The Online Library of Liberty

A project of Liberty Fund, Inc.

• One: Free Trade—a Timely Proposal
• Two: the Nature of Protectionism
• Three: the Positive Case For Free Trade
• Four: the Reasons For Protectionism
• Five: Progress Toward Free Trade
• About the Author

Five

Progress toward Free Trade

ECONOMIC EDUCATION

This final chapter will consider some possible strategies for achieving Free Trade. The greatest need is for economic education. It is not beyond hope that several hundred thousand or even several million people can be made to understand the Principle of Comparative Advantage. The case for Free Trade and the exposure of Protectionist fallacies must be repeated again and again in such simple words that understanding gains a foothold outside academic circles. Such an understanding will drive home the all-important point that the clash of interests in tariff matters is not between Americans and foreigners but between each of various special producer groups on the one hand and the American people as a whole, whose losses from Protectionism far outweigh the gains to special groups, on the other hand. It is probably not necessary that a great majority of voters really come to understand the tariff issue in all its detail. If understanding becomes general among newspapermen, prominent businessmen and labor leaders, politicians, and others whose opinions have special weight, such men will carry many voters along with them.

RECIPROCAL TRADE AGREEMENTS

One conceivable approach to Free Trade warranting attention is tariff reduction through trade agreements. The Reciprocal Trade Agreements Act, which Congress first passed in 1934 and has extended with changes ever since, gives the President power to make trade agreements with foreign countries and to lower American tariff rates within set limits in exchange for foreign tariff concessions.

Trade agreements made under the Act have significantly lowered American tariffs. The United States has cut or promised not to raise about 2,590 rates out of a total of 3,552; on the basis of import value figures for 1949, the agreements have affected about 95 per cent of our dutiable imports and about 90 per cent of our total imports (duty-free as well as dutiable). Protectionists often complain about these duty cuts by citing statistics such as follow: Over the period 1931-1935, customs receipts amounted to 50.0 per cent of the value of dutiable imports and to 18.5 per cent of the value of duty-free and dutiable imports together. In 1952, however, customs receipts amounted to only 12.8 per cent of the value of dutiable imports and to only 5.4 per cent of the value of all imports.

If we really are already so very close to Free Trade as some Protectionists complain and we have got along all right anyway, why not take one little step further and reap all the world-wide prestige that adoption of complete Free Trade would earn us? In fact, the statistics just cited exaggerate our tariff cuts. (The percentage reductions are partly unintentional, anyway: duties set as so many dollars or cents per unit have become lower percentages of inflation-raised product prices.) The ratio of customs collections to import values is a poor indicator of our remaining degree of Protectionism. Suppose, as an extreme case, that all goods except duty-free raw materials were under a prohibitive tariff of 2,000 per cent. Then, since no dutiable imports at all could sell in the American market, customs collections would be zero per cent of import values. This zero would show quite the opposite of Free Trade.

A better way to judge the degree of Protectionism is to look at the rates on particular products. Our trade agreements still leave high rates on such important classes of goods as woolens, some non-ferrous metals, rayon, many cotton specialties, glass, many finished steel products, most kinds of machinery, and miscellaneous precision specialties like optical goods and cameras. Duties on coal tar dyes run as high as 200 or 300 per cent of the foreign price. Champagne and all other sparkling wines still pay $1.50 per gallon, laces pay as high as 90 per cent of value, inexpensive clockwork mechanisms pay the equivalent of nearly 180 per cent, some watch parts pay the equivalent of about 86 per cent, embroidered wool gloves pay 90 per cent, glass surgical instruments pay 70 per cent and glass dental instruments 60 per cent, and many other high rates still in effect could readily be listed. Furthermore, even the reduced rates can be raised again under the “escape clauses” in our trade agreements whenever a domestic industry convinces the Tariff Commission and the President that it is suffering from foreign competition. This very uncertainty in our tariff rates deters trade. As evidence of how restrictive our trade barriers still are, consider this: from 1909 to 1929, mechandise imports seldom amounted to less than 5 per cent and sometimes exceeded 6 or 7 per cent of the national income of the United States; but in 1952, imports amounted to only about 3.7 per cent of national income.

The reciprocal trade agreements program has all along been a very timid approach to lower tariffs. Its avowed aim has been, not to permit a repatterning of production for the sake of greater efficiency in the use of America’s labor and resources, but to get foreign concessions on American exports by offering duty concessions so carefully chosen by ourselves as not to hurt Protected special interests in the United States. Even in his original message to Congress proposing the reciprocal trade legislation, President Roosevelt promised that “no sound and important American interest will be injuriously disturbed.” President Truman did not even confine his assurances to “sound and important” interests: he promised that “domestic producers would be safeguarded in the process of expanding trade” and that the program would not be used “in such a way as to endanger or trade out segments of the American industry, American agriculture, or American labor.” Secretary of State Acheson conceded that duty reductions could properly be revoked in cases of “genuinely serious injury to domestic industry.” Apparently these gentlemen were unfamiliar with the flaws in the Protectionist save-an-industry argument. Their “no-injury” rule, if applied literally, would rule out most meaningful tariff cuts.

The “escape-clause” provision of the Trade Agreements Extension Act of 1951 (which is kept in the 1953 extension of the Act) shows the timid spirit of the whole program:

Besides that, the so-called “peril-point” provision of the Trade Agreements Act requires the Tariff Commission to make studies and warn the President of what degree of duty cuts on particular products could not be exceeded without damage to domestic industries. The President must heed the Commission’s warnings in making trade agreements unless he explains to Congress why he has not done so.

My criticisms of the trade agreements program do not mean that Free Traders should oppose it: they would then be in alliance with the arch-Protectionists. They should support it as better than nothing while working for a direct approach to Free Trade. If we Americans really want Free Trade, we can do better than just nibble here and there at tariff barriers by agreement with foreign countries. By adopting Free Trade independently, we can show the whole world that we consider tariff removal not as a kind of self-injury that must be carefully measured and paid for but as a benefit even to ourselves alone. Such a dramatic example would probably do more for the cause of world-wide Free Trade than thousands of reciprocal trade agreements.

ADJUSTMENT TO FREE TRADE

Adoption of Free Trade would change the pattern of production in the United States—no Free Trader thinks otherwise. Labor and resources would shift out of some industries into other industries where they would be relatively more productive. Such shifts, far from being regrettable, are a vital part of the process whereby a country gains from trade. (Remember our illustration of the Principle of Comparative Advantage.)

Adjustment to Free Trade, as to any other kind of progress, would of course inconvenience some producers. The problem is undoubtedly not as hard as Protectionists say. Mr. Louis Doumeratzky, retired tariff expert of the Commerce Department, estimated that if all duties and other curbs on imports into the United States from Western Europe had suddenly been removed in 1948, only about 7 per cent of American industry (in terms of value-added) would have suffered (and the American industries with a Comparative Advantage would, of course, have benefited). Even on the extreme and untrue assumption that all adversely-affected industries would have had to close, it would have cost less than the 1948 slice of the Marshall Plan to give all employees their full pay while they looked for new jobs, even if each employee looked for a year.22 After a detailed commodity-by-commodity survey, Mr. Howard S. Piquet, economist for the Library of Congress, has concluded that the problems of adjustment to suspension of American tariffs on all imports from everywhere would probably be no greater than the problems of normal adjustment to technological change. (Whether or not necessary adjustments would be slight, however, does not really affect the Free Trade case. Great adjustments would only show how much tariffs had previously been obstructing the most efficient and productive use of labor and resources.)

Mr. Piquet’s comparison reminds us again of the similarities between trade and technological progress: adjustment to the one and to the other are very much alike. If it is desirable, even at the sacrifice of efficiency, to shelter parts of an economic system from foreign competition, why shouldn’t they also enjoy shelter from internal change such as technological developments and shifts in consumer preferences? Why shouldn’t the buggy-makers have been protected against the automobile? Why shouldn’t hot-dog sellers along Route 1 have been protected against construction of the New Jersey Turnpike? Protectionists who advocate shelter against changing conditions typically have only one small part of the economic system in mind—their own. A comprehensive program of Protection against the need for adjustments would simply be a program for stagnation. The United States would never have grown great without a free economic system that permitted and required industrial deaths as well as industrial births by way of adjustment to continual change.

Any adjustment of American industry and agriculture to Free Trade would be small compared to the reconversion program after World War II. A Protectionist who dreads adjustments would, if consistent, presumably deplore final settlement of the Korean and “cold” wars and the achievement of real peace in the world. Senator Malone has, in fact, come close to such a strange consistency:

That is what the Senator told the House Ways and Means Committee on January 26, 1951 during his tirade against tariff cuts. His words are a good example of Protectionist misunderstanding.

One very important answer to Protectionists who worry about adjustments to Free Trade is this: if the United States ever expects to taper off its burdensome foreign-aid spending, American industry and agriculture will unavoidably have to adjust to changes in foreign trade. The question is not whether or not we shall make adjustments, but what kind of adjustments we shall make. Since World War II American exports of goods and services have exceeded imports by 4 or 5 billion dollars a year; and our aid to foreigners has paid for this gap. If foreigners stop getting our aid dollars, they will no longer be able to pay for all our goods they now buy. Our exports will drop unless foreigners can somehow get the dollars to keep on paying for them—unless, for instance, they can earn dollars by selling more of their own goods to the United States. Free Trade on the part of the United States will let foreigners earn more dollars and so will soften the impact on our export industries when our foreign-aid programs taper off. (Adoption of Free Trade by the United States would probably not in itself let foreigners earn fully enough extra dollars to replace our aid; other things, such as correct foreign-exchange rates, would also be necessary to balance trade without special controls.)

If American imports fail to rise when foreign aid drops off, important segments of American industry and agriculture will have to make real adjustments. In a speech on April 17, 1953, Mr. Samuel W. Anderson, Assistant Secretary of Commerce for International Affairs, stressed “the necessity of giving our friends abroad the opportunity to earn their way by selling more to us.” Otherwise, Mr. Anderson estimated, our exports would fall by 25 to 30 per cent, displacing 300,000 workers. In 1950 or other recent years, we Americans exported 38 per cent of our cotton, 37 per cent of our wheat and flour, 26 per cent of our tobacco, 39 per cent of our rice, 31 per cent of our grain sorghums, 20 per cent of our soybeans and soybean products, 24 per cent of our lard, 21 per cent of our dried and evaporated fruit, 13 per cent of our textile machinery, 22 per cent of our machine tools, 21 per cent of our tractors, 19 per cent of our printing machinery, 16 per cent of our oil-field machinery, 13 per cent of our diesel engines, 11 per cent of our motor trucks, and 11 per cent of our farm machinery. Forty per cent of our film-rental receipts came from abroad.23 Government officials have estimated on the basis of 1949 export figures that in addition to many farm workers, about 1,695,000 Americans owe their jobs directly or indirectly to exports. These include about 305,000 workers in trade and services, 290,000 in machinery, 225,000 in transportation, 155,000 in primary metal industries, 135,000 in textiles, apparel, and leather, and 125,000 in fuel and power.24

On May 24, 1953 the Washington Post published a case study of how one Congressional district depends on export trade. The Eighteenth District of Pennsylvania was chosen for study because, ironically, its Congressman, Richard M. Simpson, is a leading sponsor of Protectionist bills in the House Ways and Means Committee. Just as the whole American economy has been changing, so have Representative Simpson’s eight counties been gradually shifting over from a declining coal industry and farming to small and medium-sized manufacturing. Significantly, none of the new and growing industries in Mr. Simpson’s district has called for tariff Protection. Right in the Congressman’s home town, the head of a firm making reflective paint and marking-machines for highway safety lines says that he would sell more of his products abroad if only the would-be foreign buyers could themselves earn more dollars in the United States. Mr. H. J. Heinz, whose company is trying to find foreign markets for the baby foods and ketchup made in Simpson’s district, advocates a more-trade policy. The Standard Steel plant in the district makes export goods. So do two machine-tool companies and the Chambersburg Engineering Company, which makes drop forges, hydraulic presses, power machinery, and machine tools. Some 200 of Mr. Simpson’s constituents commute daily to Hagerstown, Maryland, where they help make airplanes for export. Others besides such industries would suffer from the tighter import curbs proposed by Representative Simpson. A dealer in petroleum products points out that the proposed quotas against imported residual oil would raise the costs of industrial and, indirectly, home fuel. The proposed higher tariffs on lead and zinc would raise costs for shops making tools and plumber’s pipe. All in all, the Post article concludes, Simpson’s tariff-hiking bill would hurt, not help, even his own district.

Even some of the leading Protectionists finally admit the close tie between exports and imports. They show this by the way they disparage American exports. Writing to the Washington Post for June 9, 1953, Mr. O. R. Strackbein takes note of

Referring to the “needed readjustment of our economy,” Mr. Strackbein scorns “the wishful thinking that would have us hold to our artificial export market. . . .” According to him, “Our exports and not our imports are out of line.”

In a speech on February 22, 1950, Mr. Richard H. Anthony, Secretary of the American Tariff League, said:

The foregoing discussion of exports is certainly not meant to imply that exports are better for a country than imports. Exports are useful goods traded for imported goods that consumers consider still more useful. The fundamental aim of economic activity is to acquire, not dispose of, useful goods and services. Neither does the discussion imply that readjustments to declining exports would be very painful and inherently undesirable; to suppose so would be to fall into the Protectionist save-an-industry fallacy. This is my only point: since readjustments are always necessary in a progressive economy and will be especially necessary when the United States tapers off its foreign-aid programs, it is far better to have readjustments that expand rather than shrink the industries in which the United States has a Comparative Advantage. This sort of readjustment is especially preferable when we recall the non-economic as well as economic advantages of Free Trade: a lessening of pressure-groupism in American politics, a great contribution to solidarity among all free peoples, a step toward peace.

A growing number of American industrialists now take a healthy attitude toward import competition. Among the 825 leading citizens canvassed early in 1953 by the Council on Foreign Relations, 61 per cent even of the businessmen alone rejected the idea of limiting tariff cuts only to those that would not damage domestic producers; another 4 per cent of the businessmen thought themselves probably in agreement. Business Week for December 13, 1952 quotes a machinery manufacturer in Columbus, Ohio as follows:

One reason why adjustments in production need not be too painful is that many would consist in the main only of adaptation of existing lines of production rather than of a switch to wholly new lines. Tariff reduction has already stimulated the motorcycle industry to shift from heavy to lighter models. The trend in demand toward lighter models was in itself largely due to the fact that motorcycle imports had previously popularized motorcycling as a sport. Since garlic is grown for the most part along with much larger vegetable and sugar-beet crops, garlic imports probably only encourage a painless shift to these other crops. A considerable fraction of imported watches sell in middle price ranges where they create new business not much exploited before by American companies. Swiss competition has also encouraged American industry to switch to the many-jeweled watches in which its position is relatively strongest.25 Furthermore, the Hamilton, Waltham, and Elgin companies all are now importing Swiss watch movements to install in American cases.

Mr. J. G. Shennan, president of the Elgin National Watch Company, is one businessman who is adjusting his business to lower tariffs in an enterprising spirit. After President Truman had blocked a recommended increase in the tariff on watches in 1952, Mr. Shennan acknowledged that Mr. Truman’s decision

Mr. Shennan prepared for two years to diversify Elgin’s production. In 1950 Elgin bought the Wadsworth Watch Case Company of Kentucky, which made compacts and emblems as well as watch cases. A year later Elgin bought the Hadley Company of Rhode Island, which made watch bands, cuff links, tie clasps, and so on. Elgin began importing Swiss watch movements for the Wadsworth cases and began making compacts, emblems, and product name plates. Mr. Shennan set up a new department to design both the watch and jewelry product lines and combined the Wadsworth and Hadley acquisitions into a single sales division. He also got $23 million worth of technical military orders. In the meanwhile, Elgin started making a diamond abrasive jewel-and-tool-polishing compound that it had developed during the war. Elgin has also been working on a battery-run watch that keeps almost perfect time. Partly as a result of such enterprise, Elgin sales rose from $30 million in 1950 to $43 million in 1951 and to around $50 million in 1952. Mr. Shennan modestly says that he has found a better answer to foreign competition than tariff agitation.26

Another industrialist who feels that American industry must adjust to lower tariffs is Mr. Charles H. Percy, president of Bell & Howell, whose cameras now get heavy tariff Protection. According to Fortune, Mr. Percy is convinced that in the long run freer trade is bound to come and that Americans are bound to be better off for it. Mr. Percy has set up an executive group in Bell & Howell to judge what would happen to the company if tariffs were halved or entirely abolished.

Stressing the value of a flexible industrial structure in a speech in November 1952, Mr. A. B. Sparboe, vice-president of Pillsbury Mills, said:

If it were held politically or ethically desirable to do so, the government might give readjustment benefits to industries hurt by the end of Protection. Industries might get loans or even outright grants to ease their shift into making products whose markets would expand under Free Trade. Displaced workers might get extra unemployment compensation, free re-training, and free help in moving to new jobs. Adjustment to Free Trade might be thought worthier of government help than adjustment to technological change because a government decision forced it. However, in adopting Free Trade, the government would not be discriminating against certain industries but just ending its earlier discrimination in their favor. The question is: Do recipients of governmental favor have a vested right either to keep on getting it or to get compensation when it stops? My personal opinion is against compensation; there is too great a risk of setting a precedent for people who in the future would claim indemnity for technological changes and shifts in consumer preferences. As a matter of economics, though, it is worth noting that the cost of readjustment benefits would be slight compared with the gain that Free Trade would give the country as a whole. The comparison is particularly striking when we realize that adjustment benefits would soon be no longer necessary, while the gains from Free Trade would go on year after year.

HOW TO SET TRADE FREE

Economic analysis of Protection and Free Trade does not automatically translate itself into a program of action. Only the American people themselves, through their representatives, can implement a decision between continued or even intensified Protection on the one hand and Free Trade on the other.

A decision for Free Trade would leave several important questions still open. For instance, should Free Trade be adopted on a cautious commodity-by-commodity basis or on an across-the-board basis? An across-the-board approach would let each producer gain by cheaper imports of products not competing with his own. The damage a producer might feel from import competition would be partly offset by his gain as a consumer and as a buyer of raw materials. Furthermore, an industry might be more willing to make adjustments if other industries facing de-Protection were in the same boat. Across-the-board tariff abolition could be made a matter of principle, while a piecemeal product-by-product approach would degenerate into unprincipled wrangling. Under a piecemeal approach, the groups with greatest political strength would hold on to their tariffs longest; and in time the whole idea of Free Trade might get sidetracked amidst the logrolling.

A related question is whether Free Trade should be adopted through one single law or through a series of laws. The one-law approach, while avoiding protracted indecision and uncertainty, need not mean putting Free Trade into effect at one swoop. Though much can be said for making the transition quickly and getting it over with, something can also be said for a gradual transition giving de-Protected interests time for painless adjustments. One of several promising alternatives is a law, passed once and for all, that would bring complete Free Trade within a few years. Such a law might well junk the “Buy-American” rules at once. It might cut import duties steadily towards zero by perhaps 2 per cent a month from initial levels. Import quotas and all other trade barriers could be liquidated over the same period of time.

THE IMPORTANCE OF NOT WEASELING

Free Traders should speak out bluntly. They should argue not for lower tariffs, not for reciprocal trade agreements, not for freer trade, but for Free Trade—the complete end to government interference with imports and exports.

All too many people have metaphysical notions about historical “trends.” For some reason too mysterious to specify, Free Trade, among other things, is out of the question as a practical possibility for today’s world. Bruce Bliven, for instance, once dismissed William Graham Sumner’s arguments for Free Trade as “so tangential to the real problems of the present day” as hardly to hold any meaning. A New York Times editorial of February 1953 calls for “the liberalization and quickening of trade” but announces that “Free trade is not a realistic issue.” The columnist Andre Visson is all for “freer trade” but dismisses Free Trade as a “dream.”

People who make knowing remarks such as these get a reputation for being practical, reasonable, realistic. Practicality, reasonableness, realism take the place of thought. True Free Traders should not care about a cheap reputation for practicality, reasonableness, realism. If people who really understand the case for Free Trade are afraid to state and keep emphasizing it, then who on earth will? Professor Henry Simons is right: there is something immoral about trimming one’s analysis out of concern for what is thought fashionable or politically practicable. As Mr. F. A. Harper once said, all too many politicians these days are trying to act like economists and all too many economists are trying to act like politicians.

The British economist Sir Dennis Robertson tells us not to mind whether or not the “temper of the age” makes some policy “politically impossible”: “Let us get the analysis right. . . .” In a similar vein, Albert Rees discounts concern with political difficulty: “Unless thinking people try to decide what the best policies are, and then try to influence actual policy in the appropriate direction, there is no point in discussing policy issues at all.”

It is probably true, though incidental, that outright advocacy of Free Trade will in the end be more effective than hedging about freer trade. Failure to come out flatly for complete Free Trade seems like a tacit admission that Free Trade is harmful after all. People can then logically wonder, “Well, if Free Trade is harmful, why not keep far, far away from it?” Besides, questions of a little less Protection here, a little more there, do not pose a clear issue. It is not possible to specify a rational stopping-point between Protection as it exists today and Free Trade. To allow exceptions to Free Trade is to open the door to logrolling and hence to a false consensus in support of Protection. Free Trade, on the other hand, is a discussable issue. Such an issue, as a matter of principle, gives the legislator an “out” in declining to help his constituents get special privileges in opposition to the general welfare.

Perhaps practical politicians cannot be blamed for making tactical compromises. One should always distinguish clearly, however, between the goal that one is aiming at and the makeshift that one accepts for a while as better than nothing. One should realize, with Professor Gottfried von Haberler, that Protectionism cannot be outwitted: it must be conquered by a head-on attack. Professor Haberler ends as follows his book on The Theory of International Trade:

[22 ]New York Times, 20 July 1952, p. 7E.

[23 ]The percentages are from Public Advisory Board for Mutual Security, A Trade and Tariff Policy in the National Interest (Washington: U.S. Government Printing Office, 1953), pp. 8-9, with a few farm-product percentages from [Office of the Commercial Counselor to the French Embassy], A New Look at Our Economic World (Washington: 1953), p. 19.

[24 ]See the French-Embassy booklet last cited, pp. 17-19, or [Harry C. Hawkins and others], International Trade Policy Issues (Washington: Chamber of Commerce of the United States, 1953), p. 58. By their very nature, such employment figures cannot be precise.

[25 ]International Trade Policy Issues, p. 33.

[26 ]Fortune, March 1953, p. 207; Time, January 12, 1953, p. 83.