- The Washington Times - Wednesday, July 24, 2002

One of the contributing factors to the market meltdown is the bearish policy environment in Washington which is not reassuring investors, but chasing them out of the market. The rise of protectionism is a dramatic case in point. For the first time in two decades the free trade movement is in retreat. And it has been put in this position by an American president who keenly understands and eloquently articulates the virtues of free trade.

One would like to believe that if George W. Bush knew three months ago what he knows today, he would never have foolishly agreed to impose 30 percent steel tariffs. By doing so, he has put at risk the fragile majority in the U.S. Congress for further trade liberalization. As one union official told the American Prospect magazine, "The Senate was put in play [on trade issues] by the steel deal. When Bush put tariffs on steel imports to help him in Ohio, West Virginia and Pennsylvania, the free-trade Democrats began to wonder, 'Are we the last believers in free trade?' " Not surprisingly, in the House and Senate votes for free trade are disappearing in the wake of Mr. Bush's politicization of free trade.

The disgraceful $200 billion farm bill was an equally devastating setback for the free-trade movement. By signing a bill that massively raises U.S. government farm support subsidies, Mr. Bush has severely weakened his ability to cajole European and Japanese governments to lower their own trade restrictions and subsidies. Under the new farm bill, as much as 30 to 40 cents out of every dollar farmers earn will come from Uncle Sam.

As the Economist magazine correctly noted in critiquing the U.S. farm bill: "The Europeans, notoriously protective of their own agricultural interests, are likely to grab any excuse to avoid reforms that might hurt their politically powerful farmers." Now they have one. Meanwhile, retaliatory steel quotas are in the works in Japan and Europe as well. The U.S. has temporarily surrendered the moral high ground on the movement to allow tax-free global commerce, and it could take years to regain the ground that has been lost.

Mr. Bush's faltering on free trade couldn't come at a worse time. The global trading system is under assault. As the chart below shows, last year, the volume of world trade declined for the first time in two decades.

Part of this was due to depressed demand resulting from the global recession. But a much more malignant factor is at play here: the re-emergence of protectionist trade barriers around the world.

The rise in worldwide tariffs, quotas and government subsidies to domestic industries is arguably the most dangerous new development in the global economy. It has been the expansion of free trade and the chopping of tariff barriers over the past quarter-century that has helped propel the dramatic rise in living standards and wealth creation in the U.S. and much of the rest of the world. Nations that have entered the global trading marketplace have exploited the magical force of Adam Smith's comparative advantage to increase growth and wages by producing what they produce best.

This chiseling away at trade restraints drove down worldwide costs and prices of everything from bananas to vaccines, to microchips to potato chips. As a result, products that once were only available to kings and princes and multimillionaires became affordable to even the poorest Americans and to the middle classes of most other nations. When it comes to advancing worldwide consumer sovereignty, nothing works like free trade.

By politicizing free trade, President Bush has put the world economy at risk. The 20th century should have taught us the potentially catastrophic consequences of the breakdown of world trade and the rise of protectionism. The global trading system shut down in the 1930s as many nations, including the U.S., doubled and even tripled tariffs and import quotas. In the U.S., import duties rose to about 50 percent of import prices by the late 1930s. The result was a global depression and a plunging of living standards here and abroad.

For the first time in more than two decades, trade barriers are moving in the wrong direction. This isn't the 1930s by any stretch of the imagination, but Pat Buchanan is one happy camper these days. This bad news arrives just at a time when the wobbling world economy is most in need of a shot in the arm.

My colleague at the Cato Institute, Brink Lindsey, who has just published a terrific book called "Against the Dead Hand," says the Trade Promotion Authority (TPA) legislation that Mr. Bush seeks and was just passed out of the Senate, is so weighed down with environmental and labor side deals (the Democrats want free health benefits for laid-off workers), that it may be worse than no deal at all. In the House, where TPA passed by one vote several months ago, support for the free trade agreement is now in a full meltdown. Alas, this is the inevitable price to be paid when the president puts politics over principle on free trade.

The good news is there is still time for Mr. Bush to re-establish his free-trade credentials. In 1982, Ronald Reagan bowed to electoral politics and agreed to slap auto import quotas on Japan. This solitary sin didn't prevent Mr. Reagan from becoming the most important political leader for free trade in the last half-century. George W. Bush is similarly an instinctively committed free trader in his gut. He has to start following his gut and stop listening to half-witted political advisers who keep telling him that free trade is an electoral loser. It isn't. The last four U.S. presidents were elected on a free-trade platform. That includes, of courses, George W. Bush. It's time for his actions to support his free trade rhetoric before the world trading system begins to crater.

Stephen Moore is a senior fellow at the Cato Institute.

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