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Free Liberal: Coordinating towards higher values

Free Liberal

Coordinating towards higher values

Trade Wars and Protectionism are not Free Trade

by Ron Paul

Two weeks ago, both the administration and the Fed announced with straight faces that the recession was over and the signs of economic recovery were clear. Then last week, the president made a stunning decision that signals the administration’s determination to repeat the mistakes of the Great Depression. Much like the Smoot-Hawley Tariffs that set off a global trade war and effectively doomed us to ten more years of economic misery, Obama’s decision to enact steep tariffs on Chinese imported tires could spark a trade war with the single most important trading partner we have. Not only does China manufacture a whole host of products that end up on American store shelves, they are also still buying our Treasury debt.

One has to wonder why this course of action is being undertaken if the administration really believes its own statements about economic recovery. Why are they still trying to fix something they have supposedly already fixed? The most troubling thing is the rhetoric about free trade given to justify this. The administration claims it is merely enforcing trade policies and that this is necessary for free trade. This sort of double speak demonstrates a gross misunderstanding of free trade, economics and world history. Yet these are the same people the country trusts to solve our problems. This sort of thing should remove all doubt about the credibility of the decision makers in Washington.

The truth is this will hurt American consumers by driving up prices of tires and cars. This will also complicate matters for our already crippled manufacturing and agricultural industries, if and when China retaliates against US made products. Whatever jobs might be saved in the tire and steel industries here as a result of this protectionist measure will likely be lost in other American industries. It is even doubtful that those jobs will be saved, as cheap tires can be obtained from other places like Mexico instead. It is difficult to see any real winners among all the losers where trade wars are concerned. If Unions think this is beneficial to them, they are being penny-wise and pound foolish.

Free trade with all and entangling alliances with none has always been the best policy in dealing with other countries on the world stage. This is the policy of friendship, freedom and non-interventionism and yet people wrongly attack this philosophy as isolationist. Nothing could be further from the truth. Isolationism is putting up protectionist trade barriers, starting trade wars imposing provocative sanctions and one day finding out we have no one left to buy our products. Isolationism is arming both sides of a conflict, only to discover that you’ve made two enemies instead of keeping two friends. Isolationism is trying to police the world but creating more resentment than gratitude. Isolationism is not understanding economics, or other cultures, but clumsily intervening anyway and creating major disasters out of minor problems.

The government should not be in the business of giving out favors to special interests or picking winners and losers in the market, yet this has been most of what has consumed politicians’ attention in Washington. It has reached a fevered pitch lately and it needs to end if we are ever to regain a functional and prosperous economy.

Dr. Paul is a Republican congressman from Texas.

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Dr. Paul is paying too much attention to the short term and not enough to the long term consequences of our trading arrangements. He has left out the Keynesian multiplier effect of the wages and profits that stay inside the United States due to the tariffs. Consider three dates 1947, 1973, and today. 1947 because it is the oldest date where the economy was not impacted by the war or the Depression. 1973 was selected because it is the year in which Average Weekly Earnings of Americans (real wages) last set an all time record after which they have declined. Now consider the basket of goods and services used to calculate the consumer price index for each year. From 1947 until 1973 the number of man-hours needed to purchase the average product in the basket declined about 37 percent. In other words from 1947 until 1973 real wages rose faster than prices. From 1973 until today it is a different story. From 1973 to today the man-hours needed to buy the average product in the basket INCREASED about 12 percent. Real (inflation adjusted) wages have declined faster than prices leaving the vast majority of American worse off. The outsourcing may have cut production costs but those reductions have not been passed on to consumers but rather to higher executive pay and profit while workers have lost good paying jobs.

The decline in real wages is due to our free trade. The free trade of economists Adam Smith and David Ricardo is about trade in products produced by different nations. In their theories land, labor, and capital were factors of production that the state was obliged to protect. Capital was not supposed to move across a border. In our implementation of free trade a free trade agreement protects capital moving a cross a border to allow cheap labor of a foreign country to be substituted for American labor. This results in a declining standard of living for Americans.

The real world experience of US trade protection is much more positive than free traders admit. US trade protection began in 1828 with the “Tariff of Abomination” that was the highest tariffs we have ever had. Higher even, than the Smoot-Hawley tariffs of a hundred years latter. Tariffs went up and down but generally drifted lower in the following years ending at about 20 percent just before the Civil War. The Morrill and War tariffs then jacked tariffs up to just under 50 percent. After the war tariffs oscillated but stayed high (40-50 percent) until the first decade of the twentieth century. In the first part of the twentieth century it was thought that the way to respond to industrial monopolies was to expose them to foreign competition. Tariffs were lowered to below 20 percent. After anti trust legislation was passed tariffs were raised to 40 percent where they were when Mr. Smoot and Mr. Hawley introduced their new tariffs. At the time the US had been the world’s most trade protected nation for more than a hundred prosperous years. Smoot-Hawley tariffs went into effect in June 1931 but did not last long. In 1934 Roosevelt started lowering them. When the Great Depression got worse in 1937 tariffs were long back to pre Smoot-Hawley levels. Tariffs continued to decline to current low levels.

During that long period of protection the US ascended to the economic high from which it has descended during a short period of free trade.

# posted at by James

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Note that if a Value Added Tax, or even the Fair Tax is enacted, it will function as a defacto trarrif, since all imported goods must be fully taxed at import or sale.

# posted at by Michael Bindner

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