President Trump’s sudden announcement of tariffs on steel and aluminum is by no means unprecedented – Presidents Reagan and George W. Bush took similar actions. Yet it emphasizes a reality first pointed out in these columns in 2010 and in a presentation later that year: the globalization project, beloved of Whig economists and big-government types everywhere, is falling apart. De-globalization is here to stay and, contrary to Whig belief, it will be good for the world economy and for our living standards.
The theoretical case for free trade, and to a lesser extent free movement of labor, is simple and clear-cut, first expounded by Adam Smith and David Ricardo. By reducing barriers to the movement of goods and people, production is globally optimized, so that every product is produced in the location with the greatest comparative advantage, while workers move to where they are most valuable. In this way, global output is optimized. Mathematically, it is a very simple model, full of linear equations, which are the ones economists are capable of solving.
Like all economic models, it rests on several assumptions, not all of which are valid in the real world. It ignores the fact that tariffs yield revenues to the governments imposing them, so a free trade policy imposes additional costs on that country’s citizens in the form of higher income and other direct taxes. It assumes a Gold Standard world, in which the “optimal” global production structure, once found, is stable – in our world of fluctuating fiat currencies, comparative advantage is forever shifting, so the optimal structure is valid only for a nanosecond.
Most important, it assumes no government interference at any point in the process. Producers trade with each other between a large number of independent countries, each of which is free to impose regulations and restrictions if it wants, but damages its competitiveness, its export potential and generally its economic well-being by doing so. Just as tariffs are economically damaging in this system, so too are regulations limiting imports; a prohibition against an import makes its price infinite and is thus more damaging than even the largest tariff. In the theoretical model, all goods and services are freely traded and there are no non-tariff barriers blocking them, or international organizations adding costs to the system.
Since 1991, the world’s governments have been trying to return to a free trade world, or at least that’s what they have been telling the public. In fact, the free trade world to which they are pretending to return existed for only a very short time. The Cobden Treaty of 1860, freeing trade between England and France and implementing a British free trade policy, was followed in 1862 by the U.S. Morrill Tariff, passed by the new Republican Congress and setting tariff rates at far more protectionist levels than previous U.S. tariffs. French and German tariffs followed shortly thereafter, after which the world was not one of free trade, but of protectionism, with one foolish sucker, Britain, losing industry after industry to foreign competitors and squandering its early industrial lead.
The “globalized” world we lived in from 1991 to 2016 had a number of differences from the theoretical model, which made it economically unattractive, as evidenced by the prolonged period of very inferior economic performance in 2007-16. First, after the North American Free Trade Agreement and the Uruguay Round of trade talks were signed in 1994, no further global free trade deals were completed. Instead, the world indulged in an orgy of bilateral and regional deals. Even in theory, a world traversed by a cat’s cradle of bilateral and regional free trade deals is not a free trade world; flows of goods and services are diverted in numerous very complex ways and are nowhere near optimized.
More important, the bilateral and regional deals that were signed were not true free trade deals at all, because they related mostly to labor standards, environmental standards and above all, the protection of intellectual property. Patents and copyrights are not instruments of free trade, they are barriers to it. Just as free competition minimizes prices and produces an optimized economy, patents and copyrights increase prices, divert trade and make the economy more sub-optimal.
In the United States, the importance of patents and copyrights has enormously increased since the 1981 Supreme Court decision allowing software to be patented and the Digital Millennium Copyright Act of 1998, which gave 99-year copyrights on everything written since 1923. This legislation, together with the proliferation of patented pharmaceutical products, has resulted in an incredible tangle of “intellectual property” mostly held in offshore tax havens. By the trade treaties since 1998 in which the U.S. has been involved, these excessive protections have been extended to its trading partners, increasing costs everywhere.
The Trans-Pacific Partnership treaty, abandoned last year by President Trump, was another such boondoggle. On Congressional Budget Office figures all the benefits to the United States came in the form of $79 billion of patent and copyright fees, while U.S. manufacturing suffered a loss of $44 billion. While there needs to be some protection for intellectual property, the 14 years granted by the Copyright Act of 1709 seems ample; enforcing the grossly excessive U.S. protections merely encourages rent-seeking like the drug-price hikes of Martin Shkreli, only on a global scale.
A second way in which the “globalization” of 1991-2016 differed from the classical free trade model was in the proliferation of global organizations and regulatory agreements. Regulation in a single country hurts mostly that country’s economy; if there are many jurisdictions, a beneficial competition removes many of the most damaging impositions. However global regulation is a different matter; there is no escape from it and no possibility of seeing how much richer we would be without it. The global warming regulatory hysteria, in particular, was responsible for a least a significant part of the economic malaise of the last decade. There is now a movement to increase greatly the flow of costly and disruptive refugees that countries must absorb, all in the name of a climate change that appears not to be happening.
The modest benefits of complete free trade (as distinct from an orderly system of moderate tariffs) can very easily be swamped by the costs of global regulators and bureaucrats, loosed from any democratic or economic control. Free trade that requires a World Trade Organization to enforce it is not true free trade, and the existence of the World Bank, the IMF, the OECD and countless other international organizations counts heavily against the arguments for globalization. The ultimate globalist goal, of a world government imposing “political correctness” regulations on every single citizen, with no possibility of escape, is the worst current nightmare of the future short of nuclear holocaust; it needs to be stopped.
Globalization also appears to do more harm than good in the information area, which was not a significant consideration before the 1990s. The economies of scale in collecting information about everybody have led to a disquieting aggregation of market power among a very few huge Internet companies, which have personal data on a large percentage of the world’s inhabitants and which are thus vulnerable to hacking by “bad guy” governments and criminals generally.
Here the new de-globalization and national regulation may break up this cartel; if the EU, China, Japan and other countries impose balkanized regulations, producing a “splinternet,” the Internet behemoths will operate at a huge disadvantage outside their home markets. Moreover, a decentralized Internet, as appears to be on the way, will further fragment the market for information as well as allowing new and smaller companies, possibly with better algorithms, to compete with the behemoths.
President Trump’s proposed introduction of tariffs on steel and aluminum is squarely in the Republican tradition of the great William McKinley. A world in which global institutions have disappeared or become powerless and in which tariff barriers have returned has several advantages. It will reduce the massive swings in trade flows resulting from currency abnormalities – going back to the Gold Standard would achieve this also, but that’s not going to happen. It will prevent trade treaties that impose massive spurious “intellectual property” costs on consumers, forcing Disney World, Apple and the drug companies to price their products on a free-market basis. It will raise revenues for governments, almost all of which have huge budget deficits caused by silly “stimulus” spending in the downturn. Finally, it will disempower international bureaucrats, and ensure the disappearance of the nightmare of a “globalized” world with a monopoly global government.
Like most Whig panaceas, globalization produced much less benefit than it claimed, at a much higher cost. It was the equivalent of the 1834 Poor Law, which pushed the immiserated working classes into filthy and deliberately unpleasant workhouses. While not ignoring the genuine gains from careful application of the Smith/Ricardo model, we should wholeheartedly welcome the reversal of bureaucrat- and politician-led globalization.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)