In response to complaints from a world-class California surfboard maker that protective tariffs from abroad are hurting his business and America, Harvard economist Robert Lawrence mounts a spirited defense of freer trade.
A Note from Paul Solman: Renowned Harvard economist Robert Lawrence, a former member of President Clinton’s Council of Economic Advisors, has been our go-to guy on trade for years now. He once took me around our Brookline, Mass., neighborhood to explain why Americans should get over their “globaphobia” about foreign trade.
A few years later, he and I visited steel and textile mills in the South to explore two industries and a region facing stiff competition from abroad.
In 2007, he helped us assemble a group of his foreign executive students at the Kennedy School of Government to explore the pros and cons of trade.
And last year, he parried veteran anti-free trade journalists Donald Barlett and James Steele when I interviewed them about their book, “The Betrayal of the American Dream.”
A few weeks ago, we traveled to Dana Point, Calif., (without Robert) to report on a surfboard maker trying to make waves with the charge that while boards come into America duty free, protectionist barriers across the globe prevent him from exporting. All he wanted, said the surfboard maker, was the proverbial “level playing field.”
In our story, Robert Lawrence, as he so often has, played the role of reality check. Now, he elaborates on the few remarks we had time to include in last week’s program, and on research from his new book, “Rising Tide: Is Growth in Emerging Economies Good for the United States?“
Robert Lawrence: As one of the economists in Paul Solman’s story last week on surfboard trade barriers, I want to set the record straight on protectionist tariffs – in the tiny surfboard industry and more generally.
In the NewsHour piece, surfboard manufacturer Steve Boehne complains that he faces protective tariffs for his products when he sells them abroad, while bemoaning the fact that the United States allows foreigners to sell surfboards in the U.S. duty-free. The piece gives viewers the idea that when it comes to trade policy, the U.S. is guilty of unilateral disarmament: We’ve opened our markets, chumps that we are, but others continue to protect theirs.
Not only does this view need to be seriously qualified, but the response to this situation advocated by the surfboard maker — that we should raise our tariffs — is exactly wrong. Indeed, raising U.S. tariffs would not only violate our international obligations under the trade rules, but by setting off a trade war, could also reverse the powerful trend towards lower tariffs underway in our trading partners ever since World War II. The fact that our tariff levels are lower than those of our trading partners is a good reason for us to sign more trade agreements, rather than to avoid them.
It is fair to say that the U.S. is an open market — although nowhere near as open as economies such Hong Kong and Singapore that have no tariffs at all! According to the World Economic Forum’s Global Enabling Trade Report, for example, the U.S. market was ranked the 31st most open out of 132 Countries in 2012 — more open than most but by no means all.
The important point is that having an open market is good for us, because it helps to raise our living standards. For years, even centuries, the argument has raged: is freer trade good for a country, or is it bad? Do the long-term gains to consumers, that is, more than offset the short-term losses to producers imperiled by cheaper competition?
Ever since Adam Smith, economists have been of pretty much one mind: the benefits of trade outweigh the costs. To be sure, the losers need to be compensated: even Smith advocated trade adjustment assistance for workers who lose their jobs. But what’s better, he asked: Countries warring with one another, as they so regularly had throughout recorded time, or trading with one another? Which is more likely to produce global prosperity: countries protecting their producers from foreign competition or a world in which everyone can compete with everyone else?
To be sure, real wages in the U.S. have been stagnant in recent years and that has been a key argument against lower tariffs. It’s why so many people, including the surfboard makers in the NewsHour story, have a reflex response to “free trade.” But even those workers agreed that they benefit from the cheaper costs that global competition brings.
My contention is that real wages have declined in America not because of our trade with other economies, but in spite of it. And I think I can prove it. South African economist Lawrence Edwards and I have just published a book with the Peterson Institute for International Economics, “Rising Tide: Is Growth in Emerging Economies Good for the United States?” We show that imports not only provide us with cheaper and more varied products but they also spur our firms to be more productive. Indeed, we estimate that on average our imports of manufactured goods alone raise U.S. living standards by about $1000 per person — $1000 we would otherwise have to spend on more expensive products. Imports from China and from other emerging economies each account for about a quarter of the gains.
Has the U.S. really disarmed unilaterally? Absolutely not. We’ve consistently made reductions in our tariffs at home conditional on reciprocation from our developed trading partners. Since the 1940s, when tariffs on industrial products averaged over 40 percent worldwide, they’ve been steadily coming down. While sensitive to how you measure them, it’s fair to say that U.S. non-agricultural tariffs are now basically in line with those of other developed countries. According to the World Trade Organization, for example, in 2012, U.S. average applied tariff rates for non-agricultural goods were 3.3 percent versus an average of 3.9 percent for the European Union and 2.6 percent for Japan.
Think what this means. With an average tariff of 40 percent, if you buy a foreign car for $15,000, say, it would actually cost you $21,000; a $10 string of Christmas tree lights would cost $14. At a 3.3 percent tariff, they would cost about $15,500 and $10.33 respectively.
Admittedly it is fair to say, as brought out in the surfboard story, that on average U.S. exporters face higher tariffs abroad than the U.S. imposes at home. According to the World Economic Forum Report, in 2012 for example, the average tariff faced by U.S. exporters was 6.1 percent. But this is far lower than the 40 percent that prevailed in the 1940s and it is for an understandable reason. Tariffs are still higher in emerging markets because of what is known as the “infant industry” argument: a country can protect its domestic industries until they become sufficiently competitive to survive without protective tariffs. The United States protected our goods when we started out as a country.
But what needs to be borne in mind is the pace at which foreign economies have been bringing down their tariffs. Consider the chart below, showing the World Bank’s estimate of the average tariff applied on all products in the world.
The Tariff rate; applied; simple mean; all products (%) in World was last reported at 6.18 in 2010, according to a World Bank report published in 2012. Simple mean applied tariff is the unweighted average of effectively applied rates for all products subject to tariffs calculated for all traded goods.
What is so striking is the way in which worldwide tariffs have been coming down, especially since the mid 1990s. And this has been particularly true in large emerging economies such as India and China.
To be sure, as might be expected given their lower levels of development, these countries currently still have substantially higher tariffs than the U.S. In 2012, according to the WTO, tariffs were 9.6 percent and 12.6 percent in China and India respectively. But consider that just 20 years ago, China’s average rate was 37 percent; as recently as 1997, India’s average rate was 29 percent. The strength of the trends towards opening in these economies is clear.
The bottom line is straightforward and indisputable: to use the standard cliché of the trade debate, the playing field of international competition is becoming more level. All around the world, despite the impasse in the Doha Round negotiations at the World Trade Organization, both unilaterally and in regional agreements, countries are reducing their tariffs. Indeed, it was particularly noteworthy that average world tariffs remained unchanged during the global financial crisis – a remarkable development considering the way tariffs were hiked during the Great Depression in the 1930s. Given these global trends, it would surely be wrong for the United States to now reverse course and lead the world economy in the direction of raising barriers just as others are now reducing their tariffs closer to our levels.
And in fact, that’s just what President Obama is trying to do with his bi-lateral trade initiatives: work around the complications of global treaties and lower tariffs with our trading partners, one by one. Eventually, that should include eliminating the customs duties on surfboards made in the U.S.A.
This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions