Trade defense is not a zero-sum game – Twin Cities

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If “patriotism is the last refuge of the scoundrel”, as a famous phrase goes, then “national defense” is the last refuge of the cynics who seek to limit international trade.

Edward Lotterman

History is full of examples. The United States had a 41-year program of high tariffs on imports of raw wool, wood fiber, fabrics and clothing, coupled with subsidy payments to sheep farmers – supposedly because our military forces had experienced freezing cold during the Korean War. Yet there had never been any barriers to wool imports from Australia, New Zealand or other exporters. These import taxes are costing American consumers and the subsidies are costing American taxpayers more than the subsidies have helped sheep farmers – myself included.

Similarly, when then-President Donald Trump cited “national defense” in imposing tariffs on steel and aluminum imports from Canada, it also had the added benefit of circumventing necessary approval of tariffs by Congress. Never mind that Canada is our closest ally and has been an important and very reliable source of both for five wars over a century.

The problem is that, despite their cynical misappropriation, patriotism and national defense remain legitimate issues. When Samuel Johnson, the famous 18th century English commentator, first linked patriotism to scoundrels, he was clearly not criticizing patriotism, only its cynical use by a politician.

Similarly, invoking “national defense” can be abused to gain narrow political advantage, but that does not mean it should be ignored in crafting appropriate trade policies.

We are seeing these issues right now as key industries, including auto manufacturing, are hampered by transportation bottlenecks on imports from China. Similar issues plague electronics manufacturing, including for military devices. The use of rare earths for batteries and other purposes continues to increase. The production of these is concentrated in China and a few other countries. US domestic production is a small fraction and will continue to be so in almost any scenario.

So what? Won’t maritime transport bottlenecks be corrected in a few months? Perhaps, but the tense confrontation with Russia over Ukraine, growing tensions over Chinese assertions of national sovereignty of its surrounding waters, a return to missile testing by North Korea, and the concentration of uranium by Iran (after Trump withdrew us from the Europe of Six agreement limiting it), all demonstrate that international conflict is not a historical relic – any more than national defense is a priority.

Indeed, Germany’s predicament in the NATO face-off with Russia illustrates how reliance on imports of a key resource creates leverage in military confrontation. Germany stops nuclear electricity production and reduces the use of coal. It is therefore highly dependent on imports of natural gas from Russia in existing gas pipelines. If Russia chooses to close these pipelines or open warfare does, the German economy will shut down and the Germans themselves will freeze in the dark.

There is a lot of history. The cessation of crude oil exports by the main Arab countries after the 1973 Arab-Israeli war plunged our economy and those of many other countries into a free fall with sequels lasting several years.

During World War II, Germany and Japan did not have their own sources of crude oil. This was a major factor in their eventual defeat. Earlier, German submarine warfare reduced crude shipments from the Texas Gulf Coast to the United Kingdom to a degree threatening that country’s military activities. German attacks on tankers dragged Brazil into the war as an ally.

The very threat of power cuts can shape a country’s defense policy. Italy had virtually no crude oil within its borders. His own coal was of poor quality. Importing coal from the UK was inexpensive, but made Italy very vulnerable to a British embargo let alone a wartime cutoff. Italy therefore subsidized its coal mines. Two Italian engineers innovated a locomotive boiler that improved efficiency and could handle poor quality coal. But securing oil was one factor in Benito Mussolini’s attempts to seize African colonies that contributed to the tensions of the 1930s.

Likewise, the cutting off of United States oil exports to Japan in 1941 played a key role in his decision to go to war and prompted his early efforts to seize the oil fields in Dutch-controlled Indonesia.

Another example is the scramble at the start of World War II to seize very limited supplies of uranium ore as the possibility of an atomic weapon became clear to the Allies and Germany. Fortunately, the United States and Great Britain won the race.

So are we in a situation where US dependence on imports of raw materials and key components threatens our defense? Probably, although its degree is very debatable.

What to do? The historic measures were aimed at increasing domestic production by restricting imports and subsidizing domestic producers. It was the Wool Act of 1954. But like in this country, trade restrictions and subsidies both cause economic problems. Both are subject to abuse involving the transfer of money from the Treasury, other businesses and consumers to a few privileged producers. But if the need for defense is real and vital, there are no other alternatives. All one can do is try to design specific programs to minimize this.

It must also be understood that openly imposing policies to strengthen defense can, in itself, contribute to international tensions. Relations with China are already becoming more contentious, especially over issues such as its treatment of ethnic minorities, which China views as a strictly national matter. Policies to reduce open trade would fuel these tensions.

However, it helps us realize that China and Russia have reason to fear based on the geography and history remembered by people still living. These two nations are the ones that suffered the death of the highest proportion of the total population of all those involved in World War II.

Moreover, it is difficult to find a nation more vulnerable than China to a cut in international trade because of the war. It has a huge population compared to its national natural resources. Its economy is highly dependent on imports and exports. It is particularly vulnerable to submarine warfare and its main potential adversaries and many of its neighbors are increasing their submarine capability.

The current situation is fraught with danger and there is no clear or easy path for our nation or for many others. Expect this issue to receive more attention over time.

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.

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