Trade Delivers Peace and Bargain Prices
For a fair and authoritative (and did I mention favorable?) assessment of my new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, you can read William H. Peterson’s review in today’s Washington Times.
Dr. Peterson is an adjunct scholar with the Heritage Foundation and the Ludwig von Mises Institute who holds a Ph.D. in economics from New York City University. In his review he writes:
Daniel Griswold’s tour de force explores, reasons and documents how import competition benefits the American consumer, seeing him move ahead toward greater peace incentives, lower real prices, more choices, better quality. Mr. Griswold also tracks how the big-box retailers such as Wal-Mart, Home Depot and Best Buy deliver the world’s goods mostly by sea via millions of big, truckload-size containers. …
So Mr. Griswold would have the United States adopt or maintain trade policies best for most Americans, especially the poor and middle class, no matter what other nations do. Says the author: Let’s drop the remaining barriers separating us from ongoing growth and peace policies enhancing the global marketplace. Bully for him.
Information at the beginning of the review should have given the cover price of the book as $21.95. It is available with a nice discount at Amazon.com along with a peek inside at the table of contents and selected pages.
Buy American Hurts Most Americans
Earlier today, Doug Bandow weighed in with some commentary on the problems that Buy American provisions are creating for both Canadian and American businesses. Let me reinforce his view that such rules are anachronistic and self-defeating with some thoughts from a forthcoming paper of mine about the incongruity between modern commercial reality and trade policies that have failed to keep pace.
Even though President Obama implored, “If you are considering buying a car, I hope it will be an American car,” it is nearly impossible to determine objectively what makes an American car. The auto industry provides a famous example, but is really just one of many that transcends national boundaries and renders obsolete the notion of international competition as a contest between “our” producers and “their” producers. The same holds true for industries throughout the manufacturing sector.
Dell is a well known American brand and Nokia a popular Finnish brand, but neither makes its products in the United States or Finland, respectively. Some components of products bearing the logos of these internationally recognized brands might be produced in the “home country.” But with much greater frequency nowadays, component production and assembly operations are performed in different locations across the global factory floor. As IBM’s chief executive officer put it: “State borders define less and less the boundaries of corporate thinking or practice.”
The distinction between what is and what isn’t American or Finnish or Chinese or Indian has been blurred by foreign direct investment, cross-ownership, equity tie-ins, and transnational supply chains. In the United States, foreign and domestic value-added is so entangled in so many different products that even the Buy American provisions in the recently-enacted American Recovery and Reinvestment Act of 2009, struggle to define an American product without conceding the inanity of the objective.
The Buy American Act restricts the purchase of supplies that are not domestic end products. For manufactured end products, the Buy American Act uses a two-part test to define a domestic end product: (1) The article must be manufactured in the United States; and (2) The cost of domestic components must exceed 50 percent of the cost of all the components. Thus, the operational definition of an American product includes the recognition that “purebred” American products are increasingly rare.
Shake your head and chuckle as you learn that even the “DNA” of the U.S. steel industry, which pushed for adoption of the most restrictive Buy American provisions and which has been the manufacturing sector’s most vocal proponent of trade barriers over the years, is difficult to decipher nowadays. The largest U.S. producer of steel is the majority Indian-owned company Arcelor-Mittal. The largest “German” producer, Thyssen-Krupp, is in the process of completing a $3.7 billion green field investment in a carbon and stainless steel production facility in Alabama, which will create an estimated 2,700 permanent jobs. And most of the carbon steel shipped from U.S. rolling mills—as finished hot-rolled or cold-rolled steel, or as pipe and tube—is produced in places like Canada, Brazil and Russia, and as such is disqualified from use in U.S. government procurement projects for failure to meet the statutory definition of American-made steel.
Whereas a generation ago the cost of a product bearing the logo of an American company may have comprised exclusively U.S. labor, materials, and overhead, today that is much less likely to be the case. Today, that product is more likely to reflect foreign value-added, regardless of whether the product was “completed” in the United States or abroad. Accordingly, Buy American rules and trade barriers of any kind (as appealing to politicians as they may be) hurt most American businesses, workers, and consumers.
It’s time to wake up and scrap these stupid rules.
About That Vision Thing…
Does the world need a “shared vision on food and agricultural trade policy”? So says World Trade Organization Director General Pascal Lamy:
Let me start by saying that food and agricultural trade policy does not operate in a vacuum. In other words, no matter how sophisticated our trade policies may be, if domestic policies do not themselves incentivize agriculture, and internalize negative social and environmental externalities, then we will always have a problem.
Here I question what exactly Lamy means by “incentivize”. Does he mean “make sure we get incentives right”, or does he mean “provide positive incentives to agriculture”? The former probably is harmless if it means simply allowing market forces to work, the latter a potential opening for the types of subsidies and price supports that have done so much damage to agricultural trade policy. Ditto with his wish to “internalize negative social and environmental externalities”: on the face of it, this is a fairly inoffensive goal, and a positively noble one if he is referring to, say, the effects on poor farmers abroad stemming from rich country farm subsidies. But I can see all sorts of nefarious social policies flowing from that prescription if it gets into the wrong hands.
Lamy goes on to make sensible points about the effects of tax policy on agriculture, and makes this statement about the importance of free trade for food security:
To my mind, global integration allows us to think of efficiency beyond national boundaries. It allows us to score efficiency gains on a global scale by shifting agricultural production to where it can best take place. As I often say, if a country such as Egypt were to aim for self-sufficiency in agriculture, it would soon need more than one River Nile. Which basically means that global integration must also allow food, feed, and fibre to travel from countries where they are efficiently produced to countries where there is demand.
All necessary, if not sufficient, conditions for global food security, to be sure. But Lamy then turns to exactly what a global vision for agriculture might involve:
I believe that we could all agree on what the basic objectives are that we seek from our agricultural systems. We all want sufficient food, feed, fibre and some even want fuel. We want nutritious food and feed. We want safe food and feed. We want a decent and rising living standard for our farmers. We want food to be available and affordable for the consumer. We want agricultural production systems that are in tune with local culture and customs, and that respect the environment throughout a product’s entire life-cycle.
Hmm. I’m not sure about all that. For one thing, some of those goals seem potentially in conflict. United States sugar policy, for example, has shown us the results when consumers’ desire for “affordable” food conflicts with sugar farmers’ desire for a “decent and rising living standard” (hint: it’s not the consumers who make out like bandits). Similarly, it is at least conceivable that food grown “in tune with local culture and customs” might be more expensive, or make food less abundant, or even less safe. And if those goals can be in conflict within a country’s borders, I shudder to think what such an overburdened agenda could do to the already-struggling global trading system. At the extreme, a call for a “global vision” of agricultural trade policy could see the return of international commodity agreements and other supranational management nightmares of the mid-late 20th century.
On balance, the WTO has been a force for good in freeing agricultural trade. For sure, commodity markets are still very distorted, and the whole mercantilist basis of the WTO must be questioned. But by trying to harness the desire of exporters for more customers to counteract the pressure on governments to protect domestic industries, the WTO has done much good in the world. Pascal Lamy is right to encourage countries to stay on course with the Doha round of trade negotiations. I just hope that encouraging a “global vision” for agriculture, and pointing to vague notions of “social externalities,” doesn’t run against his stated purpose of freeing farm trade.
More on Cato’s work on agricultural trade policy here.
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