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 Fighting the last War


It’s said that military planners prepare to fight the last war. The same can be said, perhaps, of trade policy makers. They, too, prepare to avoid mistakes made in the past. In the process, they make new mistakes in the present without even realizing it.

The past mistake was an attempt by industrialized countries to alleviate job insufficiency during the Great Depression by imposing tariffs on products imported from abroad. The U.S. Government enacted the Hawley-Smoot Tariff Act in 1930. European nations, also afflicted by Depression, reacted in kind. They also raised tariffs. The net result was that no nation managed to gain jobs. Whatever jobs were saved by restricting imports were lost in missed opportunities to export products.

Having learned their lesson, policy makers during and after World War II initiated a policy of free trade. That way, all nations could enjoy the opportunity to export products. The world would benefit by increased specialization. In the successive rounds of discussions under the General Agreement on Tariffs and Trade, nations negotiated progressively lower tariffs and reduction of non-tariff trade barriers. The process has continued under the World Trade Organization (WTO).

What people do not realize is that the global economy today is not what it was in the 1930s. Then one could reasonably assume that nation states and corporations headquartered within their jurisdiction had much the same interests. National governments would negotiate to the benefit of those companies under the assumption that their well being would accrue to the community as well. C.E. Wilson, president of General Motors, stated the principle when he said: “What’s good for General Motors is good for America, and vice versa.”

Few corporate leaders today would echo that sentiment. Most large corporations have operating units in several different countries. Loyal to all, they are loyal to none. Loyalty to a particular nation is regarded as an emotional extravagance. Some business leaders believe that national boundaries are obsolete. They are in business to make money for the shareholders (and for themselves), not to look after the welfare of employees, governments, or anyone else.

Business firms that transcend national borders - often called “multinational corporations” - can play one government off against another to their own advantage. They are likely to locate production in countries with a favorable business climate, which means low taxes, low wages, and absence of government regulation. In other words, they will go where costs are lowest to produce goods. It seldom happens, however, that markets are located in such places because strong markets depend on a base of people with money to spend. These would be people with high-paying jobs.

So the companies are in a dilemma: They need to produce in low-wage countries and sell in high-wage countries. Suppose the high-wage countries put a tariff on products entering their country? That might defeat the scheme of producing abroad. Not to worry. The free-trade system guarantees that this cannot happen. The high-wage countries have a quasi-treaty with other countries that will not allow them to impose tariffs unilaterally (except under mutually agreed conditions). The multinational corporations are home free.

What has really happened in the years following World War II is that prosperous manufacturers often attract unions which drive up wages and other costs to a level out of line with the rest of the economy. For competitive reasons, management wants to lower the firm’s cost of labor; but the union stands in the way. Management could hold firm during a strike, but that approach is too risky, especially for the CEO who wants to keep his job. Therefore, the strategy is to bypass high-priced labor. Investing in labor-saving equipment is one approach. Outsourcing production to low-wage countries is another.

Free trade has become important to multinational corporations as a union-busting tool. Without risking the bad consequences of a strike, management can give in to the unions during contract talks but then suddenly close down the unionized plant while opening up another plant with nonunion employees. But there is then the danger that a successful union drive will unionize that plant as well. A safer strategy is to open up a plant in another country where government is on the side of business and will ensure that the plant is kept free of unions or else that workers are represented by government-run unions that negotiate sweetheart deals with the represented employees.

The bottom line is that free trade lets business shift its resources and products freely around the world without paying a penalty to government in the form of tariffs. The company is free to bust unions by ceasing production in unionized plants and starting up production elsewhere. It’s an ideal situation from a business standpoint. Free trade is, however, not so good for the work force in high-wage countries such as the United States. They need protective tariffs for their labor to remain competitive from a cost standpoint. And government needs the taxes which these working people pay.

The new global economy is this: Multinational corporations have outgrown national governments. In a free-trade environment, there is no way that government can regulate these large-sized business entities. If they were allowed to impose tariffs, they would have such a regulatory mechanism. Through tariffs, they would affect the ability to sell products in the affluent markets which these governments control.

Therefore, I think that tariffs could be a cornerstone of a trading system in the future. In such a system, national governments would agree to use tariffs in a consistent manner for the purpose of regulating business entities. They would agree to use tariffs to promote a certain kind of global economic development. We would then have moved beyond the model of trade where one national government negotiates with another to benefit its own industries to a model of trade where national governments cooperatively use tariffs to regulate business.

We need, therefore, to fight this war, not the trade wars of the 1930s. Who would have thought then that business firms would become so disloyal to their countries of origin and to the people who made them what they are that they would move their production and jobs to other countries? No, the new war is to get the multinationals under some kind of political and social control.

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