Government Don't Know Jack: Foreign Trade

This is a multi-part series examining inherent conflicts in government and the ultimate goal of avoiding the Confucian Cycle.

The first article in this series listed a number of ways government can increase economic activity, and we discussed infrastructure projects in the second article.  Now it's time to discuss trade regulation.  Broadly speaking, trade regulation consists of passing laws that determine who can import goods into the country and whether they pay taxes on the goods they import.

In theory, trade benefits everybody.  While it is true that Wal-Mart's importing Chinese goods has knocked a point or two off our inflation rate every year and saved customers a lot of money, the American companies that used to sell to Wal-Mart have cut their employment.  Economists argue that free trade makes everybody better off.  Without doubt, Wal-Mart is better off and the Chinese who work in factories making things to sell to us are better off, but are we?

Trade Regulation

The most visible and most controversial forms of trade regulation deal with the rules which let countries export goods to other countries.  People who have jobs in any industry always whoop and holler when some other country starts exporting competing products.  Instead of making their products better and competing honestly, the usual reaction is to ask the government to stop the new products coming into the country.

As fortune would have it, I was close to the negotiations of the agreements during the Carter and Reagan administrations which limited the imports of Japanese TVs and cars into the US.  The details aren't well known, but if business people knew what really happened, they might be less eager to ask for government "help."

Limits on TV Imports

My connection to the talks started when the youngest son of a friend of my father ended up in charge of the Japanese side of the negotiations to limit Japanese TV exports to the US.  He moved to New York for the talks and we were able to discus the issue over dinner after the agreement had been signed.

"I don't understand," he told me.  "Mr. Strauss, Mr. Carter's chief negotiator, went on TV last night and said that this agreement would not increase cost to American consumers.  That makes no sense.  The whole point was that Zenith can't compete with our Japanese manufacturers.  Mr. Strauss' negotiating position was that if we don't sell TVs here, the price will go up and Zenith can stay in business.  How can he say this won't affect what people pay?"

There was no point in pointing out that American politicians lie like Japanese politicians, so I said nothing.

My friend went on, "Mr. Strauss is a very smart man," he said, "but he doesn't know anything about the TV business.  Zenith told him they couldn't compete with our manufacturers, but nobody told him that our guys are going to lose to the Koreans.  By limiting the number of units we can sell, he's encouraging us to forget going after market share by selling on price.   He's encouraging us to sell higher-priced TVs on which our profit margins are better.  We'll move up-market, hold off the Koreans as long as we can, and cash out of the TV business."

Now I had something to say; I told him that the US Government didn't know much about any business.  Government people like Mr. Carter never met a payroll.  Mr. Carter ran a peanut farm which was heavily subsidized by the government, he had no idea how the TV business worked any more than a Japanese prime minister who came up through rice farming would know anything about the TV business.  He shuddered at the idea of the prime minister getting involved in trade talks, and we turned to other topics.

Limits on Automobile Imports

Years later, I was in Japan and phoned to say "Hello."  He was glad to hear from me and said, "Come to lunch, now," so I went to lunch.  He had a whole team of guys and they wanted me to help write a telegram to Bill Brock, who was Mr. Reagan's political fixer.  My friend was negotiating restrictions on selling Japanese cars in America.  This involved a whole lot more money and jobs than the TV talks, and as you might expect, there was a lot of cut-throat politics going on.

"Here's what I need," he told me.  "I got a telegram from Mr. Brock and my rivals in the ministry released a translation to the Japanese press.  The translation makes it look like I'm selling out our car companies.  Unless I get a clarification from Mr. Brock, I'll be in trouble."

"Can't you release your own translation?"

"That would look too self-serving.  The problem is that Japanese people don't really understand some of the words Mr. Brock used in his telegram to me.  My rival's translation will seem more plausible to most Japanese and they won't believe mine.  That's why I need you to help me write a telegram to Mr. Brock asking for clarification."

"Can't you phone him?"  "The phone call would be logged, but we don't record phone calls, so everybody would see the call as an admission of my getting caught and trying to wiggle out."

So we wrote a telegram.  "Does Mr. Brock know you're in trouble," I asked.  "Yes, he does.  His translators won't get everything, but he's a really brilliant politician.  The papers said where they got the translation; he'll know it wasn't from me.  His guys will translate the Japanese news back into English and it won't come out the way he sent it, so he'll understand when I ask for clarification."

"If I write the telegram, he'll know it came from an American.  Is that OK?"  "That will help.  When he gets a message from me that I didn't write, he knows it's very important, so he'll pay attention."

The first step was to write the telegram we wanted Mr. Brock to send back.  We knew that he knew that the problem involved translation and if we could feed him the right words, he'd send them back.  This was a fascinating process.  When I suggested a word, the first question was how most Japanese would translate it.  Then they had to decide whether Mr. Brock would be willing to use the word; after all, Mr. Brock had to worry about how his telegram might play in the American press.  It took a while, but we finally had the unambiguous reply we wanted.

Now we had to write a much longer telegram which fed the reply to Mr. Brock without being too obvious; the request for clarification would have to be made public, and it, too, would be translated into Japanese.  It took a while to find an English typewriter, but I finally typed it, and it was ready to go.  Then we went to lunch.

"It's amazing," he told me.  "Mr. Brock is a very good politician, but he knows less about automobiles than Mr. Strauss knew about TV.  He hasn't read Mr. Strauss' notes either.  I'm getting everything Mr. Strauss gave me because of precedent and I'm getting things Mr. Strauss wouldn't give me because, as I point out, TVs are different from cars.  This is looking like such a good deal for our side that some of the car companies think it has to be a subtle American plot."

"I wouldn't worry about that," I said, "Mr. Reagan was an actor and then a governor.  He doesn't care about business, all he wants is to get the UAW off his back; that's why he got a political fixer instead of a business man to handle it.  I don't think it's a plot, I'd sign if it looks good to you."

When I got back home, he called and said that the reply Mr. Brock sent was exactly what we'd written except for a comma and a preposition.  The rest is history - the agreement told the Japanese exactly how many cars they could sell in the US each year.

Knowing exactly how many to make is a manufacturer's dream.  The Japanese loaded their cars with options, cut costs, moved up-market, made a lot of money, and strengthened their dealer networks.  When the agreement timed out, the Japanese were ready to renew; GM wanted it ended.

Lessons Learned

• Our government doesn't know enough about business to be of any real help in international trade negotiations.
• Negotiators change when we switch administrations.  If we keep sending in new guys and the other side always uses the same team, we lose.
• Restricting imports instead of competing honestly costs the public while supposedly benefiting various interest groups.  GM, Chrysler and Ford expected to benefit from the trade agreement.  However, since our governmental system unavoidably causes it to be lousy at trade negotiations, they only benefit the other side's interest groups.  That might be a good idea under certain circumstances, but we need to be aware of it.
• Such agreements always nail consumers.  The whole point is to keep prices higher than they would be without the restrictions; how can that possibly benefit us taxpayers?
• Agreements may protect jobs, but it costs a lot of money per job.  Higher tariffs and import restrictions generally cost consumers $100,000 or more per year per job saved - and the job pays a lot less than $100,000.  Where do you think the rest of the money goes?  We'd be better off just to pay the workers directly and let businesses fail then they can't compete.

GM found that when you ask for government help, you'd better be careful - you might get what you wish for, and our guys have a track record of losing negotiations.  The difficulty with government attempts to help the economy is that we have no neutral party to compute honest cost-benefit trade-offs.  As the Wall Street Journal put it on p A10 of the Nov. 24 issue,

We could use a separate agency, shielded in part from political considerations, whose sole mission would be to analyze the costs and benefits of regulation and government programs.  Without such an agency, interest-group logrolling will continue to trump science and economics in major policy choices.

Just so.  Honest cost-benefit analysis would have doomed Tenn-Tom, automobile import restrictions, steel import restrictions, the sugar tariffs, ethanol and a host of other programs which shrink the economy to benefit the well-connected.  While in theory the government can help the economy grow, its ability to separate effective programs from politically-inspired waste seems to have passed.  The best thing the government can do for the economy now is just to leave it alone.