Cato Policy Analysis No. 138 August 29, 1990

Policy Analysis

The Perils of Managed Trade

by Susan W. Liebeler and Michael S. Knoll

Susan W. Liebeler, former chairman of the International Trade Commission, is a partner in the law firm Irell & Manella. Michael S. Knoll, a lawyer and an economist, is an assistant professor at the University of Southern California Law School and of counsel to Irell & Manella.


Executive Summary

From Capitol Hill, Wall Street, the Great Plains, and Silicon Valley have come proposals to abandon the multilateral trading system and begin managing trade from Washington.(1) A move toward managed trade--substituting government intervention and market-share goals for market forces and multilateral rules--would represent a change in policy for the United States, which since the end of World War II has been a leading advocate of liberalizing international trade.

Advocates of managed trade often refer to it as "strategic trade" and "industrial policy" in an attempt to create the impression that adopting such a policy would be wise. American public opinion is being swayed by that rhetoric. A survey by the American Insight Group found that well-educated, high- income Americans, who have traditionally been the most receptive to free trade and foreign investment, are beginning to favor an aggressive U.S. trade policy, especially toward Japan.(2)

Moreover, as Jeff Faux, president of the Economic Policy Institute, a liberal think tank, noted, the U.S. government's progression toward an industrial policy "is probably going at a faster pace than it would have had [Michael] Dukakis been elected."(3) The government has already approved subsidies for manufacturers of semiconductors and high-definition television, and Congress and the Commerce Department have forced renegotiation of the FSX fighter deal with Japan.

The argument that the United States should adopt managed trade always involves Japan and frequently boils down to no more than the following: Japan, which manages trade, is doing very well economically, so managed trade must work. The advocates of managed trade overlook Japan's high savings rate, long work week, low illiteracy rate, and relatively modest government spending. In addition, they ignore the many countries, including most of the Eastern bloc, whose economies have been strangled by central planning.

We should be wary of jumping to the conclusion that Japan's economic successes have been the result of managed trade and its powerful proponent, the Ministry of International Trade and Industry. Although some industries supported by MITI, such as semiconductors, have succeeded, other MITI projects have failed. For example, the aluminum-smelting industry, which MITI nurtured, has practically disappeared from Japan.(4) In addition, some of Japan's greatest commercial successes are firms that entered new markets even though MITI tried to hold them back.(5) Honda and Sony are good examples. It is therefore not clear whether Japan's economic miracle occurred as a result of MITI, as some in the United States believe, or in spite of MITI, as some in Japan believe.

Even if we concede that MITI has generally been successful in promoting Japanese industries, it does not follow that the United States should adopt similar policies. Only if we believe that such policies would promote our national interest should we adopt managed trade. If managed trade is to be an effective policy for the United States, it must not become another income-support program for politically well organized protection-seeking interests. In light of the debate surrounding extension of the voluntary restraint agreements on steel, which were more a matter of politics than of economics, it seems unlikely that the United States would avoid that trap. Managed trade, in whatever guise, would probably do more harm than good.

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