In June 1994, during congressional debate over approval of joining the World Trade Organization (WTO), Republican congressman Newt Gingrich said:
We need to be honest about the fact that we are transferring from the United States at a practical level significant authority to a new organization. This is a transformational moment. I would feel better if the people who favor this would just be honest about the scale of change.
Twenty years from now we will look back on this as a very important defining moment. This is not just another trade agreement…. I am not even saying we should reject it; I, in fact, lean toward it.
“Free trade,” so styled, is an issue that the establishment figures of both major parties seem to agree on. NAFTA was ratified by a GOP-controlled Congress, after being signed by Democratic President Bill Clinton.
To understand the debate over free trade, it’s important to recognize what early free market economists meant by the term. The literature of early economics, from Ricardo and Smith to Say and Bastiat, is replete with recommendations for free trade, by which they meant the abolition of tariffs and border controls, and their replacement with essentially open borders and an unimpeded flow of goods and services across them. Protectionist policies, Bastiat argued in one famous essay, were comparable to candlemakers urging people to living inside and closing all doors and windows to protect them from unfair competition — the rays of the sun. Tariffs and other impediments to free trade, Bastiat contended, are really government interference in the free market, and harm no one but consumers, whom protectionism forces to pay higher prices for domestically produced products that foreign competitors may well be able to produce more cheaply.
In economic terms, this is true — in the same way that any type of tax or government interference in the marketplace, viewed from a strictly economic perspective, is a hindrance to the free market.
But as long as government exists in some form, it will need revenue to sustain it. A government with no way of raising revenue is ineffectual. Likewise, a country wishing to remain free and independent cannot afford to become dangerously dependent on foreign suppliers, particularly potentially hostile powers, for essential commodities from oil to steel. As long as sovereign countries exist, both governments and borders will be necessary. And that means that there can never be any such thing as truly free trade or a perfect free market liberated from all government authority.
The problem then becomes, given that governments and borders must exist, how can they be maintained with as little inconvenience to personal liberty as possible? The American Founders had a simple and ingenious answer: tariffs. Taxes on imported goods, they believed, would both suffice to fund the basic, legitimate functions of government (except in extraordinary circumstances, such as war) and be guarantors of sovereignty. They saw tariffs as the least intrusive form of taxation, since they would fall primarily on imported luxury items and would therefore be paid mostly by the rich. They also saw tariffs as a way of allowing the infant United States to get its own industries off the ground, so as not to be dependent on (and beholden to) the collectivist old world. (See page 40.)
The federal government was funded almost entirely by tariffs until well into the 20th century, except during a few times of crisis such as the Civil War. But in the early 20th century, the notion began spreading that the federal government should no longer be limited by the narrow list of powers defined by the Constitution. Landmark legislation such as FDR’s New Deal greatly expanded the size and cost of the federal government. Not coincidentally, the federal government began imposing a wide range of intrusive new taxes, such as a permanent graduated income tax, capital gains taxes, corporate taxes, Social Security (FICA) taxes, and so forth.
During that same time, it became fashionable to deride tariffs as old-fashioned and retrogressive. The Smoot-Hawley Tariff Act was blamed by many for the Great Depression, and “free trade” (i.e., a world without tariffs, with open borders) was touted as the wave of the future. Yet the wave of the future, up to the present day, has turned out to be the concentration of economic and political power in the name of free trade.
Soon after the end of World War II, two events took place that were to drive the modern “free trade” movement: the signing of the General Agreement on Tariffs and Trade (GATT) in 1947 and the creation of the European Coal and Steel Community in 1951.
GATT, the first global free trade agreement, was originally signed by 23 nations, including the United States, at Geneva, and took effect the following year. At the same time that GATT was being drawn up, the United States was leading a movement to establish an International Trade Organization (ITO). The ITO was part of a set of proposals set forth by British economist John Maynard Keynes at the Bretton Woods Conference in 1944, whose purpose was to create a postwar international financial and economic order. Those proposals included a global currency (the bancor), an International Monetary Fund (IMF), and a World Bank, as well as the ITO. While the Bretton Woods participants set up the IMF and the World Bank, they rejected the bancor. Undeterred, Keynes insisted that the yet-to-be-negotiated ITO include provisions for an International Clearing Union (to regulate currency exchange) — and the issuance of bancors.
The contours for the ITO were eventually agreed upon, and the Havana Charter of 1948 was signed to bring the new organization into effect, complete with transnational authority over trade and the power to issue bancors. The United States and 55 other countries signed the charter, but the ITO failed after the U.S. Congress refused to ratify the agreement.
Photo: AvigatorPhotographer/ iStock/GettyImagesPlus
This article appears in the August 20, 2018, issue of The New American. To download the issue and continue reading this story, or to subscribe, click here.
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