Protectionism, I once said to Irving Kristol, is a bad idea. It benefits producers, but it harms consumers. “Where," he asked, "is it written that the welfare of consumers takes precedence over that of producers?" Reflection required, not a new experience after an encounter with Irving. And in this case reflection produces the notion that protectionism might not be the worst of policies under current circumstances, and certainly not as harmful as Donald Trump's caudillo capitalism.
Advocates of free trade assume that the interests of consumers are indeed paramount, not least because producers are also consumers and, more important, because international specialization of labor undeniably leads to efficiencies in an assumed world in which goods, capital, and labor move freely in response to competitively determined prices for goods, capital, and workers. A world in which, as the late Joseph Schumpeter describes it, free trade breeds "those principles and practices of foreign policy that are associated with free trade, such as the settlement of disputes by mutual concessions or arbitration, reduction of armaments, international gold monometallism, and the like."
While we await such a world, though, we must live in the one we have: where the prices of goods are rarely set in purely competitive markets, the price of capital is determined by central banks, and the price of labor is set in an unequal bargain between the workman/seller of labor and the buyer, especially now that the power of trade unions in industries manufacturing tradable goods is not what it once was. Equally important, it is a world in which politicians in democratic countries cannot long ignore a public sense that the trading system is working to their disadvantage, cheap microwave ovens in Walmart notwithstanding.
We also live in a world in which the greatest engine of material progress in history is sputtering. Market capitalism continues to produce enormous wealth and, where newly introduced, moves billions of people from subsistence to more comfortable lives. But the American variant is coming through a long period of producing very little growth, most especially in the living standard of the middle class, while the incomes and wealth of those at the top of the heap are rising at very rapid rates.
This, it is believed, is due to globalization, or at least to two aspects of it. The first is the efficiencies available to multinational companies in an era of declining transportation and communication costs. This enables skilled managers and financiers to spread their talents over larger and larger enterprises, and to demand compensation commensurate with those expanded responsibilities. That is compounded by the flaws in our corporate governance system—the absence of term limits on board membership produces what Kristol called a "self-perpetuating oligarchy" that wants no CEO to earn less than the average of those in other companies, a problem perpetuated when the CEO monitors himself by also donning the hat of board chairman.
The second feature of globalization contributing to discontent with the way capitalism and free trade distribute benefits is the entry of billions of relatively low-paid workers into the internationalized labor market, toiling in countries for whom free trade is considered a handy label for trade that is often a one-way street. Suddenly, the little old lady sewing T-shirts in a U.S. factory, law-abiding, her carefully scrubbed children sent off to school and church, her taxes paid, finds she can't compete with a $1-per-day laborer in faraway China or nearby Mexico. She is neither work-shy nor one who prefers benefits to an honest wage. She is the collateral damage of globalization and, if truth be told, free trade as practiced in today's world. Chinese-made goods that fill the shelves of Walmart, displacing those she once produced, are made in highly subsidized factories, using highly subsidized capital from highly subsidized state banks, and sold at prices made even lower by the manipulation of China's currency. In many cases, the new imports are manufactured under conditions that we in America long found an intolerable imposition on our workers and imposed costly regulations to eliminate. Add to all that the downward effect on the wages of the unskilled resulting from the free movement of people: immigrants, legal and otherwise, compound the domestic misery created for the unskilled by the free movement of goods, at the same time inflating profit margins.
This is the world in which we live, the one in which President-elect Trump will have to attempt to make and execute a trade policy that gives weight to two realities in addition to those already cited. It is a world in which our trading partners' devotion to free trade is somewhat less than our own has been; witness China's 25 percent tariff on imported cars, compared with our 2.5 percent. It is a world in which the Chinese state is among the top 10 shareholders in 39 percent of its listed companies. Equally important, it is a world in which our attempt to preserve free trade is having dangerous effects on popular support for our political/economic system, and on our national security.
The danger to our system arises from one of its strengths—its survival depends on the consent of the governed, which can no longer be taken for granted. It is not only the untutored affluent college students who find socialism attractive and rallied to the banner of an avowed socialist who barely missed taking control of the Democratic party. A large part of the working class is also disaffected; witness its decision to install Trump, who promises to feel their pain and what's more act to relieve it by whatever means necessary. It no longer believes market capitalism produces a result that is fair. Instead, it fears a future graphically described by Wilbur Ross, the nominee to be secretary of commerce and a billionaire who has made his money turning disastrous investments into productive ones: "You can't have much of an economy if people are just flipping hamburgers, trading stocks and suing each other. . . . Are our grandchildren going to dive for coins from cruise ships in the East River?"
As for national security, the current trading system is directing enormous wealth to nations that do not wish us well. By pretending that the market for oil is not dominated by a cartel led by Saudi Arabia, the home of the virulent form of Islam from which ISIS derives its inspiration, we direct billions to the coffers of Islamic radicals. And to a resurgent Iran, whose oil exports soared as soon as it had access to world markets in which it is earning dollars to buy the equipment it needs to fund its lethal anti-American and anti-Israel campaigns. Instead of doing all we can to wean ourselves off imported oil—a tariff would be appropriate in a market dominated by a cartel even absent the noxious nature of the cartel members—we seem to be doing all we can to retard development of domestic resources and access to Canadian oil.
And by insisting that our free-trader credentials would be tarnished by more than an occasional inconsequential complaint to the World Trade Organization about China's trade practices—cheap tires, steel—we contribute to the funds the regime in Beijing needs to modernize its military and expand its reach, while at the same time allowing the unimpeded flow of Chinese goods to convert what once were tax-paying American workers into benefit-reliant ones.
The great Adam Smith saw all this clearly. Yes, we are wealthier than most other nations, including our adversaries. Still, "It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. . . . Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labour very high in it." That is only one of the reasons that plans to include a dollop of protectionism in policies aimed at accelerating economic growth are worthy of a serious hearing.
Smith, arguably the founder of free trade, was not one to rely on abstract theory rather than what his own eyes and experience taught him. What to do "when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures"? "Revenge in this case naturally dictates retaliation" as part of an effort to get the other nation to change course. "The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods." The ability to achieve such a reversal will depend on "the skill of that insidious and crafty animal, vulgarly called a statesman or politician," of which we have an ample supply.
Smith also warned that free trade should not be introduced or reintroduced so suddenly as to result in goods being "poured so fast into the home-market as to deprive all at once many thousands of our people of their ordinary employment." Moreover, when home markets are "suddenly laid open to the competition of foreigners," which threatens to destroy the fixed capital of a manufacturer, "equitable regard . . . to his interest requires that changes of this kind should never be introduced suddenly, but slowly, gradually, and after a very long warning." Creative destruction, but of the long-fused rather than the immediately explosive variety.
All very sensible, all speaking to the necessity of tempering our desire for free trade with a sense of the realities of its consequences. One of these, it must be conceded, would be the disruption of the international supply chains on which companies from Apple to Ford depend. Such a disruption would almost certainly drive up the cost of American products, at least in the short- and medium-terms and possibly indefinitely. Which, to honest supporters of a new world trading order, is irrelevant. They know that they must sacrifice some efficiency for greater perceived equity, a position to which some conservatives, interested in modifying our market system in order to conserve it, are reluctantly coming around.
More worrying than rising protectionism is Trump's attempt to replace the current trading system with what can only be called caudillo capitalism. Protectionism operates within established institutions and procedures. In many cases, congressional action is required. Dumping cases that are brought to the World Trade Organization are resolved, imperfectly to be sure, by a weighing of the evidence. In short, the rule of law prevails, not always with sensible results, but without the grave dangers posed by Trump's replacement of the presidential pen with the president-elect's telephone or tweets.
This is not the place to argue whether Trump's apparent triumph over the Carrier Corporation is quite as advertised; whether the $7 million bribe, the promise of a relaxation of certain regulations and tax burdens, and the implied removal of a threat to treat Carrier's bids for government business with disfavor were prices worth paying for 800 jobs. But it is the place to point out that when the CEO of the United States tells the CEOs of America's corporations how to run their trading and international businesses, corruption will be on a Clintonian scale. Foreign diplomats and corporate executives seeking Carrier-type deals are already saying they will stay at Trump's new hotel when visiting Washington, presumably not just because it is in easy walking distance to the White House and other government offices. Presidents of other countries in which the Trump clan plans to build hotels or other facilities are unlikely to make it difficult for them to get their deals done, especially if by sheer coincidence trade negotiations are on the agenda. Executives who know that a phone call from the president might throw their capital expenditure and plant location plans into disarray are likely to see to it that their campaign contributions reflect this hard reality, preferably before their phones ring.
Worse still, caudillo capitalism would result in a massive misallocation of resources. Rather than seeking the best and most efficient use of capital, tempered by a new realization that equitable treatment of the workforce and some personal restraint on conspicuous consumption is necessary if the system by which they have done so well is to survive, CEOs will be pandering to an interventionist president—or else. Therein lies the basis of Maduro's Venezuela, the Castros' Cuba, Putin's Russia, and other failed economies. Trump would do better not to convert his pressure on Carrier and on Ford into general policy.
He has written, "Deals are my art form. . . . I like making deals, preferably big deals. That's how I get my kicks." Surely successfully renegotiating NAFTA would be a big enough deal and provide a big enough "kick" to make it unnecessary to pick on individual companies. Surely negotiating an end to China's unfair trade practices—going one-on-one with Xi Jinping—is more worthy of his mettle than moving a few thousand jobs from one factory to another. Surely Trump can see that Carrier's decision to "pay" with compliance in order to "play" with the administration is no different from paying the Clinton Foundation in order to "play" with the State Department. Protectionism achieved by established procedures has its place in the Trump scheme of things; caudillo capitalism should not.