The Weekly Standard
January 30, 2012
by Irwin Stelzer
Right diagnosis. Wrong prescription. That's the fairest way to describe Rick Santorum's idea to provide tax breaks for "manufacturing." Leave aside the definitional issues—some of us at The Weekly Standard who "manufacture" ideas might qualify for the benefit he intends for others. The solution to the problem of unemployed and anxious blue collar voters lies in trade rather than tax policy.
Everyone agrees on three things.
That reality is that China manipulates its currency to keep the renminbi sufficiently low to ensure that its goods are the lowest priced available in most markets. The regime aims to create enough jobs to avoid unrest that might threaten it. Yes, there are some areas in which China has a real competitive advantage. But there are others in which its artificially low currency combines with subsidies to tilt the playing field: No matter how efficient an American manufacturer might be, it loses and China wins.
Which is what troubles conservative candidates whose commendable support for free trade leaves them uncertain how to respond. But Santorum has reached for the wrong weapon with which to deal with the problem: the tax code. He and his rivals should consult their surely dog-eared copies of the Wealth of Nations, where Adam Smith does not counsel sitting idly by while his nation's tradable goods industries are devastated by a predatory competitor.
In fact, the Great Scot concluded, "Revenge .??.??. naturally dictates retaliation .??.??. when some foreign nation restrains by high duties or prohibitions the importation of some of our manufactures into their country." Such retaliation is especially indicated when it is likely to produce the repeal of the "prohibitions complained of." The job of doing all of this requires "the skill of that insidious and crafty animal, vulgarly called a statesman or politician," in ample supply here.
Smith also recognized that it "will be generally advantageous to lay some burden" upon imports "when some particular sort of industry is necessary for the defence of the country." And it is acceptable to tax imports to offset any taxes imposed on domestic firms that exceed those imposed by foreigners on their companies: "When some tax is imposed at home upon the produce [of domestic industry] it seems reasonable that an equal tax should be imposed on the like produce" of foreign companies with which the hometown boy competes.
Finally, Smith pointed out that such restrictions as are imposed on trade should be removed only "gradually, and after a very long warning," lest workers and capitalists "suffer very considerably."
There are, of course, also warnings about the negative effects of some of these measures, and these restrictions are exceptions to Smith's general rule that free trade in most cases enriches the parties to it. But if currency manipulation doesn't warrant retaliation, if theft of intellectual property is not a sufficient barrier to the free flow of capital to justify retaliation, if the variety of administrative restrictions on both imports and exports of items such as rare earth metals doesn't warrant retaliation, if the persistent trade imbalances do not constitute a threat to "the defence" of the nation (all those IOUs in the hands of the Chinese regime surely affect our foreign policy), it is difficult to imagine what would.
That is the case whoever ends up facing off against Obama can make. It's trade policy, not the tax code, that can achieve the objective of providing American manufacturing a fair playing field. There are those who would accuse him of protectionism. He can respond by distinguishing his limited tariffs in a free trade regime from real protectionism. He can ask what his critics propose instead. And he can help move the debate among Republicans on economic policy in a more realistic direction.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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