Any manager who tries to create a strategy out of worn-out clichés and unexamined nostrums is dismissed. Yet in the United States and other Western countries we have grown comfortable with the government following outworn nostrums about free trade. We have elevated the economic theory of free trade to the status of a national theology, and we follow its simple dictums as if they were immutable laws. We appear prepared to follow the precepts of free trade wherever they lead us, even if that means plunging lemminglike to our economic ruin.
Today the evidence should be clear to anyone who wants to look at it: our blind allegiance to free trade threatens our national standard of living and our economic future. By sacrificing our home market on the altar of free trade, we are condemning ourselves and our children to a future of fewer competitive businesses, fewer good jobs, less opportunity, and a lower standard of living. These unacceptable outcomes threaten us in ways that are all related to our practice of free trade.
American business’s stake in these matters is clear. If we do not wish to live with these outcomes, then we must construct a new and effective way to think about trade that will serve the interests of both business and the nation.
Threats of Free Trade
As we practice it, free trade has profoundly destructive results for the United States and other Western nations. First, nations that do not play by our rules practice unequal competition. Second, free trade puts us in direct competition with low-wage nations, countries that have a lower standard of living than the United States. Third, by allowing these nations to take over big sectors of our market, we permit the permanent interruption of an important relationship between demand and supply that has been the main engine of economic growth in American history.
Unequal National Competition
Classical economics teaches us that free exchange works to produce the best results for all, whether the exchange takes place within one nation or across national boundaries. But this concept works only when the exchange is an equal one that occurs within a common framework of laws, customs, rules, and regulations. Economic competition conducted under the law of the jungle leads to chaos and failure. The price system becomes a guide to nothing that is sensible or tolerable.
The laissez-faire approach to economics fashionable in the United States permits distorted outcomes precisely because it neglects the essential role of rules and regulations in preventing destructive competition. When each nation creates self-serving rules, free trade across national boundaries becomes destructive—an unequal competition under inconsistent and inharmonious rules.
Most American companies facing international competition have encountered the problem. Most governments are playing a simple game: they use their myriad powers—subsidies, favorable banking practices, local content requirements, exchange control, and the like—to win jobs and gain higher incomes for their people or to achieve a favorable national balance of payments.
American companies, therefore, end up competing not with foreign companies but with sovereign foreign states—states intent on winning jobs and sometimes whole industries for themselves. Foreign competitors are able to beat out a U.S. company not because of superior economic efficiency but because of subsidies. Japan grants favorable credit terms to certain industries, and many countries give cheap export-finance loans. European nations have special treatment for the value-added tax on exported goods. Most of the Pacific rim nations have weak or nonexistent environmental regulations, and Taiwan often fails to enforce its patent and copyright laws. Laborers in places like China lack the rights of U.S. workers.
Copyright © 1986 Harvard Business School Publishing Corporation. All rights reserved
Today the evidence should be clear to anyone who wants to look at it: our blind allegiance to free trade threatens our national standard of living and our economic future. By sacrificing our home market on the altar of free trade, we are condemning ourselves and our children to a future of fewer competitive businesses, fewer good jobs, less opportunity, and a lower standard of living. These unacceptable outcomes threaten us in ways that are all related to our practice of free trade.
American business’s stake in these matters is clear. If we do not wish to live with these outcomes, then we must construct a new and effective way to think about trade that will serve the interests of both business and the nation.
Threats of Free Trade
As we practice it, free trade has profoundly destructive results for the United States and other Western nations. First, nations that do not play by our rules practice unequal competition. Second, free trade puts us in direct competition with low-wage nations, countries that have a lower standard of living than the United States. Third, by allowing these nations to take over big sectors of our market, we permit the permanent interruption of an important relationship between demand and supply that has been the main engine of economic growth in American history.
Unequal National Competition
Classical economics teaches us that free exchange works to produce the best results for all, whether the exchange takes place within one nation or across national boundaries. But this concept works only when the exchange is an equal one that occurs within a common framework of laws, customs, rules, and regulations. Economic competition conducted under the law of the jungle leads to chaos and failure. The price system becomes a guide to nothing that is sensible or tolerable.
The laissez-faire approach to economics fashionable in the United States permits distorted outcomes precisely because it neglects the essential role of rules and regulations in preventing destructive competition. When each nation creates self-serving rules, free trade across national boundaries becomes destructive—an unequal competition under inconsistent and inharmonious rules.
Most American companies facing international competition have encountered the problem. Most governments are playing a simple game: they use their myriad powers—subsidies, favorable banking practices, local content requirements, exchange control, and the like—to win jobs and gain higher incomes for their people or to achieve a favorable national balance of payments.
American companies, therefore, end up competing not with foreign companies but with sovereign foreign states—states intent on winning jobs and sometimes whole industries for themselves. Foreign competitors are able to beat out a U.S. company not because of superior economic efficiency but because of subsidies. Japan grants favorable credit terms to certain industries, and many countries give cheap export-finance loans. European nations have special treatment for the value-added tax on exported goods. Most of the Pacific rim nations have weak or nonexistent environmental regulations, and Taiwan often fails to enforce its patent and copyright laws. Laborers in places like China lack the rights of U.S. workers.
Copyright © 1986 Harvard Business School Publishing Corporation. All rights reserved
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