11.15.2017 0

Reciprocity is the only sustainable path to free trade

By Rick Manning

Adapted from the Nov. 13, 2017 Soho Forum debate.

You know, as a non-economist, when I received the invitation to participate in this forum, I kind of felt like a Christian being invited into the Coliseum to meet the lions for lunch.  However, since this debate is largely a political and not an economic question, I am confident that the audience will find that I have some smooth stones at my disposal to take down Goliath.

After listening to the affirmative, I want to remind the audience of what this debate is about. The affirmative must prove this resolution: “The U.S. government should unilaterally abolish all tariffs and duties on imports and all subsidies to exports, thereby making all reciprocal trade agreements with other countries unnecessary.”

This resolution rises or falls on three words: UNILATERALLY, SHOULD and UNNECESSARY. Because ultimately, the affirmative demands that the U.S. should, in the real world, take unilateral actions, which in practical application will cause reciprocal trade agreements to become unnecessary. So, as we begin we will exam these three areas.

Let’s start with the terms unilateral and reciprocal. Unilateral action is the opposite of seeking reciprocal trade agreements as a precondition to lowering tariffs and lifting subsidies. But reciprocity is not merely a negotiating stance, as well shall see, it has been the basic building block for sustainable free trade and other agreements in modern history.

In Professor Boudreaux’s own words, reciprocity ‘most important’ reason there is any free trade

In order to understand the need for reciprocity, one need not look any further than Professor Boudreaux’s own book, “Globalization,” a $61 requirement for his ECON 309 Students at George Mason University.

Professor Boudreaux writes unequivocally on page 123, “By far the most important modern institution for promoting freer international trade is the General Agreements on Tariffs and Trade (GATT)…” Why?

As Professor Boudreaux explains in his book, GATT was based on reciprocity and he outlines all of its advantages: “Under GATT, countries mutually agree to lower their tariffs and to grant most-favored trading status to each member of the GATT agreement. From each government’s perspective, the immediate gain—the gain that is most politically beneficial—is that each government can assure its citizens that, in exchange for lowering tariffs at home, that government has extracted promises from foreign governments to lower their tariffs… Because each government’s tariff reductions are bound together in a single agreement, no government has to worry that it will lower tariffs without other governments lowering their tariffs simultaneously and in accordance with the terms of the agreement.”

As the book continues, so Boudreaux must agree, lower tariffs have only encouraged more global trade, arguing the result has been freer trade. It was GATT which propelled U.S. tariff rates on imports to fall from an average of 30 percent at the end of World War II to about 5 percent today and drove down tariff rates all around the world between developed nations, too. GATT facilitated the tariff reductions that the affirmative world so desires, proving that the tariff reduction could not be done unilaterally, but only through reciprocal trade agreements.

Professor Boudreaux ends the argument succinctly on page 124, writing “No other such sustained decrease in tariff rates is found in U.S. history,” and “Most informed observers credit GATT for this success.”

In short, it is none other than Professor Boudreaux who persuasively makes the case in his book that the mutual, reciprocal trade agreements in GATT are the only reason for the sustained reduction of tariff rates worldwide we see today. If the goal is free trade, if the goal is to continue reducing tariffs and other non-tariff trade barriers around the world in a sustainable manner, you must vote against the affirmative, because you need reciprocal trade agreements.

Singapore has pursued reciprocal trade agreements

In contrast, I expect a lot will be made tonight over Singapore’s long-held, unilateral near-zero percent tariff.  For a number of reasons, this island nation’s experience negates all three of the affirmative’s burdens — UNILATERAL being more desirable than reciprocal, the real-world SHOULD test, and the reciprocal agreements being UNNECESSARY test.

It is instructive that as Singapore entered GATT with their near-zero tariff rate in 1973, their Finance Minister Hon Sui Sen argued vociferously for developed countries like the U.S. to lower their tariffs, noting that Singapore had already unilaterally lowered theirs. [See: Appendix 1.] Hon also urged special and differential treatment for developing economies whereby developed countries lower their tariffs first in order to help the lesser developed economies to grow.

But, since Singapore’s tariffs were already low, Hon demanded no such non-reciprocal protection for Singapore. From Singapore’s perspective, then, it was seeking reciprocal trade tariff reductions from the developed economies.

To disprove the affirmative, one need only find a single reciprocal trade agreement being necessary in a post-unilateral tariff reduction environment. Here, with Singapore, we have several to look at. Thirty years later, Singapore has succeeded in getting reciprocal trade deals permanently eliminating all tariffs with the U.S. and Australia, and others where there is still more work to be done in removing barriers, as with China and India.

Coupled with the sustained dramatic decline in tariffs globally under reciprocity achieved in GATT, it would be foolish to move away from the only proven model for success, which is reciprocity.

What worked in Singapore might not work in the U.S.

Singapore also negates the real world SHOULD problem for the affirmative by providing a real-world example of a nation that created the framework to succeed in global trade through key domestic policies, which besides reciprocity in trade from developed economies, are the true reason it competes well with its trade partners.

In 1965, Singapore became independent from Malaysia, and put temporary import quotas in place for a small number of products for the next four years. During that period, their single party government ended labor strikes by eliminating labor unions, aggressively built industrial infrastructure, educated its people for industrial technical jobs, reformed fiscal and monetary policy, and only then eliminated the import quotas entirely.

The affirmative makes no such preparation for the U.S. economy for what would be a dangerous unilateral action.

Currently, the U.S. has the highest corporate tax rate in the developed world, an onerous regulatory regime designed to export environmental risk and restrict the flow of capital, a free market system that does not engage in top-down industrial policy, an education system that emphasizes liberal arts rather than technical education, a robust two-party system of government that slows legislative action to a crawl, and a Constitution that has tariffs embedded into it. Not to mention politically potent labor unions.

Unlike Singapore, the affirmative — since it doesn’t mention it — would have politicians make the unilateral tariff cut to zero without at least significantly lowering corporate income tax as well as rolling back large portions of the Administrative regulatory state, all guaranteeing a massive political backlash and failing the SHOULD test. Further, where is Professor Boudreaux’s plan to achieve two-thirds support of Congress and three-quarters of the States to amend the U.S. Constitution?

Former Rep. Tim Huelskamp proves why Farm Belt will never vote to unilaterally overturn agricultural subsidies

At this point, I’d like to augment this SHOULD slash REALITY argument to the export subsidy statement in the affirmative. For the past seventy or so years, conservatives and libertarians have argued for ending agricultural subsidies and have failed. The reason they have failed is as clear as the red political sea throughout the farm belt and rural communities on the electoral map. These farm state Republicans like farm subsidies for political purposes, if for no other ones. Exhibit A of the dangers of opposing these subsidies is Representative Tim Huelskamp, a member of Congress from Kansas. Huelskamp tested whether voting against farm subsidies was politically viable in the heartland last Congress, and now he is known as former Representative Tim Huelskamp.

This proves that voting against farm subsidies is a political non-starter for scores of Republican members of Congress. Heck, we can’t even fully get rid of ethanol subsidies because the road to the presidency runs through Iowa.

Don Boudreaux’s position is that a large group of Members of Congress should run lemming-like over the cliff of ending subsidies. They won’t. But even if they did, the result would be disastrous, because they would be replaced, in many cases by Members who think Bernie Sanders is too conservative.  And just as they would put the subsidies back in place before any potential benefits could be felt, those who sought to end them would be politically discredited for a generation.

Again, the affirmative has no real-world solutions and due to that, the affirmative fails in meeting the SHOULD burden.

The slave trade was not abolished unilaterally

Finally, the affirmative concludes their statement, “thereby making all reciprocal trade agreements with other countries unnecessary.”

As you recall, the negative has already shown that Singapore as a nation that unilaterally ended tariffs, proves the negative by virtue of their subsequent aggressive pursuit of reciprocal free trade agreements.

The fact is that reciprocal trade agreements are not just or even primarily about tariffs or subsidies. They are about the conditions of trade including but not limited to: labor conditions, intellectual and physical property rights protections, dispute resolution, regulatory environments, customs rules, social goods and human trafficking among many others.

Because Boudreaux makes no accommodation for non-economic reasons to maintain reciprocal trade deals, the affirmative position can only be that simply by lowering tariffs to zero, trade deals that protect against the predatory taking of intellectual property become unnecessary, similarly anti-human trafficking provisions in trade deals become unnecessary in the affirmative’s world.

The affirmative is wrong.

In fact, one of the most significant trade deals in history involved human trafficking. After Great Britain eliminated the slave trade in 1807, it then pushed France and Spain to join them in the anti-slave trade Treaties of 1814 and 1817. These major sea powers jointly agreed to end the slave trade and use their respective navies to enforce the agreements.

It was this anti-slave trade agreement model that Great Britain used along with their economic and military power to convince other states diplomatically to abolish the slave trade, including such a treaty with the U.S. government of Abraham Lincoln in 1862 to sign. This moral, not economic, consideration put another nail in the Confederacy’s coffin, even though it was in the British Empire’s economic and expansionist interest to join with the Confederacy in the U.S. Civil War.

This is a clear case of an economic trade agreement entered into for other national interests and ideals rather than simply economic ones.

Reciprocity still needed today or WTO, free trade enterprise could fail

What’s more, today reciprocal trade agreements remain essential under any tariff environment, because as Professor Boudreaux noted in his book on page 125, the WTO was founded to end certain trade abuses that were still occurring under GATT. Per Boudreaux, since GATT lacked enforcement mechanisms, the WTO through its resolution process would ensure tariff reduction would be sustained without cheating.

With other non-tariff barriers to trade like currency manipulation today emerging along with predatory practices on technology transfer occurring, and human trafficking remaining a cause for concern in locations such as Malaysia, it is more essential than ever to keep the underpinning for reciprocity in place. GATT and now the WTO are places the U.S. can use its leverage.

It is unassailable that modern bilateral and multilateral reciprocal trade agreements have many elements beyond tariffs making them necessary even in a unilateral, zero tariff and subsidy environment, because at the end of the day the U.S. will want to export goods and commodities, and to do that, you will in all likelihood need a trade deal with the countries you’re exporting to.

Overall, the affirmative fails all three of its tests.

One: Professor Boudreaux asserts in his book that it was reciprocity that has been the vital component to sustaining and expanding free trade, not unilateral action.

Two: The real world SHOULD test Boudreaux imposed upon himself fails miserably — just ask my friend, former Representative Tim Huelskamp.

And Three: Trade agreements with other countries will remain necessary regardless of tariff rates and subsidies because tariffs and subsidies are but a small part of modern day reciprocal trade agreements.

As such, you must vote for the negative.

Zero for Zero

If, as the affirmative argues, the largest economy in the world unilaterally lowered our tariffs and subsidies to zero, it would end the U.S.’s practical leverage to induce other countries to lower their tariffs to gain better competitiveness in U.S. markets, and in so doing undercut the political basis for sustaining the enterprise.

This is why my organization advocates something called Zero for Zero, with sugar being the first commodity being considered. With this policy, Congress would end sugar subsidies, but only after the President negotiated a reciprocal deal through the World Trade Organization (WTO) with other major sugar producing nations like Brazil and India.  Once the President certified a deal, the subsidies would go away.  This is a politically feasible model for ending agricultural subsidies, using the tested and proven power of reciprocal trade deals to get it done.

Conclusion

As Professor Boudreaux argues eloquently to his class in Fairfax, Virginia that, on pages 135-136 of hisbook, in the final paragraph, he makes the case conclusively that reciprocal tariff reductions are superior to unilateral: “[P]olitical reality being what it is, governments very seldom practice unilateral free trade. Perversely, a government will remove rocks from its harbors only when it can be sure that other governments will remove rocks from theirs. And if other governments toss more rocks into their harbors, each government’s temptation is to toss more rocks into its own. But after the catastrophic orgy of choking harbors with rocks between the wars, government officials realized that they had to find some means of mutually agreeing to clear their harbors—that is, to lower tariffs and open trade. GATT (and now WTO), the World Bank, and the IMF are the principal monuments to this admirable realization. GATT especially is responsible for the extraordinary post-World War II reduction in harbor-clogging tariff rates. For free-trade purists, GATT and WTO are often annoyingly modest and slow in moving the world toward freer trade. The results, though, cannot be seriously disputed: trade today is much more free than it was just fifty years ago, and there is no sign today of any major retreat on this front. Without GATT and WTO, this progress is highly unlikely to have occurred.”

Again, to repeat, Professor Boudreaux states that it is GATT and WTO, reciprocal tariff reduction agreements, and not unilateral tariff reductions, which are the principal reason trade today is much freer than it was. By Boudreaux’s own contention, if we had relied merely on unilateral tariff and subsidy reductions and ignored the need for diplomacy and achieving reciprocity, the progress on free trade we see today “is highly unlikely to have occurred.”

In the real world of Professor Boudreaux at George Mason University, he rightly teaches the negative position to his students, and even forces them to buy his book to make the point.  In the wouldn’t it be nice world here in New York City, Don Boudreaux argues the contrary taking the affirmative position.

Given that Don is of two minds on this subject, and it is clear that reciprocal trade agreements are an honest, politically viable pathway to zero tariff rates, and finally that reciprocal trade agreements remain necessary in a post tariff world, you have no choice but to vote for the negative.

Rick Manning is the President of Americans for Limited Government.

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