burgeoning middle class demands for democracy and civil liberties in South Korea and Taiwan. Without export markets in the U.S., such middle classes probably would not have arisen.

Free trade would change attitudes in the Third World. The most enduring effect of eliminating V. S. trade barriers would be to change the attitudes prevalent in the Third World toward America and capitalism. Free trade and cutting off foreign aid would increase the economic well-being of people in the Third World (although aid cutoffs in the short term would have the opposite effect). But greater wealth by itself is no guarantee of pro-V. S. or pro-capitalist viewpoints; witness Sweden. Nor is the fact of increasing wealth necessarily a guarantor of such viewpoints; the "revolution of rising expectations" can just as easily gen erate demands for more governmental activity. The critical determinant of attitudes is what people view as the source of their increasing well-being. For all of the reasons discussed above, opening V. S. markets would tend to cause Third Worlders to identify their in creasing prosperity with America and with the market economy, rather than a government dominated economy.

198 THE FREEMAN. MAY 1987 No Time For Halfway Measures If the ideas discussed in this article eventu ally find their way into American political cul ture, the most likely outcome would be a series of halfway measures which meet the political demands of established anti-import and anti immigration interests (for example, observe how such groups have gutted even a modest program such as President Reagan's Caribbean Basin Initiative), and which allow our leaders the illusion that they can "target" the benefits of liberalization. One can easily envision some legislator proposing that countries be certified as recipients of a more liberal U.S. trade or im migration policy. The answer to such targeting efforts should be: The world simply doesn't work that way. No government agency could predict how many emigrants to America or how many trade contacts with Americans a Third World country needs before its people can learn "enough"

about the American system. No government agency could predict how much of a liberaliza tion of U.S. trade or immigration policy is nec essary to induce policy changes by any given Third World government. And no government agency could begin to predict free trade's long term selection effects in a specific Third WorId country. As recently as one decade ago, no one could have predicted the recent liberalization of eco nomic policies in socialist India or communist China or the virtual destruction of Iran's state capitalism by an anticapitalistic religious fun damentalism. The effects of free trade and open immigra tion are likely to be unsatisfactorily slow and random for those accustomed to producing re sults in time for the next election. But slowly and inevitably, these twin liberalizations would tilt the world's playing field decisively in America's favor. D 1. Milton and Rose Friedman, Free to Choose: A Personal State ment (New York: Harcourt Brace Jovanovich, 1980), pp. 50-51; Milton and Rose Friedman, Tyranny of the Status Quo (San Diego: Harcourt Brace Jovanovich, 1984), pp. 124-129.

2. Julian Simon, "The Overall Effect of Immigrants on Natives' Incomes," in Barry R. Chiswick, ed., The Gateway: U.S. Immi gration Issues and Policies (Washington: American Enterprise Insti tute for Public Policy Research, 1982), pp. 314-348, and "What About Immigration?", The Freeman, January 1986, pp. 8-16. 3. George Gilder, The Spirit of Enterprise (New York: Simon and Schuster, 1984), and "Uncle Sam Wants Your VCR ... " Reason, November 1986, p. 32. 4. ''The Economic Effects of Immigration," Economic Report of the President, February 1986, pp. 213-234. 5. "The New Ellis Island," Time, June 13, 1983, p. 18; "Still the Land of Opportunity?", U.S. News & World Report, July 4, 1983, p. 37; Time, Special Issue entitled "Immigrants: The Changing Face of America," July 8, 1985; "Promise of America," U.S. News & World Report, July 7,1986, p. 25. 6. Melvyn Krauss, How NATO Weakens the West (New York: Simon and Schuster, 1986), p. 208.

7. Ibid., p. 222. 8. "Planet Computer," Forbes, February 24, 1986. 9. Economic Report of the President, February 1986, p. 225. 10. Frank Chodorov, "The Humanity of Trade," in Joan Kennedy Taylor, ed., Free Trade: The Necessary Foundation for World Peace (Irvington-on-Hudson: The Foundation for Economic Educa tion, Inc., 1986), p. 5. 11. Krauss, note 6, p. 215. 12. Ibid., pp. 220-221. 13. Ibid, pp. 215-219. 14. Friedrich A. Hayek, The Road to Serfdom, (Chicago: Univer sity of Chicago Press, 1944), pp. 134-152. Softcover $ 5.95 Order from: The Foundation for Economic Education Irvington-on-Hudson, New York 10533 FEE pays postage on all prepaid orders. To place free trade in this larger context of foreign relations, we have mined the back issues of The Freeman and other hard-to-find primary sources. Here are fifteen short essays that discuss such thorny issues as world hunger, industrial superi ority, industrial unemployment, the American Revolution, for eign investment, the fallacies of economic nationalism, and how free trade protects our national interests.

Free Trade: The Necessary Foundation for World Peace edited by Joan Kennedy Taylor 199 A REVIEWER'S NOTEBOOK Cities and the Wealth of Nations by John Chamberlain J ane Jacobs, whose specialty is the death and life of cities, is not an economist. You won't find much in her books about such things as the gross national product of sep arate countries, or the effects of monetary deci sions of the Federal Reserve on national stan dards of living. Her latest work, Cities and the Wealth olNations (New York: Random House, 257 pp., $17.95), tells us that the classical economists were guilty of putting the cart be fore the horse in their discussions about the or igins and enhancement of wealth. In her view cities create wealth quite independently from their national settings. It follows that economic wisdom must begin with an investigation of city cultures. What Jacobs explores in this book is a pro cess that takes off from individual wills and personal ingenuities. Boston and the Boston re gion offer a prime example of such a process in dynamic continuity. The city, with its ties to Salem and the North Shore, had been a creative metropolis since the days of the tea packets.