Free Trade Begins At Home

Our political and economic elite regularly lecture us on the benefits of “free trade” and have been doing so for years. But these exhortations to resist protectionism miss the point. The real question facing US policymakers is not whether to impose barriers on trade with foreign nations, but whether to stop giving such trade an unfair advantage over domestic production.

Free trade is one of those ideas that sounds good in principle, but invariably seems to apply only to certain favored types of trade. In particular, any tax or barrier on trade that happens to cross an international border seems to galvanize instant resistance in Washington and on Wall Street. Let a similar tax or barrier happen to fall on trade within our own borders, however, and the same voices are stone silent.

To take just one example, proposals to levy an import tax of 25% on goods produced in China are termed “punitive”; ostensibly a punishment for the failure of the Chinese to float its currency or otherwise take action to reduce its huge trade surpluses with the US. For some reason, however, a tax of similar magnitude on the production of US workers – we call it the “income tax” – escapes criticism on the same grounds. If a 25% tax is “punishment” for China, then what exactly do we think we are doing to the US worker?

Meanwhile, US businesses are subject to a network of tax and regulation that foreigners escape. We not only have the income tax, but FICA, HITS, OSHA, EPA, workman’s comp, etceteras, that workers either pay for directly or through their employers. As a result, businesses large enough to be international in scope not only find they can pay lower wages to foreign workers, but the embedded regulatory overhead is much smaller as well. Is it any surprise that many feel they must outsource beyond our borders to remain competitive?

Why is it the free trade lobby wraps itself in righteous indignation about taxes and regulation when you buy something from someone half way around the world, but when you buy the same thing from the guy across the street, it couldn’t care less?

As a casual cruise through the United States Constitution reveals, our Founding Fathers envisioned that the Federal government would be financed primarily by duties and tariffs. During the first century or so of United States history, when this was the actual practice, the US went from a ragtag group of colonies to global economic power. Our modern political and corporatist elite has turned that on its head, cutting one “free trade” deal after another, while the burden of taxes and regulations on the domestic economy continues to grow. For at least three administrations now, globalists of both major political parties have had the upper hand in Washington, and the result is that now the US, formerly a creditor nation, is now deeper in debt than any nation has been in all of history, produces some 7% less than it consumes, and is fast losing its status as the home of some of the best living standards in the world.

Another missed point is that different nations have different domestic economic systems, political systems, financial systems, and monetary systems. Over time, the only way to have unfettered trade between them without developing disruptive imbalances is for those systems to converge towards a common, global regime. As a result, the US finds itself in the awkward position of perpetually hectoring its trading partners in a futile effort to get them to Americanize their internal policies in order to try and rectify the imbalances which threaten its future. Much of the rest of the world resents what it sees as American economic imperialism. But the US has no choice – it must either change other nations’ way of doing business, or change its own. That is, unless it is willing to engage in serious reexamination of its own misguided policies and adopt a system of trade taxation that functions as a kind of economic impedance-matching device between itself and nations that have different systems. Rates on both imports and exports could be adjusted on a periodic dynamic basis between itself and each of its trade partners to provide glide path towards greater balance.  Another option would be to switch to a consumption based tax, which applies to all goods regardless of origin.

Of course all taxes are economically burdensome, but it’s never explained why they are are more so when they happen to apply at a political boundrary.