Why Managed Trade is Not Enough; R. Batemarco

The political liabilities associated with free trade stem from the vigorous competition it promotes. Competitors who do not provide the best deal for consumers fail. Far from sugarcoating this unwelcome fact, free trade demonstrates it in no uncertain terms. Rather than looking to improve their own shortcom ings, many of the losers in the competitive process seek to derail the process. They seek Dr. Batemarco is director of analytics at a marketing researchfirm in New York City and teaches econom ics at Marymount College in Tarrytown, New York. to ensure that they provide customers the best deal not by improvingthe package they provide, but by getting the government to hamper the ability of their competitors to provide a better deal. Foreign competitors make an especially easy target for such government·restrictions. Thus, government restrictions on interna tional trade are of a piece with domestic restrictions on competition. They share the same goal: to redistribute income from the many to government's chosen few and to substitute its own preferred allocation of resources for that of the market. Indeed, by restricting trade with foreigners, governments close off an important means of mitigating the impact of their domestic restrictions. This is what John T. Flynn had in mind when he said, "The first condition of a planned economy is that it be a closed economy.,,3 Free Trade: The Real Thing In establishing a free economic system for the United States, the Framers mandated free trade among all the states in the union. They spelled this out in Article I, Section 9, of the Constitution: No tax or duty shall be laid on articles exported from any state. No preference shall be given by any regulation of commerce or revenue to the ports of one State over those of another: nor shall vessels bound to, or from, one State, be obliged to enter, clear, or pay duties in another.

At 54 words, this was the original North American Free Trade Agreement. As we shall see, the 1994 agreement that goes by that name makes a travesty of free trade. The damage done by restrictions on inter national trade became clear to most people during the debacle of the 1930s. Once World War II had ended, the popularity of free trade surpassed Macaulay's fondest hopes. Yet in many ways truly free trade was not in keeping with the tenor of the postwar times. Free trade requires neither complex laws nor ponderous bureaucracies. With the establishment of the United Nations, the World Bank, and the International Monetary Fund, the world was moving in the opposite direction. So postwar governments sought managed trade rather 488 The Foundation for Economic Education Irvington-on-Hudson, New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail:freeman@westnet.com August 1997 Coercivists and Voluntarists C ategorizing a political position according to some simple left-right scale of values leaves something to be desired. Political views cover such a wide variety of issues that it is impossible to describe adequately anyone person merely by identifying where he sits on a lone horizontal line.

Use of the single left-right scale makes impossible a satisfactory description of lib ertarian (and classicalliberal) attitudes toward government. Libertarians oppose not only government direction of econom ic affairs, but also government meddling in the personal lives of peaceful people. Does this opposition make libertarians "right ists" (because they promote free enter prise) or "leftists" (because they oppose government meddling in people's private affairs)? As a communications tool, the left-right distinction suffers acute anemia. Nevertheless, despite widespread dis satisfaction with the familiar left-right-or "liberal-conservative" -lingo, such use continues. One reason for its durability is convenience. Never mind that all-impor tant nuances are ignored when describing someone as being, say, "to the right of Richard Nixon" or "to the left of Lyndon Johnson." The description takes only sec onds and doesn't tax the attention of night ly news audiences.

Therefore, no practical good is done by lamenting the mass media's insistence on using a one-dimensional tool for describing political views. A better strategy for helping to improve political discussion is to devise a set of more descriptive terms. There is much to be said for a sugges tion offered by Professor Richard Gamble, who teaches history at Palm Beach Atlantic University. Richard proposes that instead of describing someone as either "left" or "right," or "liberal" or "conserva tive," we describe him as being either a centralistor a decentralist.This 1/ centralist decentralist" language would be a vast improvement over the muddled "left right" language. Unfortunately, "centralist-decentralist" language contains its own potential confu sion-namely, "decentralist" might be taken to mean someone who is indifferent to what Clint Bolick calls "grassroots tyranny." Is there an even better set of labels for a one-dimensional political spec trum? I think so: "coercivist-voluntarist."

At one end of this spectrum are coer civists. Coercivists believe that all order in society must be consciously designed and implemented by a sovereign government power. Coercivists cannot fathom how individuals without mandates from above can ever pattern their actions in a way that is not only orderly, but also peaceful and productive. For the coercivist, direction by sovereign government is as necessary for the creation of social order as the meticu lous craftsmanship of a watchmaker is nec essary for the creation of a watch.

At the other end of the spectrum are voluntarists. Voluntarists understand two important facts about society that coer civists miss. First, voluntarists understand that social order is inevitable without coer cive direction from the state as long as the basic rules of private property and volun tary contracting are respected. This inevitability of social order when such rules are observed is the great lesson taught by Adam Smith, Ludwig von Mises, F.A. Hayek, and all of the truly great economists through the ages. Second, voluntarists understand that coercive social engineering by govern ment-far from promoting social harmo ny-is fated to ruin existing social order. Voluntarists grasp the truth that genuine and productive social order is possible only when each person is free to pursue his own goals in his own way, constrained by no politicalpower. Coercive political power is the enemy of social order because it is unavoidably arbitrary-bestowing favors for reasons wholly unrelated to the values the recipients provide to their fel low human beings. And even if by some miracle the exercise of political power could be shorn of its arbitrariness, it can never escape being an exercise conducted in gross ignorance. It is a simpleton's fan tasy to imagine that all the immense and detailed know ledge necessary for the suc cessful central direction of human affairs can ever be possessed by government.

Society emerges from the cooperation of hundreds of millions of people, each acting on the basis of his own unique knowledge of individual wants, talents, occupations, and circumstances. No bureaucrat can know enough about software design to outperform Bill Gates, or enough about retailing to successfully second-guess the folks at Wal-Mart, or enough about any of the millions of different industries to outdo people who are highly specialized in their various trades. The coercivist-voluntarist vocabulary is superior to the left-right, or liberal-conser vative, vocabulary at distinguishing liber ty's friends from its foes. Support for high taxes and intrusive government commer cial regulation is a "liberal" trait. A sup porter of high taxes and regulation is also, however, properly labeled a coercivist. But note: no less of a coercivist is the conservative who applauds government regulation of what adults voluntarily read, view, or ingest. Both parties believe that social order will deteriorate into chaos unless government coercion overrides the myriad private choices made by individuals.

Voluntarists are typically accused of endorsing complete freedom of each indi vidual from all restraints. This accusation is nonsense. While they oppose heavy reliance upon coercivelyimposed restraints, sensible voluntarists do not oppose restraints per see Voluntarists, in contrast to coercivists, rec ognize that superior restraints on individual behavior emerge decentrally and peaceably. Parents restrain their children. Neighbors use both formal and informal means to restrain each other from un-neighborly behaviors. The ability of buyers to choose where to spend their money restrains busi nesses from abusing customers. A free society is chock-full of such decentrally and noncoercively imposed restraints. Indeed, it is the voluntary ori gins of such restraints that make them more trustworthy than coercively imposed restraints. A voluntary restraint grows decentrally from the give and take of everyday life and is sensitive to all the costs and benefits of both the restraint itself and of the restrained behavior. But a coercive restraint too often is the product not of that give and take of all affected par ties but, instead, of political deals. And political deals are notoriously biased toward the wishes of the politically well organized while ignoring the wishes of those unable to form effective political coalitions. What's more, members of the political class often free themselves from the very restraints they foist upon others.

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WHY MANAGED TRADE IS NOT FREE TRADE 489 than free trade. While the establishment of the proposed International Trade Organiza tion was avoided, free trade was not restored. While far from the ideal, the managed trade regime that followed World War II was a measurable improvement over the beggar thy-neighbor protectionism which preceded that conflict. For a while even, the interna tional bureaucracies that managed trade seemed to move the world in the right direc tion, generally lowering tariff rates. Managed traders seemed to resemble free traders. However, as memories of the folly of Smoot Hawley4 faded, politically well-connected firms sought shelter from the cold winds of international competition. As bureaucrats re verted to empire-building form, managed trade became a fig leaf for protectionism. A rundown of the major vehicles of managed trade illustrates this. Mechanisms of Managed Trade GATT The General Agreement on Trade and Tariffs (GATT) came about largelybydefault.

Established on an interim basis, to be super seded by the International Trade Organiza tion, it ended up lasting four decades when the proposed ITO failed to muster the votes to be passed by Congress. GATT basicallyprovided for tariff reduction based on multilateralism. While it did achieve a number of piecemeal steps in the direction of freer trade, its weak link was that it played into the popular notion that unilateral relinquishing of trade barriers was at best a mixed blessing. The idea that a country should not "give up" its trade barriers shifted the focus to "striking a deal" and away from the merits of free trade itself. NAFTA The North American Free Trade Agree ment (NAFTA) is the quintessential man aged-trade vehicle sold under the rubric of free trade. The first tip-off should be its size. While we earlier sawhow 54 words in the U.S. Constitution established free trade among the states of the Union, NAFTAweighs in at over 2,000 pages, 900 of which are tariff rates.

(Vnder true free trade, there is one tariff rate-O percent.) The agreement does have trade-liberalizing features, to be sure. Con sistingof a 10 percent reduction in tariffsto be phased in over 15 years, however, they are all but buried under the profusion of controls NAFTA also establishes. In the first place, the benefit from those tariff reductions are jeopardized by the agree ment's "snap-back provisions." Those permit pre-NAFTA tarifflevelsto be restored against imported items which "cause or threaten serious injury to domestic industry."s In other words, NAFTA supports free trade as long as it does not promote international competi tion which is too hot for favored domestic firms to handle. In addition, NAFTA's rules of origin are designed to divert trade from the world's most efficient suppliers to North America's most efficient suppliers. This hob bles the international divisionof labor instead of expanding it, as true free trade does.

The importance of NAFTA clauses that keep out foreign goods came to light as V.S. clothing manufacturers railed against the im port of wool suits from our NAFTA partner Canada. The suits in question were made from third-country wool not covered by NAFTA rules of origin. Since Canadian tariffs on foreign wool were lower than U.S. tariffs (10 percent vs. 34 percent),6 Canadian suits sold for less and soon claimed a large share of the V.S. market. The fact that the entire discussion of this issue centered on closing this "loophole" in NAFTA rather than on lowering the injurious V.S. tariff on wool should prove how devoted NAFTA's support ers are to free trade. Free trade does not depend on interna tional bureaucracies, yet NAFTA creates sev eral of them. Its Commission for Environ mental Cooperation was set up to enforce the environmental aim of sustainable growth. One tactic it uses is to prevent countries from trying to create a friendlier environment for investors by relaxing any extant environmen tal regulations.7 Such rules are to be enforced by trade sanctions and fines, with the latter to go into a slush fund for "environmental law enforcement."s NAFTA also created a Labor Commission, whose purpose is to "level the 490 THE FREEMAN • AUGUST 1997 playing field" between trading partners with regard to labor costs. To repeat, free trade this is not.

WTO The crowningjewel of managed trade is the World Trade Organization. Instituted to re place GATT, its 29,000-page treaty is a bu reaucrat's dream corne true. Its driving force comes from those who see government's job as "civilizing" the market (which they believe would otherwise operate as the law of the jungle). While those 29,000 pages say little about deregulating trade, they say a great deal about regulating everything else. Whereas GATT had been a voluntary forum for na tions seeking mutual agreements to lower tariffs, the WTO has enforcement powers, with trade sanctions chief among them. The treaty and other enabling legislation creating WTO overflowswith such Orwellian verbiage as "systematicdenial of worker rights in order to gain a competitive advantage is an unjustifiable trade barrier.,,9 In other words, people in poor countries are allowedto partic ipate in international trade as long as they don't offer to sell goods cheaply enough that anyone would desire to purchase them. Indeed, many within the WTO bureaucracy support extend ing minimum-wage "protection" to poor na tions in which they would wreak even more havoc than they do in the" advanced" nations where they are already in force.

The WTO agreement also expands the reach of anti-dumping laws, another favorite tool of entrenched multinational corporations .to shield themselves from the competition of Third World upstarts. Technically defined as exporting goods below costs, the very concept of dumping is problematic, given costs' subjec tive nature. Any determination of a firm's costs by one not involved in the decision-making process must by definition be arbitrary. The concept of harmonization is another buzzword beloved by the managed trade ma vens of the WTO. The idea here is to achieve uniformity of labor laws, environmental and health regulations, and a host of other such restrictions on enterprise. And surprise, sur prise-achievement of this uniformity is to come by countries with the least restrictive measures ratcheting them up to the levelof the most restrictive (known as upward harmoniza tion). Clearly, the goal is not worldwide free trade based on the divisionof labor, but rather of a worldwidewelfare state based on the faith that bureaucrats know best how to run busi nesses in which they themselveshave no stake.

Conclusion Free trade means the abilityof producers to exchange their wares with anyone on the globe for other goods without some govern ment standing in the way of some of those exchanges due to the country of origin of the goods involved. It requires no more laws or institutions than are necessary to provide standard protection of the property rights of all involved·in the exchange. It is the appli cation of laissez faire across international borders: nothing more, nothing less. Multivolume documents paying lip service to free trade but forbidding transactions by parties whose competitive advantages are considered by some to be unfair are the antithesis of free trade no matter how many times the words "free trade" appear in their pages. That managed trade proponents hide the nature of their policy preferences under the cloak of free trade reveals their utter shamelessness. It also suggests that the free trade side is winning the battle of ideas. D 1. Cited by Lindley H. Clark, Jr., "The GATT Struggle Continues," the Wall Street Journal.

2. A compendium of the successful refutations of economic theories which purported to find exceptions to the general benefits of a free trade regime can be found in Douglas Irwin, Against the Tide (Princeton, N.J.: Princeton University Press, 1996). 3. Cited by Llewellyn H. Rockwell, Jr. in "Who Killed Free Trade?" The Free Market 14, April 1996, p. 2. 4. The Smoot-HawleyTariffwas passed in 1930supposedly to prevent the loss of American jobs to foreigners. It raised tariff rates to unprecedented levelsand ended up crippling world trade and contributing to the severity of the Great Depression. 5. James M. Sheehan, "Nafta-Free Trade in Name Only," the Wall Street Journal, September 9, 1993. 6. Christopher J. Chippelo, "Fight Looms over Canada's Suit Exports," the Wall Street Journal, August 7, 1996, p. A2. 7. For example, article 1114 forbids relaxing environmental regulations "as an encouragement for establishment, acquisition, expansion or retention in its territory of an investment or investor." Sheehan, ibid.

8. Matthew C. Hoffman and James M. Sheehan, The Free Trade Case against NAFTA (Washington, D.C.: Competitive Enterprise Institute, 1993), p. 3. 9. William H. Lash III, "Labor Rights and Trade Policy,"The Journal of Commerce and Commercial, May 17,1994.