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The New Demon

5.“Unfair” wage differentials. The heart of Mr. Buchanan’s plea for protectionism is the huge difference between what American workers earn and the wages in many other parts of the world. Moreover, US regulations protect Americans from having to work, as some foreign workers do, under unsafe and unhealthy conditions. This further widens the differential, which in the end amounts to a direct extra cost to the businesses producing in the United States that are trying to compete with foreign products.

Mr. Buchanan seeks to neutralize this difference in cost by imposing on products from low-wage countries (not Western Europe or Japan) an “equalization tariff” sufficient to render their cost equal to ours. For example, if a textile firm here pays its workers $8 per hour while a competitor in Thailand can get the same work done for the equivalent of $2 an hour, and if labor expenses account for two thirds of total US production costs, Mr. Buchanan would equalize the situation by imposing a 100 percent tariff on imports of the Thai goods. If the wage differential were even greater, the required equalization tariff would be higher than 100 percent.

The equalization tariff is an old idea—though, as we shall see, not a very good one—and Mr. Buchanan traces its pedigree in this country to Lincoln, Theodore Roosevelt, and others. In all likelihood many of his current-day fellow party members will be surprised, or even embarrassed, by his claim that “this is sound Republican doctrine.”

The more important issue, however, is that according to this particular argument for protectionism, tariffs should be both general and permanent. The military preparedness argument applies only to highly specialized products; the infant industry argument calls for protection of particular industries, and even then only during their early phase of growth; and the bargaining chip argument favors imposing tariffs in the explicit hope of soon removing them. But there is no reason to think workers throughout the world will catch up to the American level of wages, and surely most Americans (including me) would join Mr. Buchanan in hoping that US workers will always have the world’s highest earnings. For America, therefore, an equalization tariff is a permanent tariff.

An equalization tariff also presents specific practical difficulties, and The Great Betrayal gives no indication that Mr. Buchanan has thought them through. To begin with, if the tariff succeeds in depressing American demand for foreign products, the US trade deficit will shrink, at least initially, and the dollar will appreciate in value. But a higher dollar will widen the differential in labor cost that the equalization tariff is supposed to neutralize. Would the tariff then go up in response? (In the example above, a 25 percent rise in the exchange rate between the dollar and the baht would reduce Thai wages to $1.50 per hour in dollar terms; in order to equalize production costs the tariff would have to rise from 100 percent to 118 percent.) If so, the dollar would appreciate yet further. Would the tariff go up yet again? Where would the process stop?

Lincoln and Theodore Roosevelt did not think about this problem when they advocated an equalization tariff, presumably because they did not imagine a world of flexible exchange rates set by market supply and demand for different currencies. But we do live under market-determined exchange rates, and so such questions are not only pertinent but important.

What, moreover, about the resulting damage to US exports? Not only the equalization tariff but the other anti-import mechanisms that Mr. Buchanan proposes—a 15 percent general tariff on goods even from high-wage countries in Western Europe, the special anti-Japanese measures, and others—would all drive up the dollar, and as a result American products would become more expensive to foreign buyers. Some part of the decline in US imports would therefore be offset by a parallel (though presumably smaller) decline in US exports. In the end the net reduction in the US trade deficit might be fairly modest.

Strangely, Mr. Buchanan completely ignores the costs that his proposals would impose on American workers and firms in export businesses—most of whom are, after all, in the manufacturing industries that are his main concern. He also chooses to disregard the possibility that other countries might respond to our new tariffs by raising their tariffs on our own goods (the bargaining chip argument in reverse), which would impose further costs on our exporters.

Third—and here is the fundamental tension between protectionism and free markets—an equalization tariff would remove much of the incentive for US industries now competing against imported goods to work harder and more efficiently to innovate, invest, and improve their products more generally. The main reason American workers earn far more than Thai workers is that Americans are so much more productive. That higher productivity is in turn the result of decades of investment and innovation and strategic management, in one industry after another, together with the more widespread education and the superior training of our work force. Once an equalization tariff were in place, any export industry that improved its efficiency would see its gains neutralized by the resulting reduction in its level of tariff protection.

Under such a tariff, increases in US firms’ productivity become equivalent to increases in foreign firms’ wages, in that both reduce the differential between production costs here and costs abroad. Either way, the tariff declines. Conversely, under an equalization tariff US firms would have little incentive to resist steps that reduce their productivity (for example, padding payrolls and providing cushy executive perks), since in that case the resulting tariff increase would offset the resulting wider cost differential.

The fundamental point is that protectionism causes economic damage through a dynamic process. It is not enough to calculate who loses jobs when foreign imports gain a share of our markets, and who will be able to buy goods more cheaply. What also matters is how markets and companies and individuals change over time. Permanent, general tariff protection will dull the incentives to make changes that boost productivity; and it will therefore reduce the medium- and longer-run growth of both productivity and wages. The specific form of protectionism that Buchanan advocates, an equalization tariff, is especially insidious in just this way.

Isolated bits of rhetoric notwithstanding, The Great Betrayal makes clear that Mr. Buchanan is no fan of free markets. It is true that he tries, in one chapter, to distinguish the “free trade” that he so vigorously opposes from “free markets,” which he supposedly favors. But in the end his angry denial that free-market outcomes have any claim to superiority could just as well have been written by John Kenneth Galbraith, Senator Edward Kennedy, Robert Reich (whom Mr. Buchanan quotes approvingly), or Robert Kuttner:

Neither the national economy nor the free market is an end in itself. They are means to an end. A national economy is not some wild roaring river that must be allowed to find any course it will, to be admired for its raw power and beauty. It is to be tamed for the benefit of the nation. The same holds true for the market. While an unfettered free market is the most efficient mechanism to distribute the goods of a nation, there are higher values than efficiency. To worship the market is a form of idolatry no less than worshiping the state. The market should be made to work for man, not the other way around.

Mr. Buchanan is clear, therefore, in putting the national interest first: “The economy is not the country; and the country comes first.” He quotes with approval the Austrian philosopher Wilhelm Roëpke to the effect that “there is more to the whole of life …than maximizing GNP.” Similarly, he curtly dismisses the classical argument against protectionism—that is, that the gain to people who buy foreign-made goods outweighs the loss to people who would otherwise produce those goods domestically—saying “the national interest must take precedence over any consumer demand for foreign products.”

But what is the national interest? For Mr. Buchanan, “manufacturing is the key to national power.” Part of his rationale, which derives naturally from his historical perspective, is geopolitical. Buying essential goods from foreign suppliers constitutes a form of dependency. If a country lacks some natural resource, like oil or chromium, there may be no alternative to importing it; but he has little patience for the idea of importing goods that in principle we could make ourselves. His other reason for concentrating on manufacturing is more plainly economic: “Not only does it pay more than service industries but the rates of productivity growth are higher and the potential of new industry arising is far greater.”

Even apart from the fact that the earnings differential in favor of manufacturing in the United States is modest ($13.17 per hour on average in 1997, versus $12.26 on average for all US business), and even if we discount the modern emergence of service industries (for example, telecommunications and computer software) that deliver strikingly rapid productivity growth and have generated vast new industrial potential, the problem is that only 15 percent of American workers are employed in manufacturing.

As a result, while Mr. Buchanan laments the stagnation of Americans’ living standards, he pays no attention to the further erosion of average US living standards overall that would result from the loss of the gains from trade. Similarly, while he professes to speak for all Americans (other than members of the “transnational elites”), he would not hesitate to force low-and middle-income workers to pay more for their cars and computers and cameras in order to subsidize the jobs of their higher-income fellow citizens who make those products. (Mr. Buchanan further compounds this poor-to-rich redistribution by proposing to use the proceeds of his various tariffs to reduce income taxes not for incomes in general but for income earned from investment and saving. Since high-income taxpayers disproportionately engage in those activities, he is, in effect, using the tariff to impose a tax on lower-income citizens and rebating the revenue to high-income people.) Indeed, the well-being of the 85 percent of working Americans who do not earn their living from manufacturing never directly enters his argument.

Does it make sense to believe that manufacturing, apart from specific military needs, is “the key to national power” today, just as in Alexander Hamilton’s time? What would Hamilton have thought, for example, about the growing importance of computer software? How about the financial industry? Historically, from Spain in the sixteenth century to Britain in the eighteenth and nineteenth centuries to America for much of this century, foreign investment—one country’s using its capital to finance industry and commerce in another—has been a well-recognized way of gaining national influence and power. Even so far as manufactured goods are concerned, why do the US industries that compete against foreign producers in our home market matter more for American national power than the US industries that export into foreign markets?

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