Leibowitz: The Threats and Promises of Managed Trade

First, we should define the term “managed trade.” Trade is usually conducted between private parties for their mutual gain. Governments take taxes from trade, and they have for a long time. For example, the United States government’s revenues were largely based on tariffs until the income tax was instituted in 1913. As far back as the eighteenth century, the economist Adam Smith described trade as a major social benefit. “By pursuing his own interest,” he wrote, the individual “frequently promotes [the interest] of the society more effectually than when he really intends to promote it.” In other words, society benefits from all of us acting in our own interest. The most effective and efficient way to promote constructive change is to regulate commerce as little as possible.

“Managed trade” substitutes the interest of regulators (government and those favored by government) for the interests of the traders themselves. The more government interferes in commerce, the more innovation (which generally comes from private initiative) tends to be inhibited. So, managed trade results in less economic activity than would otherwise take place. It has a cost to society as a whole—most economists will tell you that.

But for all its flaws, managed trade has benefits. Some believe that keeping employment at home by limiting competing imports creates full employment. Others believe that allowing private enterprise to flourish will create more jobs and result in longer-term growth. There is something to be said for each point of view.

Some countries import more than they export. The assumption is that if imports diminished, more people would be employed at home. As noted above, that is not necessarily the case.

Of course, if you govern a country that exports more than it imports, your security and the happiness of your people depend on keeping foreign markets open. If international trade slows down, fewer workers in those countries would be employed.

Some companies have grown dependent on imports of components and raw materials for manufacturing. Complex manufactured goods (such as cars and trucks, iPhones and computers) all have global sourcing. This trend has been strongly encouraged by government for thirty years. But now governments have reversed course and encourage companies to look to domestic suppliers to meet their needs. The problem is that, in many cases, the domestic suppliers are no longer there. And government does not know how to bring them back, at least not quickly.

Another point in favor of managed trade is predictability. People are often frightened by the increasing pace of change. As uncertainty caused by the pandemic and other supply disruptions takes hold, people tend to want the predictability of nearby jobs and local supply chains. It is not a coincidence that politicians tend to promise these things to voters.

When President Biden took office one year ago, his administration saw this craving. As the political party of more government, the Democrats tend to see problems in terms of what government can do – if not to solve those problems, then at least to make them more manageable. They are reluctant to recognize the limitations of government.

Government is, of course, responsible for protecting the nation. Kings, presidents and Congresses have raised money from the economic activity generated by private exchange of goods and services to fund military adventures, and sometimes to build better lives for their people.

All these factors have increased the appeal of managed trade. While governments have not shown themselves to be adept at managing economic activity better than the private sector, the uncertainty of the modern world has many people craving managed trade over free trade.

The global order appears to be fraying, adding to the fear of the unknown that encourages managed trade. Ukraine-Russia, China-Taiwan, Israel-Palestine, Iran-U.S., all these tensions show that the post-World War II order is not as solid as we thought it was. That includes, frighteningly, the lack of respect for international boundaries. If our geopolitical opponents (such as Russia and China) benefit from trade expansion, shouldn’t we at least tap on the brakes?

Energy is a key driver of this impulse. Russia has completed the Nord Stream 2 pipeline to carry natural gas directly from Russia to Germany, bypassing (you guessed it!) Ukraine. The European Union depends on Russia for 40% of its natural gas supplies. That might explain why Germany is less inclined than other NATO members to “get tough” with Vladimir Putin.

But the impulse to manage trade with our friends makes less sense. The EU, Japan, the UK, and many other countries are reliable trading partners. Trade with those countries should be based on mutual support and trust. Moving our trade relations in a market-based direction would not only be better for business in this country, it would also feed a common purpose to band together against those countries that are trying to undermine the global order.

The Biden administration seems to be moving in the direction of providing more benefits to friendly countries and fewer benefits to hostile ones. The process is slow, and U.S. concessions have been frustratingly small. But it seems that a realignment is starting to take shape.

As discussed in last week’s column, the U.S. seems willing to negotiate more lenient treatment in steel and aluminum trade with friendly countries. If this happens quickly, it will help cement the support of our allies.

Perhaps these new agreements will be nailed down relatively soon. And more trade will be possible in steel and aluminum with increased (and perhaps more predictable) use of exclusions. If the managed trade strategy for our friends continues to play out, look for more exclusions in steel and aluminum and fewer exclusions for imports from China.

Lewis Leibowitz

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