Iconoclastic economist sees little harm, much good in tariff barriers
TRYING to persuade Congress to defeat protectionist trade legislation last month, President Reagan blamed the Great Depression on the Smoot-Hawley tariff of 1932. ``That is totally made up,'' comments John M. Culbertson, a professor of economics at the University of Wisconsin.
Most economic historians would agree. The depression was already two years old when Congress boosted tariffs. The tariffs did not revive the economy. But they may have strengthened farm prices.
Nor would today's trade bill cause a slump should it pass the Senate and escape a presidential veto. However, the provision sponsored by Rep. Richard A. Gephardt (D) of Missouri that requires United States retaliation against countries that use unfair tactics to maintain huge trade surpluses with the US could soon create plenty of international quarrels.
The cause of the 1930s depression remains controversial. In those days, many economists blamed it on the drying up of investment opportunities in a maturing American economy. That view doesn't have many defenders today.
Mr. Culbertson and many other economists find more acceptable research showing that widespread bank failures prompting a decline in the nation's money supply produced the depression.
In a time when exports amounted to only a small proportion of US output, the responsibility certainly wasn't high tariffs.
Nonetheless, the experience of the 1930s, with Nazi Germany and other nations engaged in trade wars and discriminatory tariff structures, prompted the Western world to seek a fairer trading system. In 1947, 23 nations set up the General Agreement on Tariffs and Trade (GATT). One rule, the most-favored-nation principle, requires that tariff concessions granted one nation be given all other members of GATT. This avoids trade discrimination and the creation of trading blocs.
Gradually, the idea of freer trade as something good dominated the economics profession and a large chunk of political opinion. By the law of ``comparative advantage,'' free trade boosts the living standards of most people. Each nation produces goods in which it has an advantage, and buys the goods where it lacks an advantage.
As a result of GATT, tariffs have been gradually lowered over the postwar years and, to a lesser degree, other barriers to trade have been toppled - with some backsliding in recent years.
Mr. Culbertson wants to reverse this postwar pattern. He wants the US to forget GATT and set up an agency to regulate trade in the interests of the United States and wipe out the massive $160 billion trade deficit. This new Foreign Trade Agency would negotiate ``mutually beneficial'' trade deals with individual nations that could involve quotas or other restraints on imports.
This iconoclastic economist regards foreign trade as ``harmful, not beneficial. It reduces the independence, coherency, and stability of the nation's economy. It is justified only where it leads to some real efficiency and provides an increase in the nation's standard of living sufficient to justify itself.''
He maintains that this agency need not apply standard procedures to different nations. Where a developing nation has the advantage of low wages and at the same time has quickly adapted high technology from abroad to produce some goods extremely cheaply, the agency could limit its imports to protect domestic industry.
Mr. Culbertson regards managed trade rather than free trade as ``realism,'' a recognition of the control of trade by many nations (Japan, France, and so on), and a remedy for a world where the population explosion has resulted in many millions willing to work for virtually nothing but food money.
Such views are heresy among economists. They regard his theories of trade as ``flat earth'' stuff.
Yet some orthodox economists are showing a greater flexibility on trade issues. They are suggesting methods for dealing with foreign subsidies, ``targeting,'' or other violations of free trade. One idea is to auction quotas for imports of such products as cars to foreign nations. This would give the financial benefits of such import limits to the US government rather than to Japanese auto makers. Or the US could impose temporary tariffs and get the revenues - which, by the way, is allowed under the GATT when a nation has massive deficits.
These, however, are merely techniques for improving protectionism, assuming that some limits on free trade are a political necessity.
Culbertson just doesn't believe in free trade.