Trade, the Presidency and the challengers

Apologies for the lack of posts over the last few days owing to work and family matters.

I've been meaning to write an update on US politics. The lifting of the steel tariffs is of course excellent news. Whatever justification the Bush administration uses for the policy and its reversal, the tariffs were economically destructive and politically indefensible. An economic lesson – that of David Ricardo - nearly two centuries old ought not to need restating, but almost invariably does: trade protectionism damages countries that practise it, never mind those against whom it's directed. It persists mainly because the benefits of any particular measure of protection are concentrated and visible, while the costs are diffuse. It's bad economics, because it imposes a regressive tax on the consumer to the benefit of a sectional interest, and it's bad politics because it rewards loud and well-organised interest groups that are adept at lobbying. There is a theoretical case that can be made for tariffs in some circumstances, but even those who have published important theoretical work in 'strategic trade theory' maintain that the practical outcome of pursuing such a policy would be a trade war.

The good news was characteristically slyly slanted by the BBC last week. Its Washington correspondent contrasted the rule of law in international economics, which the Bush administration has accepted, to that in international diplomacy, which supposedly the administration has circumvented. Somewhat inconsistently, the BBC also presented the steel issue as a victory for Europe against the US.

The real victor in the steel dispute has been the World Trade Organisation, a supranational body that – unlike the UN – does an important job well. Anti-globalisation protestors on the nativist Right, such as Pat Buchanan, and the reactionary Left, such as Ralph Nader, speak of the WTO in remarkably similar language and indeed explicitly recognise each other as allies in a common struggle. Their premise is that, in the words of anti-globalisation guru Walden Bello (a man with no qualifications in economics of any kind), the WTO is:

a charter for corporate rule that enshrine[s] the principle of corporate trade above equity, justice, environment, and almost everything else.

Bello's characterisation is ignorant and irresponsible. The WTO has no jurisdiction over a country's environmental, economic or social policies. A member state can follow any such policies it wishes. The only thing it may not do is to discriminate between foreign and domestic producers. Being on the Left, I naturally favour the principle of non-discrimination on grounds of nationality, and being a liberal I also favour the introduction of commonly-applied rules in place of arbitrary authority. There was a time when if you were on the Left you were automatically assumed to be in favour of internationalism and the rule of law, but that is apparently no longer the case.

The reason the WTO is important is that it subjects trade to impartial rules rather than allowing the strongest to exercise arbitrary authority. Its first major ruling – which was condemned in demagogic and xenophobic terms by Buchanan - upheld a complaint by Venezuela that the US was imposing a discriminatory duty on petroleum imports. There is no organisation in the world doing more important work in increasing the standard of living for poor countries. The wonder is that so undemonstrative and proficient body should have excited such passionate opposition among the know-nothings of the anti-globalisation movement. It is still more extraordinary that it should be depicted as a nefarious conspiracy of international corporate interests, when it is merely a commercial court that subordinates corporate interests to the wider good of enabling countries to specialise in production and thereby become richer.

I referred to the contrast between the good the WTO does and the indifferent results of the UN (in international governance at least: one or two of the UN agencies, specifically the World Food Programme and the UNHCR, do valuable work in aid and development). But the distinction is more than one merely of relative competence. The WTO applies rules consistently; the UN Security Council earlier this year failed to uphold its own resolutions with regard to Saddam Hussein’s serial violations of the ceasefire terms agreed at the conclusion of the first Gulf War (and codified in Resolution 687). In trade, the US has belatedly acceded to the notion of rules and law, and rightly so; in diplomacy concerning Iraq, she was attempting to implement the rules that the UN Security Council had itself formulated.

I hope that the steel decision will lead to a more sympathetic US international economic diplomacy. While I applaud the Bush administration's security policies, its economic management has been a weak point in a generally competent record. The international components of the economics have been still less impressive. In this respect the Bush administration is the exact reverse of its immediate predecessor. The Clinton administration had few marks of distinction with the important exceptions of welfare reform, and economic management under successive highly-qualified Treasury Secretaries.

Unfortunately, the administration seems set on pursuing its economic diplomacy by bilateral and regional, rather than multilateral, trade agreements. As the excellent young economics writer Philippe Legrain, former adviser at the WTO, commented recently in The New Republic:

Though American trade negotiators claim otherwise, bilateral and regional deals offer only a facade of free trade. They are, by definition, discriminatory: By granting preferences to some countries, they impose handicaps on others. Worse, negotiating regional and bilateral deals with many countries leads to a tangled web of rules--differing tariff rates, rules-of-origin requirements, and other regulations--that constrain commerce.

Such deals are also, by definition, partial. They encompass only a small fraction of America's total trade. Under [US trade representative Robert] Zoellick's watch, the United States has signed bilateral trade deals with two countries: Singapore and Chile. Singapore, the eleventh-biggest destination for U.S. exports, accounts for 1.67 percent of America's trade; Chile, the thirty-fourth largest, for a further 0.34 percent. In total, then, Zoellick has signed deals with countries that account for a mere 2 percent of U.S. trade, hardly an earth-shattering achievement.

If the administration has lost its way in international economic diplomacy, the Democrats – with the honourable exception of presidential aspirant Joe Lieberman – have lost any semblance of internationalist principle. Richard Gephardt, who is amazingly one of the four 'grown-up' candidates for the party's nomination, has long advocated the notion of 'results-oriented' trade policies – code for Japan-bashing. Even if the economics justified such an approach, the politics would be destructive and mean-spirited. But in fact the economics are rubbish: there is much that can be said about the US trade deficit, but what can’t be said is that the deficit is due either to a lack of US 'competitiveness' (whatever that means) or 'unfair' trading practices by other countries. A Gephardt presidency would be so damaging to the principles of liberal internationalism and Third World development that I would even venture that a Dean presidency would be preferable.

And that's really saying something. Howard Dean managed to demonstrate his unfitness for public office last April when he observed of the liberation of Iraq:

We've gotten rid of him [Saddam Hussein], and I suppose that's a good thing.

I suppose, on balance and all things considered, it is preferable not to have a National Socialist torturer and imperialist in power in Iraq who launched three aggressive wars in 16 years and who butchered scores of thousands of his own countrymen in a single month (March 1991).

Despite Dean's moral tawdriness, the Democrats are determined to avoid the one candidate for the nomination who would present a reputable case for the positions that were once characteristic of American liberalism. How wrong Lieberman was to have shown a misplaced loyalty to his senior running mate from the 2000 race. Vice-President Gore, for reasons that we must presume to be principled rather than self-interested (leave aside that the principles are themselves reprehensible) is set on assisting the Democrats to experience once more a McGovern Moment. Much good may he do them.

UPDATE: Washington Post columnist David Broder usefully summarises the reaction of the Democrat contenders to the lifting of the steel tariffs. It makes grim reading, especially - because the man really does know much better - Lieberman's call for "a manufacturing plan with a spine of steel to promote American businesses and workers". As Broder notes:

The Democrats had a free shot at Bush for inconsistency, and most took it. But every comment I saw from them said or implied that they would not have responded as Bush did when the World Trade Organization ruled that the tariff was unjustified and European nations threatened to slap $2.2 billion of retaliatory levies on U.S. products.

The party whose last president fought against protectionism and for international agreements to liberalize trade has moved in the other direction.

Exactly. The economic record of the Clinton administration was good, especially on trade. Al Gore never had a finer moment in politics than when he destroyed Ross Perot in a CNN debate on Nafta. None of us knows what a Dean administration would mean in economic policy, but with the Democrats' current retreat from liberal internationalism in economics there is literally no reason any longer that a consistent liberal would wish to see President Bush defeated next year.

Comments

[Charles Stewart]

I was with you up to that last paragraph, but then:

1) "How wrong Lieberman was to have shown a misplaced loyalty to his senior running mate from the 2000 race": suggests Liebermann made a choice out of loyalty that cost him the nomination. Surely you do not believe that?

2) "for reasons that we must presume to be principled rather than self-interested": the reasons are (i) many insiders think over the last couple of weeks it has become clear that Howard Dean has the nomination sewn up, and (ii) letting the nomination continue will simply ensure that Dean focusses more of his effort at courting the party base rather than the wider country, which cannot improve the democrats chances. Unless you think it is reprehensibly unprincipled of Gore to want the Democrats to win this race, surely he is right to move for closure.

3) " is set on assisting the Democrats to experience once more a McGovern Moment": even Glenn Reynolds thinks this won't wash (http://www.instapundit.com/archives/012936.php).

[Daniel in Medford]

In re Gore's endorsement of Dean:

http://www.nationalreview.com/frum/diary120903.asp#020850

I'm not sure I believe that Gore is quite that calculating, or quite that Machiavellian. (Who does he think he is, Hillary Clinton??) But I agree with Frum that we shouldn't forget about Gore just yet.

[Alasdair Robinson]

If you look at the steel tariff issue alone, and ignore the politics for a moment, the imposition (and the lifting) of it was entirely sensible keeping in mind the currency exchange. The tariff was imposed almost 2 years ago ostensibly to protect American jobs from cheap foreign steel imports. Now that the US dollar has depreciated by about 30% wrt the euro, the tariffs aren't necessary. Quod erat demonstratum.

I believe that the Bush Administration made a deliberate decision to favour a weak American dollar. It did it for a couple of reasons, both to help demand for American exports and to economically punish Europe (i.e France and Germany) for their opposition to the war in Iraq. An appreicating Euro is deadly for Germany's weak economy.

[Dan]

Oliver, I share your admiration for the WTO, and your rejection of (at least unilateral) protectionism. But I hope when you hint that there's "a theoretical case that can be made for tariffs in some circumstances" you're including circumstances in which one's trading partners' practices _aren't_ free.

Let's put aside the questionable merits of Bush's original justifications for the steel tariffs (something about Europeans and others engaging in market-skewing subsidies and "dumping," all with the nefarious intention of bankrupting the U.S.'s domestic steel producers), and pretend for a moment that those justifications were well-founded.

Is "free trade" some sort of economic categorical imperative for one nation even when its neighbors remain unmoved by that principle? Is it prudent for a man to be honest even in a den of thieves? Countless countries maintain tariffs, duties, subsidies and other unfair trade practices without eliciting voluble condemnation, while policies pursued in order to _counterbalance_ such practices are loudly accused of precipitating "a trade war."

Protectionism is so hard to kill, I suspect, because "playing fair" only dovetails with self-interest when everyone commits to the concept. Otherwise, game theory kicks in. And the only semifree global status quo seems to leave nations languishing in just such a Prisoner's Dilemma.

Your WTO/UN analogy extends to this feature of the two institutions as well: if only _some_ abide by "international rules," why should any? Aren't those who do simply volunteering for abuse? Both the WTO and the UN engage in selective prosecution, after all. (If only because there's only so much time in the day.)

Economists rarely seem very interested in the consequences of an uneven distribution of free trade. Or if they are, their various resolutions to such "dilemmas of asymmetry" rarely seem to drift down into the popular media.

If it _does_ pay to be honest, even in an otherwise Hobbsian global marketplace, I submit it's worthwhile to remind everyone why and how it does.

Both the WTO and free trade itself would be better for it.

[Charles Stewart]

Daniel: Frum's political analysis is not usually this worthless. Precisely how is being seen in a dramatic manner to seal the candidacy of a "catastrophic" failure supposed to count as a devilishly cunning plot to increase one's appeal? In an Austin Powers movie, perhaps.

I think my damage limitation story is perhaps a tiny bit less incredible.

[dsquared]

Oliver: When you say that "WTO has no jurisdiction over a country's environmental, economic or social policies", you're being too optimistic; via the "Singapore Issues", a number of developed world countries (mainly EU) are trying to use the WTO as a vehicle for exactly that (the Singapore agenda is an attempt to use the WTO to revive the late unlamented Multilateral Agreement on Investment, which genuinely was a corporate government charter).

Dan: I think that the theoretical argument you're looking for is as old as Ricardo: Since some countries have rocky coastlines, does that mean we can do better by throwing rocks into our own harbours? Retaliatory tariffs are one of the few policies that are genuinely known to be bad (except as a strategic tool, but there's a "strategic" argument for everything).

[Gary Bezowsky]

The real victor in the aftermath of the steel tariffs is the American consumer.

[Dan Goss]

dsquared:

Even though your perspective is a familiar one among "categorical free-traders," I do appreciate you offering it. Few partisans bother outlining their reasons for advocating the positions they advocate at all--preferring instead to assume that their conclusions are somehow "self-evident."

However.

Your old-as-Ricardo argument in favor of unilateral free trade--the one equating trade restrictions to "rocky coastlines"--strikes me as not only unhelpful but simplistic.

Unhelpful, because "rocky coastlines" are existential facts of geography, while trade restrictions are expressions of human decision-making.

Simplistic, because your comparison assumes that the global tendency toward economic protectionism can be reduced to a self-defeating urge to shoot oneself (aka, one's market) in the foot in a fit of nationalistic pique. Defensive trade practices of any kind are then equated with useless self-abuse--no matter _what_ one's trade partners might be up to.

Your perspective seems to assume that no advantage whatsoever is ever gained by any species of monopolistic state interference in the "free market."

Is it entirely inconceivable to you then that any state action, of any kind, can corrupt, in any way whatsoever, an otherwise "free market"? And are any responses to such disruptive state actions therefore invariably pointless and self-defeating?

If so, then laissez-faire arguments against state monopolies of any kind are also similarly suspect.

Governments may engage in any sort of free trade favoritism they fancy, since such redistributive actions have no effect whatsoever on the free market.

Otherwise--if governmental interference in commerce actually _can_ corrupt the free market--policies pursued merely to counterbalance such interference can, at least in principle, be justified.

The nasty ins-and-outs of international commerce are often much more complicated than a reductionist perspective can comfortably admit. But I believe that we _must_ admit such complications if we're ever to solve the perennial problem of protectionism.