Testimony

Trade and the Commerce Department

By Edward L. Hudgins
March 20, 1997
Committee on Government Affairs
United States Senate

I appreciate the opportunity to testify today on the future of the U.S. Department of Commerce and its trade functions. To determine the proper role of the Commerce Department in trade matters, it is first necessary to ask what are the proper government functions concerning trade.

Two Systems

We see in the world today two systems and two ways to manage economic affairs. One is the approach of Western Europe, Japan, and to a lesser extent the United States, an approach in which governments manage trade and directly help industries. This approach is a dismal failure. The Western industrialized countries are experiencing a slow-motion, and thus more far peaceful, version of what transpired in the communist world. Some supporters have wanted to make the U.S. Commerce Department into an American version of Japan’s Ministry of International Trade and Industry (MITI) or the European equivalent.

The other approach is the free market one that tends to be more the approach in the United States. If this approach informs our policies, most of the Commerce Department should be dismantled.

Principles and Trade

The trade barriers erected by the U.S. government limit the economic liberty of Americans to dispose of their property as they see fit, specifically, their freedom to purchase goods from the citizens of other countries. This freedom should be restored to Americans whether other countries maintain restrictions on the liberty of their citizens or not.

But it would be even more advantageous for the governments of other countries to remove their trade barriers as well. This would maximize freedom for Americans and prosperity for citizens in all countries.

Further, it is the principal function of government to protect the life, liberty and property of this country’s citizens in the territory of the United States. It becomes much more problematic to protect Americans or their property overseas. But this is still a legitimate concern.

The Government’s Role in Trade

Opening markets. In light of these principles it is therefore appropriate for the U.S. government to maintain an office to negotiate market opening with other countries. This is currently the function of the Office of the U.S. Trade Representative (USTR).

Trade figures. It can also be argued that to exercise this function the government must keep trade figures. I grudgingly accept that this is sometimes necessary. For example, information on the trade barriers of other countries is the starting point for U.S. government market opening efforts.

But trade figures are some of the most misunderstood, abused are often inaccurate. For example, whenever trade figures are released, grave TV news anchors often inform us—in tones usually reserved for airline crashes— that the American trade deficit rose.

Nearly all individuals run trade deficits with their grocery stores. The stores purchase nothing from their customers. The customers receives the products and the store receives the money. The customers do not view that “deficit” as a problem. It is no more of a problem in international transactions.

From an economic perspective, a trade deficit in and of itself is neither good nor bad. It simply means that in a given year the citizens of one country purchased more goods and services than they sold overseas. A deficit might result because the economy and purchasing power of consumers in one country grew faster than in others. That would be a sign of economic strength. Or a deficit might result, for a short period, because a country inflated its currency. That would be a sign of unsound policies. So there might actually be advantages to not keeping trade figures.

I also note that trade figures are often inaccurate. For example, in theory all of the trade deficits and trade surpluses in the world should net out to zero. They do not even come close. I recall in the 1980s during the debate over the U.S.-Canada free trade area, a corrected set of trade figures added about $10 billion to trade between these two countries. If The United States has errors like that with its largest trading partner, one wonders what they are like with other countries.

Trade promotion. The U.S. government, in part through the Commerce Department, promotes America exports directly. But this should be a private sector not a government function. The best way to describe this spending is corporate pork.

American trade barriers. America also maintains trade barriers. Some of these are tariffs. Others are non-tariff quota-type barriers, such as restrictions on textiles.

Further the U.S. government maintains antidumping laws that are perhaps this country’s most insidious form of protectionism. There is no economic basic for excluding from the American market products that are sold for what bureaucrats define as an inappropriate price. The formulae by which dumping is determined are based on political concerns. They were drawn up to make it easier for American businesses to restrict products from the American market.

These protectionist functions are primarily the responsibility of the Commerce Department. And the Commerce Department is often the target of businesses and sectors seeking special protection for their protects.

Protecting property. Producers in foreign countries do sometimes use American patents and copyrights without authorization of the owners. This is a matter for the U.S. government, for example, to restrict the entry of counterfeit products into the American market. But it should be realized that as much as the U.S. government presses the governments of other countries to crack down on such activities, this is difficult and could endanger American export markets. Ultimately, as less developed countries establish the rule of law, property rights and independent judicial system to protect their own citizens, the property rights of Americans will be better protected.

The Managed Trade Danger.

Over the past decade a new danger to free trade has arisen that centers on the Commerce Department. Government intervention to manage trade in the name of opening foreign markets represent the flip side of the more conventional protectionist coin. Managed trade can involve the government of a country limiting the exports of its enterprises to the United States or even to third countries under pressure from U.S. officials. It can involve a country’s government “guaranteeing” a percentage of its market to American exporters. Or managed trade can take the form of a government agreeing to change its regulatory regime in a way that harms its own enterprises, to give American firms a competitive advantage. In all of these cases we trade determined by bureaucrats, not by buyers and sellers.

Political Corruption

Corruption, a problem thought by some to be confined, in its most serious forms, to less developed countries, as become one of the most serious problems in the industrialized, democratic countries as well. Recent scandals concerning the Commerce Department appear to involve straightout shakedowns by Commerce officials of foreign enterprises. This is not surprising. It is the nature of the system. To understand the current situation, it is necessary to distinguish two forms of corruption:

Classical Corruption. This occurs when an elected official or government bureaucrat wields political power for personal gain contrary to the explicit letter of the law. Diverting government funds into his personal bank account is an obvious example. Or an official might expedite a license for a businessman while making others wait. Or one might offer an undeserved government contract or overlook some legal indiscretion. In exchange the state official might receive cash, a sweetheart business deal, a paid vacation or some other gratuity.

Institutional Corruption. More destructive of civil society is the form of corruption inherent in the welfare state. By its nature a welfare state breaks down the separation of between government and the private sector and thus, between political and economic power. Government is expected to act directly to help this industry or that sector. The public good becomes in fact simply interest-group driven policy. This means that policies are often arbitrary and contradictory. In essence, the rule of law gradually gives way to the rule of particular powerful men and interest groups.

Policy makers, in exchange for the largess they bestow on privileged groups, receive large salaries and offices, expense accounts and free travel. But most important, they receive power to determine the economic fate of businesses and individuals, they receive prestige for being “friends of the people,” and they receive political support to continue in their positions.

Welfare states remain formally democratic but in operation are oligarchical or even feudal, without real constitutional checks on government power. Politicians might make superficial reforms in response to public outrage at abuses of power, but they never limit their own power.

The Commerce Department seems to be an agency deeply mired in these sorts of problems.

Lessons for Reorganization

What, then, do these observations tell us about reorganization? First, it is best to keep the market-opening functions now performed by the USTR insulated from the protectionist functions performed by Commerce. If the same agencies or even individuals asking a government to remove non-tariff barriers to American exports is also asking that government to force its producers to limit their sales in the United States, the U.S. government will reduce its credibility and effectiveness.

Further, Congress should revisit American protectionism and consider erasing antidumping laws. These laws not only restrict the freedom of Americans to dispose of their own property, they also limit the credibility of American negotiators seeking to open other markets.

Since many of the Commerce Department’s trade functions are not in the country’s best interest, they should be reduced or eliminated. In all cases we must avoid creating an American version of Japan’s MITI. This approach is a proven failure. Deregulation and restoring economic freedom is the best path to prosperity.