In general, the behavior of the Bush administration is consistent with the view that good economics makes for good politics. Rate cuts of the dividend tax, the death tax, and the personal income tax are clear examples that the president has followed this maxim. However, the story is completely different when it comes to trade policy.
Politics seems to be driving President Bush’s trade policy — the assumption being that protectionist policies will save jobs in America, thereby improving his chances for a re-election victory. But such static thinking will take the administration down the wrong policy path.
You may be able to justify redistributionist policies in a zero-sum world. However, in an interdependent world of expanding opportunities, protectionism will only bring everyone down with it. On the other hand, a pro-growth, pro-free-trade agenda will make us all better off.
When market forces are operating, the production of lower value-added items will be exported to us at much lower prices than if they were produced here. The U.S. gains in this manner: Consumers pay lower prices, freeing up of resources that can be invested in higher value-added activities.
In real life the adjustment process is not without cost, however the long-run benefits are obvious. Look at the Midwest during the early Reagan years. Back then, some of us called it the rustbelt. The smokestacks in the industrial Midwest were having a tough time. Yet looking back one can see that the region retooled and recovered. In Cleveland the river does not catch fire anymore. The Midwest has became a thriving dynamic region.
The technological revolution taking place in the world today is forcing similar adjustments. If you add to that the adoption of market-oriented tendencies in the rest of the world, we have the makings of another major readjustment in trade and production patterns. The sad part is that rather than accelerating the transition, actions by the U.S. are retarding the adjustment to the new world order.
The recent Group of Seven declaration in favor of floating exchange rates is one example; the U.S. was clearly the driving force behind the declaration. Treasury Secretary Snow led the charge and, judging from his post communiqué commentaries, he strongly endorsed the floating-exchange-rate views.
But that is not all. To add insult to injury, there was a rumor around the same time that Congress would impose countervailing tariffs against countries that “unfairly” kept their exchange rate artificially low. That is a formidable one-two punch.
In addition to being economically flawed, the current U.S. trade policy shows a Machiavellian bent — in other words, the U.S. is trying to force other countries to enact policies “favored” by the U.S. If this is the true U.S. attitude towards international trade, it is a very disturbing development.
One thing for certain today is that the balance of trade will not change. That means the protectionist pressures will remain in Washington, and the pressure to enact direct trade restrictions will be enormous. This scenario is not too far fetched if you follow the protectionist path to its logical conclusion.
There is one person who can change this path — President Bush. He must follow his instincts and not the advice of whomever is pushing him in the protectionist direction. Such static thinking may lead to an interesting political calculus — for instance, new tarrif increases will be enacted so the president can capture the electoral votes of a couple of states. However, dynamic thinking should point out that the consumer and the downstream and upstream users of the protected items will suffer, as will employment in the protected industries.
President Bush must remember that good economics makes good politics. Free-market policies have served the U.S. well. All we need is a clear voice articulating that economic message.
– Victor Canto, Ph.D., is the founder of La Jolla Economics, an economics research and consulting firm in La Jolla, California.