Originally Published: 9/20/2006
U. S. TRADE POLICY
By The Issue Wonk
The U.S. government attempts to manage the economy in part through its trade policy with other countries. Tools in controlling trade include tariffs, quotas, and subsidies. Policy is developed through laws, regulations, and international agreements, all of which impact U.S. manufacturers’ access to foreign markets as well as importing foreign goods into the U.S. Here are some definitions:
Tariff. A tax imposed on goods that are imported. They may be imposed in order to protect domestic industries from competition by foreign markets or to generate revenue for the government.
Quota: The maximum quantity or value of a commodity that is allowed to be imported or exported during a specific period of time.
Subsidy: A payment (in the form of cash or tax deductions) made by the government to encourage the export of specific products.
A Very Brief History
The arguments over trade policy go back to the beginning of our Republic, as do many of today’s policies. In the early days there were, as today, two (2) political parties with differing views on how to rule. The Federalists, whose backbone was the merchants and traders, were conservative. The Republicans, led by Thomas Jefferson and James Madison, were liberal. The arguments of the conservatives versus the liberals was pretty much the same then as now.
Alexander Hamilton, a Federalist, in 1791 proposed government support for U.S. manufacturing by giving subsidies to the manufacturers and discouraging imports through tariffs.1 Many of his recommended tariffs were implemented. However, it is believed they were not implemented as protectionist policy, but rather as a means of raising revenue to pay the public debt owed from the Revolution.
Thomas Jefferson, during his second term in office, wanted to keep the U.S. out of the war between England and France, which frequently “blockaded each other’s ports and seized American ships that happened to be nearby.” Jefferson passed the Embargo Act which barred U.S. trade with European nations. “Businesses criticized Jefferson for costing them millions of dollars in trade and the embargo was lifted in 1809.2 Irwin3 states: “The embargo, along with the dramatic reduction in trade as a result of the War of 1812, is commonly believed to have spurred early U.S. industrialization by promoting the growth a nascent domestic manufacturers.”
Since that time there has been much debate over controlling trade, over whether it has helped or hurt industrialization.3 The arguments continue to this day.
Where We Are Today
Today the argument is over Free Trade versus Fair Trade. Free Trade “argues that American prosperity and security are best served by aggressively seeking to lower trade barriers, even if it means that some industries lose out.” Fair Trade “contends that the economic benefits of freer trade are overstated and that the U.S. government should slow or even halt efforts to lower trade barriers in order to promote goals such as community stability and income security.”4 What is our current policy – free or fair? If you read a statement by the State Department, Bureau of Economic and Business Affairs you still won’t know:
U.S. trade policy is based on two primary goals:
· To expand access for American exporters to overseas markets, and
· To ensure that commercial competitors and partners abroad observe fair trade practices.
To achieve these goals, the State Department and others in the U.S. helped established the system of international trade rules administered by the World Trade Organization (WTO). The U.S. Government works to lower barriers to trade through negotiations both multilaterally in the WTO and bilaterally in negotiations with individual nations and regional groups. Currently a major round of negotiations is underway aimed at making trade more free and fair. We also work hard, including through U.S. Embassies and Consulates overseas, to ensure that foreign governments live up to their trade commitments. [Emphasis added.]
A Balance of Trade
Balanced trade is achieved when the monetary value of exports (goods and services) is equal to the monetary value of imports over a certain period of time. If the value of exports is more than the value of imports, it is known as a trade surplus. In other words, we are selling more than we are buying. If the value of imports is more than the value of exports, it is known as a trade deficit or a trade gap. In others words, we are buying more than we are selling. We can liken this to your own financial condition. If you spend more than you bring in, you have a deficit. And just like your own financial position, what you want is a surplus, which is a positive asset position. A deficit, or a gap, is a negative asset position, or a decrease in asset position. According to Investopedia, there are factors other than just imports and exports that go in to the equation. Other debit items include foreign aid, domestic spending abroad, and domestic investments abroad. Other credit items include foreign spending in the domestic economy and foreign investments in the domestic economy.
Effects on the Economy
Just like U.S. Fiscal Policy, manipulating trade policy is not easily understood and there are differing opinions. In general, a trade surplus stimulates jobs and, thus, wages. So, in a recession, a surplus is a good thing. Conversely, a trade gap will provide price competition, which could keep inflation under control and may be beneficial in an expanding economy. Thus, according to Investopedia, “a trade deficit is not a good thing during a recession but may help during an expansion.”
1 A Biography of Alexander Hamilton (1755-1804). Report on Manufactures – submitted to Congress December 5, 1791. From Revolution to Reconstruction.
2 America the Beautiful. Thomas Jefferson. The American Presidency.
3 Irwin, Douglas A. Summer 2006. Historical Aspects of U.S. Trade Policy. National Bureau of Economic Research.
4 Council of Foreign Relations. Review of U.S. Trade Strategy: Free Versus Fair by Daniel W. Drezner.
© The Issue Wonk 2006-09