Trade Deficits and Free Trade

Trade Deficits and Free Trade

Raymond L. Richman

Bruce Bartlett, an adviser to President Ronald Reagan and a treasury official under President George H.W. Bush, writes in Reason Magazine (reasononline.com 5-26-08) “Herbert Hoover was rightly reviled for having the worst record on international trade of any president. The Smoot-Hawley Tariff, which Hoover signed into law in 1930 after a Republican Congress passed it, was a significant factor in deepening the Great Depression. Since then, every president has embraced at least the rhetoric of free trade. But actions and rhetoric are different things, and George W. Bush in particular has preached free trade while advancing the agenda of a petty protectionist.”

There are several things wrong with this statement. Herbert Hoover was not “rightly reviled”, the Smoot-Hawley tariff had nothing to do with the depression. The Smoot-Hawley tariff was passed after the stock market bubble burst in 1929. A thousand economists petitioned Pres. Hoover to veto the bill. It would not have mattered if he did not. Our trade deficit on goods and services amounted to less than three-tenths of one percent of the 1929 GDP; our surplus on goods and services actually declined from 1930 to 1938 as Table 1 indicates.

Table 1.

Year	1929	1930	1937	1938
Exports of goods and services	5.9	4.4	4	3.8
Goods\1\	5.3	3.9	3.5	3.2
Imports of goods and services	5.6	4.1	4	2.8
Goods\1\	4.5	3.1	3.2	2.2
Surplus or deficit goods & services	0.3	0.3	0	1
Surplus or deficit on goods	0.8	0.8	0.3	1
Gross domestic product	103.6	91.2	91.9	86.1
Deficit gds and srvcs as % of GDP	0.29	0.33	0	1.16
Source: BEA

As it turned out, foreign trade had little to do with the depression of the thirties. Monetary policy which permitted the bursting of the stock market bubble to force the closing of hundreds of banks was certainly the major culprit. The paper losses of those who gambled in the stock market need not have pushed the economy into depression. No real inputs were laid off. A comparable crisis is currently being prevented by a monetary policy dedicated to keeping liquidity and supporting the commercial and investment banks from a similar paper crisis.

George W. Bush rightly tried to protect the U.S. steel and textile industries from unfair competition. And Bush’s and Clinton’s alleged protectionism was too little to dent the enormous growth of the trade deficit from one-half of one percent of GDP in 1992 to 5.7 percent in 2006 as Table 2 indicates. It appears that the U.S. needed a lot more protectionism from foreign beggar-my-neighbor policies than either president was willing to give. We show that in our book, Trading Away Our Future. Failure to protect our industries from predatory mercantilist practices of trading partners such as Japan, China, permitting them to buy American financial assets instead of purchasing our goods is very likely to precipitate another depression.

Bruce Bartlett goes on to write:

One of Franklin Roosevelt’s first acts in office was to reverse Smoot-Hawley. He later insisted that freer trade be a key element of postwar planning, which led to the creation of the General Agreement on Tariffs and Trade. . .From then on every president had a hand in liberalizing world trade. John Kennedy initiated a round of multilateral trade negotiations, concluded under Lyndon Johnson, that eventually led to a reduction in world tariff levels by about a third. Under Richard Nixon, another round of trade negotiations began, known as the Tokyo Round, which Jimmy Carter finally pushed through an increasingly protectionist Democratic Congress in 1979.

All of these contributed to the worsening trade position of the U.S. which converted the U. S. from world’s leading creditor to world’s leading debtor. Whole industries were obliterated, millions of workers lost good-paying factory jobs, wages stagnated, the distribution of income worsened, and not only did the government become the world’s leading debtor but American private savings rate declined to zero, even corporate net investment declined to zero. Corporations began de-capitalizing buying their own stocks to create artificial capital gains to justify the enormous bonuses managers began paying to themselves. And why was this happening? Because of our tolerance of exploding chronic trade deficits as Table 2 shows

Table 2

Year	1992	1996	2000	2004	2007
Exports of goods and services	635.3	868.6	1096.3	1182.4	1643
Goods\1\	448	618.3	784.3	818.3	1152.9
Imports of goods and services	668.6	964.8	1475.8	1797.8	2351
Goods\1\	544.9	807.4	1243.5	1499.5	1979.4
Surplus or deficit goods & services	-33.3	-96.2	-379.5	-615.4	-708
Surplus or deficit on goods	-96.9	-189.1	-459.2	-681.2	-826.5
Gross domestic product	6337.7	7816.9	9817	11685.9	13841.3
Deficit on goods and servics as % of GDP	-0.53	-1.23	-3.87	-5.27	-5.12

The problem, as we see it, is that the U.S. is practically alone practicing free trade (notwithstanding the protection given a few industries and sectors.) The resulting consequences of trade deficits have been completely ignored by the entrenched economic bureaucracies in government and academia. They have never asked what the consequences of the chronic trade deficits are. The traditional answer is why should we object if countries want to sell us goods for paper dollars that cost nothing to print? What fools they are, our leadings economists exclaim, while China grows at double-digit rates and we grow hardly at all. We received an e-mail from a prestigious economist very recently who told us trade is good even when it is one-sided, we are simply getting goods with having to pay for them in goods.

Everybody knew that Japan’s market was closed to American goods while it pursued a policy of export-based development at our expense. Even the Chinese Communists pretend to be opening their markets when in fact they impose all sorts of barriers to closing the trade gap. When they decide to produce automobiles, they impose barriers on not only autos but auto parts and ask our companies to provide the capital for their new automobile industry. And our companies are pleased to oblige.

Lenin was not far off when he announced his new economic policy (NEP) in 1921. Privately, he assured his supporters that the policy was to enable the farmer capitalists to finance their own destruction. The USSR would long ago have surpassed the U.S. had Stalin’s orthodoxy not killed that policy. The Chinese Communists, obviously more intelligent than their Soviet counterparts, applied its NEP to industry as well as agriculture, enjoying the benefits of capitalism until they are ready to bury it.

Bruce Bartlett’s other points include the assertion that NAFTA, CAFTA, and including Colombia and Korea and others in a free trade area is a protectionist ploy. So far that has not been the case. Canada’s and Mexico are enjoying a trade surplus as other oil-producing countries are doing. The problem is not in the stars, it is us. We allowed OPEC, an illegal cartel, to restrict output of its members while we pay the price. We won’t drill in the ANWR while Russia exploits its tundra. We restrict consumption of coal, we throw money at foolish alternative sources of fuel. Worst of all, as Lee Iacoca says, we worship at the false god of Free Trade.

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Dr. Raymond Richman is Professor Emeritus of Public and International Affairs at the University of Pittsburgh. He earned his Ph.D. in Economics at the University of Chicago. With co-authors, Dr. Howard B. Richman, economists, and Dr. Jesse T. Richman, Asst.Professor of Political Science at Old Dominion University,he is the author of Ideal Tax Association's recently published book, Trading Away Our Future (Pittsburgh, PA., Ideal Taxes Association (Web site: idealtaxes.com)