Trade and the Commerce Department

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I appreciate the opportunity to testify today on the future ofthe U.S. Department of Commerce and its trade functions. Todetermine the proper role of the Commerce Department in tradematters, it is first necessary to ask what are the propergovernment functions concerning trade.

Two Systems

We see in the world today two systems and two ways to manageeconomic affairs. One is the approach of Western Europe, Japan, andto a lesser extent the United States, an approach in whichgovernments manage trade and directly help industries. Thisapproach is a dismal failure. The Western industrialized countriesare experiencing a slow-motion, and thus more far peaceful, versionof what transpired in the communist world. Some supporters havewanted to make the U.S. Commerce Department into an Americanversion 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 morethe approach in the United States. If this approach informs ourpolicies, most of the Commerce Department should be dismantled.

Principles and Trade

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

But it would be even more advantageous for the governments ofother countries to remove their trade barriers as well. This wouldmaximize freedom for Americans and prosperity for citizens in allcountries.

Further, it is the principal function of government to protectthe life, liberty and property of this country's citizens in theterritory of the United States. It becomes much more problematic toprotect Americans or their property overseas. But this is still alegitimate concern.

The Government's Role in Trade

Opening markets. In light of these principlesit is therefore appropriate for the U.S. government to maintain anoffice to negotiate market opening with other countries. This iscurrently the function of the Office of the U.S. TradeRepresentative (USTR).

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

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

Nearly all individuals run trade deficits with their grocerystores. The stores purchase nothing from their customers. Thecustomers receives the products and the store receives the money.The customers do not view that "deficit" as a problem. It is nomore of a problem in international transactions.

From an economic perspective, a trade deficit in and of itselfis neither good nor bad. It simply means that in a given year thecitizens of one country purchased more goods and services than theysold overseas. A deficit might result because the economy andpurchasing power of consumers in one country grew faster than inothers. That would be a sign of economic strength. Or a deficitmight result, for a short period, because a country inflated itscurrency. That would be a sign of unsound policies. So there mightactually be advantages to not keeping trade figures.

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

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

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

Further the U.S. government maintains antidumping laws that areperhaps this country's most insidious form of protectionism. Thereis no economic basic for excluding from the American marketproducts that are sold for what bureaucrats define as aninappropriate price. The formulae by which dumping is determinedare based on political concerns. They were drawn up to make iteasier for American businesses to restrict products from theAmerican market.

These protectionist functions are primarily the responsibilityof the Commerce Department. And the Commerce Department is oftenthe target of businesses and sectors seeking special protection fortheir protects.

Protecting property. Producers in foreigncountries do sometimes use American patents and copyrights withoutauthorization of the owners. This is a matter for the U.S.government, for example, to restrict the entry of counterfeitproducts into the American market. But it should be realized thatas much as the U.S. government presses the governments of othercountries to crack down on such activities, this is difficult andcould endanger American export markets. Ultimately, as lessdeveloped countries establish the rule of law, property rights andindependent judicial system to protect their own citizens, theproperty rights of Americans will be better protected.

The Managed Trade Danger.

Over the past decade a new danger to free trade has arisen thatcenters on the Commerce Department. Government intervention tomanage trade in the name of opening foreign markets represent theflip side of the more conventional protectionist coin. Managedtrade can involve the government of a country limiting the exportsof its enterprises to the United States or even to third countriesunder pressure from U.S. officials. It can involve a country'sgovernment "guaranteeing" a percentage of its market to Americanexporters. Or managed trade can take the form of a governmentagreeing to change its regulatory regime in a way that harms itsown enterprises, to give American firms a competitive advantage. Inall of these cases we trade determined by bureaucrats, not bybuyers and sellers.

Political Corruption

Corruption, a problem thought by some to be confined, in itsmost serious forms, to less developed countries, as become one ofthe most serious problems in the industrialized, democraticcountries as well. Recent scandals concerning the CommerceDepartment appear to involve straightout shakedowns by Commerceofficials of foreign enterprises. This is not surprising. It is thenature of the system. To understand the current situation, it isnecessary to distinguish two forms of corruption:

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

Institutional Corruption. More destructive ofcivil society is the form of corruption inherent in the welfarestate. By its nature a welfare state breaks down the separation ofbetween government and the private sector and thus, betweenpolitical and economic power. Government is expected to actdirectly to help this industry or that sector. The public goodbecomes in fact simply interest-group driven policy. This meansthat policies are often arbitrary and contradictory. In essence,the rule of law gradually gives way to the rule of particularpowerful men and interest groups.

Policy makers, in exchange for the largess they bestow onprivileged groups, receive large salaries and offices, expenseaccounts and free travel. But most important, they receive power todetermine the economic fate of businesses and individuals, theyreceive prestige for being "friends of the people," and theyreceive political support to continue in their positions.

Welfare states remain formally democratic but in operation areoligarchical or even feudal, without real constitutional checks ongovernment power. Politicians might make superficial reforms inresponse to public outrage at abuses of power, but they never limittheir own power.

The Commerce Department seems to be an agency deeply mired inthese 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 nowperformed by the USTR insulated from the protectionist functionsperformed by Commerce. If the same agencies or even individualsasking a government to remove non-tariff barriers to Americanexports is also asking that government to force its producers tolimit their sales in the United States, the U.S. government willreduce its credibility and effectiveness.

Further, Congress should revisit American protectionism andconsider erasing antidumping laws. These laws not only restrict thefreedom of Americans to dispose of their own property, they alsolimit the credibility of American negotiators seeking to open othermarkets.

Since many of the Commerce Department's trade functions are notin the country's best interest, they should be reduced oreliminated. In all cases we must avoid creating an American versionof Japan's MITI. This approach is a proven failure. Deregulationand restoring economic freedom is the best path to prosperity.

Committee on Government Affairs
United States Senate