On Wednesday, Oren Cass responded to my response to his American Compass essay on globalization and free trade. In his American Compass essay, Cass argued for a “bounded market” where “economic analysis and legal treatment of activity depends on whether it occurs within the boundary, across it, or beyond it.” In my response, I argued that we already have a bounded market, given that we have basic customs enforcement plus a whole host of protectionist measures, and that when government sets boundaries in the market, it will inevitably be subject to special-interest capture.
Cass was unimpressed. In response to the question, “What to do?” Cass wrote:
Pino has no idea. In his defense, neither do most people who have spent recent decades reciting the conservative priesthood’s various incantations, only to discover them irrelevant to the real world and its problems. Pino has the compulsory reference to the number of chapters and pages in a particular government regulation and the head-scratching example of different regulatory treatment for two similar products. He demonstrates mastery of the public-choice lament that “elected politicians chasing votes and campaign donations are going to listen to” interest groups in formulating public policy. He concludes with the suggestion to “mak[e] the government a little less powerful.”
In one sense, Cass is right: I have no idea how best to coordinate and organize the purchasing decisions of 330 million people in a way that will optimize national well-being. That belief is not primarily based on faith but on what we know about the nature of government intervention and the incentives policy-makers face.
Cass seems to have faith in the government’s ability to generate better outcomes, though. He argues for “clear, simple, universally applicable rules that set the parameters within which free-market competition can flourish — for instance, a global tariff, a market-access charge, or tradeable import credits.”
Cass gives a backhanded compliment to my “mastery of the public-choice lament,” but he would do well to take it more seriously when proposing government intervention. Universally applicable rules for trade may sound good in theory, but they won’t stay that way in practice.
Let’s take Cass’s suggestion for a global tariff, and let’s set it at 20 percent for all imports. (The idea of this policy is to reduce the trade deficit.)
Among the first groups to show up to protest this will be automakers. Ford and GM both rely on parts from manufacturing facilities right across the border from Detroit in Ontario. (For all intents and purposes, Detroit and Windsor, Ontario function as one economic zone despite being in two different countries, with thousands of people commuting in both directions every day.) We saw how important these connections were when the Ambassador Bridge was blocked for almost a week by protesters, leading to shifts being canceled for auto workers in several facilities on both sides of the border.
If the general tariff Cass envisions were on the table, Ford and GM would come to the government and say, “Look, we get that you want to have a global tariff — and we love that it would apply to foreign cars — but Detroit and Windsor need each other, and it’s not like we’re importing from some far-off place like China, so could we please have an exemption?” They’d explain that without the exemption, they’d have to lay off workers, and their car production numbers would be thrown off for years.
At this point, the government would likely give in and grant an exemption because there are few things less popular than autoworker layoffs. But let’s say the government was feeling tough, and it said, “Sorry, you should have been making the parts in America all along!”
Ford and GM would come back and say, “We really will have to lay people off. If you’re dead-set on this global tariff, you’re going to need to compensate us. We’ll need some tax breaks and some subsidies, and we’ll build a new facility in Michigan, but we’ll at least need an exemption for a few years while we move production from Windsor.”
The government takes the deal. Hooray! The policy moved jobs to the United States.
But it did so by creating more corporate welfare and giving the government new strings to pull to influence the automakers’ behavior. Imagine a future presidential administration making those tax credits and subsidies conditional on accepting some political agenda (the connection between cars and climate change, for example, is not hard to make). The flip-side to “the power to tax is the power to destroy” is “the power to subsidize is the power to control.”
More crucially, granting the exemption, even though limited, would mean lobbyists would smell blood in the water. Every other industry would send its men to Washington, saying, “Hey, while you’re granting exemptions . . .
- “. . . Western New York and the Golden Horseshoe region of Ontario have similarly integrated economies as Detroit and Windsor, so companies that operate on both sides of the border there should have similar exemptions.”
- “. . . many American oil refineries are specially designed to process particular types of foreign oil, so crude-oil imports should be exempt from the tariff to avoid huge job losses in the American refining industry.”
- “. . . there’s only one mine for platinum-group metals (PGM) in the United States, and we wouldn’t want that one company to be able to hold American car and electronics production hostage by being the only PGM company in the world not subject to the 20 percent tariff, so an exemption would be good there, too.”
And those are only the somewhat reasonable demands, before we get to the sugar-as-a-national-security-threat style of arguments that, however ridiculous they may be, still have significant purchase among American politicians.
The way to avoid this compounding nonsense is to not go down the path of trying to optimize economy-wide outcomes through government intervention to begin with. Such actions inevitably result in labyrinthine schemes that grant privileges to certain producers over others.
The reason to avoid this trap is not some utopian sense of global fairness. If all the costs to such intervention were borne by foreigners, there might be a case for taking them. But the costs of government-granted privileges for corporations are ultimately borne by American consumers, through higher prices, fewer options, and yes, less freedom to spend their hard-earned money as they see fit. If we want to see a flourishing American economy, a goal Cass and I share, we should take pride in our place as a hub in the global marketplace and remove the government regulations and taxes that unreasonably hold our people back from participating in it.
As to whether that’s a conservative goal, I’ll take my cue from Edmund Burke, who wrote in a letter that the goal of his extensive free-trade advocacy in Great Britain was “to fix the principle of a free trade in all the ports of these Islands, as founded in justice, and beneficial to the whole; but principally to this, the seat of the supreme power.”