St. Martin's Griffin
Paperback September 1992
-- Table of Contents --
The Fair Trade Fraud
1. Introduction 1
2. Tariffs and Other Border Land Mines 7
3. Protecting America from Foreign Bras 35
4. Pulling Numbers out of a Political Hat 65
5. A Bureaucratic War on Low Prices 107
6. The Specter of Foreign Subsidies 169
7. A Crap Shoot for Protection 196
8. The Failure of Gunboat Economics 227
9. Fair Trade on Capitol Hill 272
10. The Morality of Fair Trade 306
AMERICANS' freedom and prosperity are being sacrificed on an altar of fair trade. Protectionists have wrapped themselves in a cloak of fairness, and each year they discover new moral pretexts to further restrict how American citizens may spend their paychecks. Fair trade is a moral delusion that could be leading to an economic catastrophe.
Congressmen are calling for an "economic war" with our trading partners. Starkly protectionist legislation has been passed in recent years by both the House and Senate, only to be stopped by presidential vetoes. American corporations are now running advertisements that seek to inflame hostility to foreign companies. "Fair trade" is widely perceived as a panacea for the U.S.'s international economic problems.
But, "fair trade" is one of the great intellectual frauds of the twentieth century. The louder politicians have demanded fair trade, the more U.S. trade policies have become a travesty of fairness. The U.S. government has created a trade lynch law that can convict foreign companies almost regardless of how they operate. Between 1980 and 1989, the U.S. Commerce Department reached a "not guilty" verdict in only 5 percent of its investigations of foreign dumping. Over three thousand foreign companies have been penalized since 1980 for selling their products to Americans at prices lower than the U.S. government approved.
When politicians call for "fair trade" with foreigners, they routinely use a concept of fairness that is diametrically opposed to the word's normal usage. In exchanges between individuals -- in contract law -- the test of fairness is the voluntary consent of each party to the bargain: "the free will which constitutes fair exchanges," as Sen. John Taylor wrote in 1822. When politicians speak of unfair trade, they do not mean that buyers and sellers did not voluntarily agree, but that U.S. government officials disapprove of the bargains American citizens chose to make. Fair trade, as the term is now used, usually means government intervention to direct, control, or restrict trade. Fair trade means government officials deciding what Americans should be allowed to buy, and what prices they should be forced to pay. Fair trade is paternalism applied to international commerce. Fair trade means subjugating the economic interests of private citizens to the moral and political values of government policymakers.
Fair trade often consists of some politician or bureaucrat picking a number out of thin air and imposing it on foreign businesses and American consumers. Fair trade means that Jamaica is allowed to sell the U.S. only 970 gallons of ice cream a year, that Mexico is allowed to sell Americans only 35,292 bras a year, that Poland is allowed to ship us only 350 tons of alloy tool steel, that Haiti is allowed to sell the US only 8,030 tons of sugar. Fair trade means permitting each American citizen to consume the equivalent of only one teaspoon of foreign ice cream per year, two foreign peanuts per year, and one pound of imported cheese per year. Fair trade means the U.S. government imposing import quotas on tampons, typing ribbons, tents, twine, table linen, tapestries, and ties. Fair trade means that the U.S. Congress can dictate over 8,000 different taxes on imports, with tariffs as high as 458%.
Fair trade is generating a new economic scholasticism. Thirteenth century theologians debated the doctrine of the "just price." Today, U.S. Commerce Department employees spend their lives ensnaring foreign companies in quibbles over what is a used forklift, how a company disposed of wilted flowers, and how to account for the costs of storing frozen raspberries. The Commerce Department recently penalized a Japanese company for selling typewriters in the U.S. for a fraction of a penny less than in Japan. A federal judge criticized American TV manufacturers for using American trade law to conduct an "economic war" against their Japanese competitors.
American trade negotiators have exerted far more effort to close the U.S. market than to open foreign markets. Since 1980, the U.S. government has negotiated over 170 bilateral trade agreements to restrict exports to the United States. If a Third World nation's exports of a clothing item equal 1 percent or more of U.S. production, the U.S. government almost automatically restricts that nation's exports. U.S. trade law has turned incompetence into an entitlement, as any lagging American company has a right to seek relief from foreign competition. Foreign nations are increasingly denounced as unfair unless they provide "affirmative action" programs to force foreign businesses to buy more American products.
Webster's New World Dictionary defines "fair" as "just and honest; impartial; unprejudiced." Yet, most of the foreign trade practices deemed to be unfair are not considered unfair if done by the U.S. government or by an American company. U.S. government officials loudly denounce Japan's beef import quota, though the U.S. also imposes import quotas on Australian and Argentine beef. The U.S. levied an import surtax on Thai rice in 1986 because of a small Thai government rice subsidy -- though the U.S. government was simultaneously providing a subsidy over a hundred times larger to American rice growers. American trade law requires foreign companies to earn a significantly higher profit than American companies -- or else the foreign companies are penalized as if they were selling at a loss. In federal unfair trade investigations, foreign companies are automatically assumed to be lying and American companies are automatically assumed to be telling the truth. The Commerce Department has used information provided by American firms to punish foreign competitors even when it knows that the allegations from the American firms are incorrect or false.
Fair trade consists largely of the U.S. government devising new ways to protect American consumers against the scourge of low prices. The U.S. government does not penalize foreign companies for charging high prices -- only for charging low prices. Imported clothing that is priced lower than U.S. clothing is automatically assumed to threaten to disrupt the U.S. market. Fair trade aims not to safeguard competition, but to enrich American competitors. The most common foreign "unfair trade practice" is producing a better product at a lower price. In a nation with hundreds of federal, state, and local consumer protection agencies, consumers are explicitly denied a role in most trade proceedings of the U.S. International Trade Commission and Commerce Department.
Federal trade policy is increasingly sacrificing some industries to other industries. American manufacturers have been forced to beg Commerce Department officials for each ton of specialty steel they are allowed to import. The number of American manufacturing jobs destroyed since 1980 by sugar import quotas exceeds the total number of sugar farmers in the U.S.
American politicians are profiteering on allegations of foreign unfairness. For American trade policy, need is the basis of right, and political campaign contributions are the measure of need. Congressmen's solution to the problem of unfair foreigners is almost always to increase their own power over what Americans are allowed to buy. Every restriction on foreign competition means an increase in political control over the American consumer. And to control what a person is allowed to buy is indirectly to control how a person lives.
Though complaints about unfair trade are at a historic high, American protectionists have always found some moral pretext to denounce imports. In the 1820s, protectionists proclaimed that trade between England and America could not be fair because England was advanced and America was comparatively backward. In the 1870s, protectionists announced that trade between America and Latin America could not be fair because America was comparatively rich while Latin American countries were poor. In the 1880s, protectionists warned that trade could not be fair if the interest rate among the trading nations differed by more than 2 percent. In 1922, Congress effectively defined "unfair competition" as any foreign cost of production advantage that existed for any reason on any product.
In practice, fair trade means protectionism. Yet, every trade barrier undermines the productivity of capital and labor throughout the economy. A 1979 Treasury Department study estimated that trade barriers routinely cost American consumers eight to ten times as much as they benefit American producers. A 1984 Federal Trade Commission study estimated that tariffs cost the American economy $81.00 for every $1.00 of adjustment costs saved. Restrictions on clothing and textile imports cost consumers $1.00 for each 1 cent of increased earnings of American textile and clothing workers. According to the Institute for International Economics, trade barriers are costing American consumers $80 billion a year -- equal to over $1,200 per family."
The myth of fair trade is that politicians and bureaucrats are fairer than markets -- that government coercion and restriction can create a fairer result than voluntary agreement -- and that prosperity is best achieved by arbitrary political manipulation, rather than allowing each individual and company to pursue their own interest. Government cannot make trade more fair by making it less free.
Our great-grandchildren may look back at the trade wars of the twentieth century with the same contempt that many people today look at the religious wars of the seventeenth century -- as a senseless conflict over issues that grown men should not fight about. Every voluntary trade transaction is mutually beneficial, otherwise the parties would not agree to trade. Most trade wars consist of politicians turning a squabble over the division of benefits into a schism that makes all the nations involved losers.
Many people consider the idea of fair trade in the abstract and judge trade policy simply by the question of whether fairness in itself is a good or bad thing. We need to understand the contrast between the ideals and the realities of fair trade. Fair trade can only be as fair as the trade laws and the restrictions that governments proclaim in the name of fairness. The best way to understand fair trade is to examine how our trade laws, trade agreements, and trade restrictions actually operate.
We will examine the U.S. tariff code, import quotas, how the dumping law operates,
the U.S. government's judgments on foreign subsidies, the U.S. International
Trade Commission's role in unfair trade investigations, the failure of trade
retaliation, the nature of political control of trade, and the moral essence
of trade restraints.