American Trade Policy
Keith Rankin, 2 June 1999
The United States wants to put a tariff of at least 20% on New Zealand sheepmeat imports. The American ambassador to New Zealand stated (eg on last night's television news) that he didn't think it would hurt New Zealand sheepfarmers much because their production is down anyway, thanks to the recent summer drought.
In an op-ed piece in yesterday's Herald, Andrew Lewis, a lawyer who specialises in trade law, questions: "The jury remains out on the genuineness of the American commitment to free trade and whether it extends beyond a commitment to promote the interests of its exporters." This question is particularly pertinent in light of the huge fuss that the United States made over Caribbean banana exports to Europe (see "What is the US playing at?", 14 February 1999).
The USA is behaving much as Great Britain did during its free trade era that began in the 1840s. (Britain set the scene in 1842 by forcing China to accept imports of opium from British India.) Britain had been one of the most protectionist countries in Europe, and it continued to be so after it adopted "free trade".
Free trade was Britain's form of protection in two ways. By trying to make other countries adopt free trade, as the United States does today, Britain was protecting its manufacturers. Further, by using free trade as a means to cut manufacturing costs, it was gaining an advantage over its trade rivals. The most important input into Britain's tradeable sectors was the increasingly imported food which represented the wages of British workers.
Both the dominant British school of thought on free trade ("free trade imperialists" as Bernard Semmel called them) and Britain's opponents (eg the German-American Friedrich List) were quite explicit about the nationalist intent of Britain's free trade policy. The few advocates of cosmopolitan free trade - free trade designed to make the world economy more efficient rather than to make Britain stronger than rival nations - were seen in Britain as liberal extremists. They were derided as "little Englanders".
The worry is that the Americans see the World Trade Organisation (WTO) as an organisation that can be used to promote free trade imperialism, and not cosmopolitan free trade.
One of the issues that British policymakers in the late nineteenth century mused over was about how the British could get foreigners to pay their taxes. (Indeed, during Britain's free trade era, the majority of Britain's public revenue came from tariffs; eg tariffs on wine which protected British brewers. They called them revenue tariffs rather than protective tariffs.) This externality approach to fiscal policy is key facet of free trade imperialism.
The United States wants to impose a tariff on New Zealand lamb. If New Zealand lamb is to be sold at the same price after the tariff as before (and American consumers will switch to other products if the price goes up), then this tariff will be a US federal tax paid for by New Zealand sheepfarmers. Indeed, if the United States government calls it a revenue tariff, then they may claim to be practising free trade.
The United States sheepfarming industry may have social benefits in places like Idaho. There may be good reasons for the United States to want to have a sheepfarming industry and for allowing their sheepfarmers to continue making a living in that way. This would then be what economists call a positive externality.
The correct prescription is a protective subsidy; not a tariff. The United States' government should pay its sheepfarmers a subsidy and let ours sell in the United States at the world market price for sheepmeat. The American government could reject this, the efficient option, to save on the cost of the subsidy and to gain tax revenue at the expense of those who export to the USA. Saving the sheepfarmers may be the excuse, not the reason.
While American sheepfarmers are seeking protection, so New Zealand pig farmers are seeking protection from pork imports from, among other places, Canada. Analogies have been drawn between the two situations. Canadian pig farmers, however, are subsidised. The two situations are not the same.
It may be correct to subsidise a small local industry to save it from extinction. It is not in accordance with cosmopolitan principles (promoting global economic efficiency) to subsidise an export industry (with some exceptions, which include the foreign aid implicit in the European banana trade and the need to pay minimum payments to agricultural exporters as a kind of social welfare benefit, at times when the world price is at a cyclical low point).
The correct New Zealand response to Canadian pork subsidies is a tariff. That ensures that both Canadian and New Zealand pork are sold in New Zealand at the world market price. While there may be consumption gains in New Zealand from cheap Canadian pork, the world economy is better off if traded products like pork are not subsidised.
A New Zealand tariff against such subsidised pork imports represents a cost to New Zealand pork consumers but a gain to a world. In the absence of tariffs on subsidised pork imports, the world produces and consumes too much pork relative to other preferred products. New Zealand should impose such a tariff, not only to protect our pig farmers from inappropriate competition, but also as our duty as members of the global economic community.
Just as free trade can sometimes represent a nationalist trade policy, likewise tariff protection can represent ethically sound trade policy, based on cosmopolitan principles. The cosmopolitan principle is that what is good for the world as a whole is ultimately what is best for each country in the world.
The United States of America is not motivated by cosmopolitan principles. Its preaching of liberalism and free trade serves a nationalist purpose. The United States, with its double standards, is not a good world citizen.
© 1999 Keith Rankin
Rankin File | 1999 titles