Archive for the ‘Trade’ Category

This century has not been good news for economic liberty in the United States.

According to Economic Freedom of the World, America has dropped from being the 3rd-freest economy of the world in 2001 to the 12th-freest economy in the most recent rankings.

Perhaps more important, our aggregate score has fallen from 8.20 to 7.81 over the same period.

So why has the U.S. score dropped? Was it Bush’s spending binge? Obama’s stimulus boondoggle? All the spending and taxes in Obamacare? The fiscal cliff tax hike?

I certainly think all those policies were mistaken, but if you dig into the annual data, America’s score on “size of government” only fell from 7.1 to 7.0 between 2001 and 2012.

Which means economic freedom in the United States mostly declined for reasons other than fiscal policy. In other words, our score dropped because of what happened to our scores for trade policy, monetary policy, regulatory policy, and property rights and rule of law.

That triggered my curiosity. If America is #12 in the overall rankings, how would we rank if fiscal policy was removed from the equation?

Here are the results, showing the top 25 jurisdictions based on the four non-fiscal policy factors. As you can see, the United States drops from #12 to #24, which means we trail 14 European nations in these important measures of economic freedom.

If you look in the second column, you’ll notice how many of those European nations have double-digit increases when you look at their non-fiscal rankings compared to their overall rankings.

This is for two reasons.

First, their fiscal scores are terrible because of high tax rates and a stifling burden of government spending.

Second, these same nations are hyper-free market on issues such as trade, regulation, money, rule of law and property rights.

In other words, the data back up points I’ve made about policy in nations such as Denmark and Sweden.

In an ideal world, countries should have free markets and small government. In Northern Europe, they manage to get the first part right. Which is important since non-fiscal factors account for 80 percent of a nation’s overall grade.

Now let’s return to the issue of America’s decline.

Here are the non-fiscal rankings from 2001. As you can see, the United States was #5 at the time, scoring higher than even Singapore and Hong Kong. And the U.S. was behind only three European nations back in 2001.

For what it’s worth, America’s score has fallen primarily because of a significant drop in the trade category (from 8.7 to 7.7) and a huge drop for rule of law and property rights (from 8.7 to 7.0).

In other words, it’s not good for prosperity when a nation begins to have problems such as protectionism and politicized courts.

P.S. The erosion of America’s score for non-fiscal factors is particularly disappointing since improvements in those factors have played a big role in protecting the world from the negative economic consequences of more spending and taxes.

P.P.S. I think this is an example of correlation rather than causation, but the above rankings for non-fiscal economic liberty seem somewhat similar to the rankings I shared last week looking at overall societal freedom.

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Free trade is a good moral concept for the simple reason that politicians and bureaucrats should not be allowed to interfere with voluntary transactions between consenting adults.

It’s also a good economic concept for the simple reason that protectionists can’t provide good answers to simple questions.

And free trade is a good geopolitical concept because it is far better than foreign aid as a mechanism for generating prosperity in less-developed nations.

Writing for the Economic Times of India, Bjorn Lomborg of the Copenhagen Consensus Center writes about the benefits of open markets among nations.

With one simple policy—more free trade—we could make the world $500 trillion better off and lift 160 million people out of extreme poverty. …reducing trade barriers not only makes the world richer, it is a great enabler for reducing poverty, curtailing hunger, improving health and restoring the environment. …Freer trade essentially means that each country can focus on doing what it does best, making all countries better off.

The good news is that global trade has been substantially liberalized. Protectionist barriers are much lower than they were a few decades ago.

Indeed, shifts to freer trade have helped compensate for growing fiscal burdens in the post-WWII era.

But we also have bad news. There are still sectors where trade taxes and other protectionist policies inhibit voluntary exchange, most notably for agriculture and textiles.

Lomborg cites data about the huge gains that would be possible if these sectors were liberalized.

The direct economic benefits would be a 1.1 per cent increase in global GDP. This sounds modest. But because it would impact the entire world economy, by 2030 we would be about $1.5 trillion richer every year. Open economies also grow faster. In the last 50 years, countries as diverse as South Korea, Chile and India have seen their rate of growth shoot up by 1.5 per cent per annum on average, shortly after liberalisation. If Doha can be completed, it is estimated that the global economy will grow by an extra 0.6 per cent for the next few decades. By 2030, such dynamic growth would make the world economy $11.5 trillion larger each year, leaving us 10 per cent more resources to fix all other problems. …By the end of the century, free trade could leave our grandkids 20 per cent better off, or with $100 trillion more every year than they would otherwise have had.

Lomborg is making the very important point that even modest increases in growth, sustained over long periods of time, can lead to huge increases in prosperity.

He correctly applies this analysis to the trade sector, but it’s a lesson that has universal applicability. It’s why we need better tax policy, a lower burden of government spending, less regulation and red tape, and better rule of law to limit government corruption.

But today’s focus is trade, so let’s look at a great video from Marginal Revolution University. Here’s Professor Tyler Cowen of George Mason University talking about the benefits of trade.

By the way, I didn’t notice it at first, but Tyler’s video doesn’t focus on international trade. He simply explains the benefit of trade among people.

But this also helps to explain why free trade across borders is good for growth. If it’s good for two people inside Virginia to engage in voluntary exchange, and if it’s good for a person in Virginia and a person in Ohio to engage in voluntary exchange, then it’s also true that it’s good for a person in Virginia and a person in Ireland to engage in voluntary exchange.

Another subtle yet important secondary point from the video is that central planning is folly because no single bureaucrat, or group of bureaucrats, will ever have the necessary knowledge (much less incentive) to properly allocate resources. To elaborate, you just listened to Prof. Cowen explain that one of the big benefits of trade is that people can specialize in things where they have a comparative advantage. And when people specialize, they develop greater knowledge in particular fields, which further increases their productivity. Yet it’s impossible for that diffuse knowledge to be centralized, much less used properly.

Which is why centrally planned economies such as North Korea, Cuba, and Venezuela are such disasters.

And this also explains why nations that normally rely on markets get such bad results when politicians take control of specific sectors of the economy. Just consider the failures of Obamacare and the U.K.’s government-run healthcare system.

But let’s get back to the issue of trade.

Politicians sometimes make arguments about “economic patriotism.” If that simply meant, for instance, that they wanted a lower corporate tax rate to make American companies and workers more competitive, that would be fine.

But as we’ve seen with Obama, language about patriotism oftentimes is a ruse to push for protectionism and other bad policies.

And one of the reasons why the protectionism-patriotism argument doesn’t make sense is that it presumes a contest among nations. Yet as Walter Williams wisely explained, trade ultimately is between private individuals.

P.S. The MRU videos are great tutorials about economics. In prior posts, I’ve shared videos explaining how taxes destroy economic value, highlighting the valuable role of market-based prices, and revealing the destructive impact of government subsidies. They’re all worth a few minutes of your time.

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I’ve written several times about the foolish War on Drugs, which has been about as misguided and ineffective as the government’s War on Poverty.

So when I saw a news report about a couple of Swedes getting busted for smuggling 200-plus kilos of contraband into Norway, and then another story about a Russian getting caught trying to sneak 90 kilos of an illicit substance into the country, I wondered whether these were reports about cocaine or marijuana. Or perhaps heroin or crystal meth.

Hardly. Norway’s law enforcement community was protecting people from the horrible scourge of illegal butter.

Sounds absurd, but there’s been an increase in the demand for butter and high import taxes have created a huge incentive for black market butter sales. Here’s a video on this latest example of government stupidity.

I guess the moral of the story is that if you outlaw butter, only outlaws will have butter. Or perhaps butter is the gateway drug leading to whole milk consumption, red meat, salt, and other dietary sins. Surely Mayor Bloomberg will want to investigate.

By the way, the United States is not immune from foolish policies that line the pockets of criminals. Here’s a video from the Mackinac Center revealing how punitive tobacco taxes facilitate organized crime.

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When asked to pick my most frustrating issue, I could list things from my policy field such as class warfare or income redistribution.

But based on all the speeches and media interviews I do, which  periodically venture into other areas, I suspect protectionism vs. free trade is the biggest challenge.

So I want to ask the protectionists (though anybody is free to provide feedback) how they would answer these simple questions.

1. Do you think politicians and bureaucrats should be able to tell you what you’re allowed to buy?

As Walter Williams has explained, this is a simple matter of freedom and liberty. If you want to give the political elite the authority to tell you whether you can buy foreign-produced goods, you have opened the door to endless mischief.

2. If trade barriers between nations are good, then shouldn’t we have trade barriers between states? Or cities?

This is a very straightforward challenge. If protectionism is good, then it shouldn’t be limited to national borders.

3. Why is it bad that foreigners use the dollars they obtain to invest in the American economy instead of buying products?

Little green pieces of paper have little value to foreign companies. They only accept those dollars in exchange for products because they intend to use them, either to buy American products or to invest in the U.S. economy. Indeed, a “capital surplus” is the flip side of a “trade deficit.” This generally is a positive sign for the American economy (though I freely admit this argument is weakened if foreigners use dollars to “invest” in federal government debt).

4. Do you think protectionism would be necessary if America did pro-growth reforms such as a lower corporate tax rate, less wasteful spending, and reduced red tape?

There are thousands of hard-working Americans that have lost jobs because of foreign competition. At some level, this is natural in a dynamic economy, much as candle makers lost jobs when the light bulb was invented. But oftentimes American producers can’t meet the challenge of foreign competition because of bad policy from Washington. When I think of ordinary Americans that have lost jobs, I direct my anger at the politicians in DC, not a foreign company or foreign workers.

5. Do you think protectionism would help, in the long run, if we don’t implement pro-growth reforms?

If we travel down the path of protectionism, politicians will use that as an excuse not to implement pro-growth reforms. This condemns America to a toxic combination of two bad policies – big government and trade distortions. This will destroy far more jobs and opportunity that foreign competition.

6. Do you recognize that, by creating the ability to offer special favors to selected industries, protectionism creates enormous opportunities for corruption?

Most protectionism in America is the result of organized interest groups and powerful unions trying to prop up inefficient practices. And they only achieve their goals by getting in bed with the Washington crowd in a process that is good for the corrupt nexus of interest groups-lobbyists-politicians-bureaucrats.

7. If you don’t like taxes, why would you like taxes on imports?

A tariff is nothing but a tax that politicians impose on selected products. This presumably makes protectionism inconsistent with the principles of low taxes and limited government.

8. Can you point to nations that have prospered with protectionism, particularly when compared to similar nations with free trade?

Some people will be tempted to say that the United States was a successful economy in the 1800s when tariffs financed a significant share of the federal government. That’s largely true, but the nation’s rising prosperity surely was due to the fact that we had no income tax, a tiny federal government, and very little regulation. And I can’t resist pointing out that the 1930 Smoot-Hawley tariff didn’t exactly lead to good results.

We also had internal free trade, as explained in this excellent short video on the benefits of free trade, narrated by Don Boudreaux of George Mason University and produced by the Institute for Humane Studies.

My closing argument is that people who generally favor economic freedom should ask themselves whether it’s legitimate or logical to make an exception in the case of foreign trade.

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Walter Williams explains why politicians and bureaucrats shouldn’t have the power to tell us what we’re allowed to buy.

At first blush, the mercantilists’ call for “free trade but fair trade” sounds reasonable. After all, who can be against fairness? Giving the idea just a bit of thought suggests that fairness as a guide for public policy lays the groundwork for tyranny. …Last summer, I purchased a 2010 LS 460 Lexus, through a U.S. intermediary, from a Japanese producer for $70,000. Here’s my question to you: Was that a fair or unfair trade? I was free to keep my $70,000 or purchase the car. The Japanese producer was free to keep his Lexus or sell me the car. …The exchange occurred because I saw myself as being better off and so did the Japanese producer. I think it was both free and fair trade, and I’d like an American mercantilist to explain to me how it wasn’t. Mercantilists have absolutely no argument when we recognize that trade is mostly between individuals. Mercantilists pretend that trade occurs between nations such as U.S. trading with England or Japan to appeal to our jingoism. …That’s nonsense. Trade occurs between individuals in one country, through intermediaries, with individuals in another country. Who might protest that my trade with the Lexus manufacturer was unfair? If you said an American car manufacturer and their union workers, go to the head of the class. …it’s never American consumers who complain about cheaper prices. It’s always American producers and their unions who do the complaining. That ought to tell us something.

The only thing I would add is that protectionists and free traders should unite in a campaign to get rid of misguided government policies that make it more difficult for American companies to create jobs and produce goods in America. America’s punitive corporate tax rate, for instance, should be dramatically lowered.

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