slightly abridged version of "American Trade Policy", 2 June 1999.
Lamb impost plan shows up US double standards
© Keith Rankin, NZ Herald, 10 June 1999
If the United States insists on protecting its sheepfarmers, imposition of a direct subsidy would be preferable to placing a tariff on imports of our lamb, explains KEITH RANKIN.
The United States wants to put a tariff on New Zealand sheepmeat imports. The American Ambassador to New Zealand said he didn't think it would hurt New Zealand sheepfarmers much because their production is down anyway, thanks to the recent summer drought.
On this page Andrew Lewis, a lawyer who specialises in trade law, wrote: "The jury remains out on the genuineness of the American commitment to free trade and whether it extends beyond a commitment to promote the interests of its exporters."
That question is particularly pertinent in the light of the huge fuss the United States made over Caribbean banana exports to Europe.
The US is behaving much as Britain did during its free trade era that began in the 1840s. (Britain set the scene in 1842 by forcing China to accept imports of opium from British India.) Britain had been one of the most protectionist countries in Europe and it continued to be so after it adopted "free trade."
Free trade was Britain's form of protection in two ways. By trying to make other countries adopt free trade, as the United States does today, Britain was protecting its manufacturers. And by using free trade as a means to cut manufacturing costs, it was gaining an advantage over its trade rivals.
The most important input into Britain's tradeable sectors was the increasing amount of imported food which represented the wages of British workers. Both the dominant British school of thought on free trade and Britain's opponents were explicit about the nationalist intent of Britain's free trade policy.
The few advocates of cosmopolitan free trade - free trade designed to make the world economy more efficient rather than to make Britain stronger than rival nations - were seen in Britain as liberal extremists. They were derided as "little Englanders." The worry now is that the Americans see the World Trade Organisation as an organisation that can be used to promote free-trade imperialism and not cosmopolitan free trade.
One of the issues that British policymakers in the late 19th century mused over was about how the British could get foreigners to pay their taxes. (Indeed, during Britain's free-trade era, the majority of Britain's public revenue came from tariffs. They called them revenue tariffs rather than protective tariffs.) That fiscal policy is a key facet of free trade imperialism.
The US wants to impose a tariff on New Zealand lamb. If New Zealand lamb is to be sold at the same price after the tariff as before (and American consumers will switch to other products if the price goes up), then this tariff will be a federal tax paid by New Zealand sheepfarmers. Indeed, if the US Government calls it a revenue tariff, then it may claim to be practising free trade. The American sheepfarming industry may bring social benefits to places such as Idaho.
There may be good reasons for the US to want to have a sheepfarming industry and for allowing its sheepfarmers to continue making a living. If so, the correct prescription is a protective subsidy, not a tariff. The US Government should pay its sheepfarmers a subsidy and let ours sell there at the world market price for sheepmeat. In rejecting that prescription the US Government saves the cost of the subsidy and gains revenue at the expense of those who export there. Saving the sheepfarmers may be an excuse, not a reason.
New Zealand pig farmers are seeking protection from pork imports from, among other places, Canada. Analogies have been drawn with the American lamb tariffs. But Canadian pig farmers are subsidised. The cases are not the same.
It may be correct to subsidise a small local industry to save it from extinction. It is not in accordance with cosmopolitan principles (promoting global economic efficiency) to subsidise an export industry. (There are exceptions, such as the foreign aid implicit in the European banana trade and the need for minimum payments to agricultural exporters as a kind of social welfare benefit when the world price is at a cyclical low.)
The correct response to Canadian pork subsidies is a tariff. That ensures that both Canadian and New Zealand pork are sold in New Zealand at the world market price. While there may be consumption gains from cheap Canadian pork, the world economy is better off if traded products such as pork are not subsidised.
A tariff against such subsidised pork imports represents a cost to New Zealand pork consumers but a gain to the world. In the absence of tariffs on subsidised pork imports, the world produces and consumes too much pork relative to other preferred products.
New Zealand should impose such a tariff, not only to protect our pig farmers from inappropriate competition, but also as our duty as members of the global economic community.
Just as free trade can sometimes represent a nationalist trade policy, likewise tariff protection can represent ethically sound trade policy, based on cosmopolitan principles - what is good for the world as a whole is ultimately what is best for each country.
The US is not motivated by cosmopolitan principles. Its preaching of liberalism and free trade serves a nationalist purpose. With its double standards, it is not a good world citizen.
Keith Rankin is an Auckland economist.