In the middle of perhaps the most decisive year in the history of American trade policy--and perhaps foreign policy--since the late 1940s, it is hard to say who is more confused, the Clinton administration or its critics.
The new administration has taken a pugnacious line toward two of America's largest trading partners, Japan and the European Community, and during its first months in office it seemed to be of two minds about the merits of the pair of momentous free-trade measures bequeathed it by its Republican predecessors, the North American Free Trade Agreement (NAFTA) and the larger General Agreement on Tariffs and Trade (GATT). Talk of an international trade war, the likes of which we have not seen since the 1930s, was thick in the air, and despite the administration's guarded embrace of the two pacts (pending modifications), the rumors of war have not entirely dissipated. They were stirred up again in June, when the administration announced that it would seek a form of "managed trade" with Japan in some areas of commerce.
The administration's critics, especially those in the press, complain that it cannot make up its mind about trade. On the one hand, they say, government officials threaten America's partners with retaliation for trade practices Washington finds objectionable, while on the other President Clinton repeatedly affirms his commitment to free trade and to completion of a GATT treaty. "Both directions of policy have their own logic," the Economist (May 8, 1993) says. "But to combine them has no logic at all."
Such critics assume that the government has only two choices: free trade or protectionism. Yet as administration economists would no doubt be the first to say, there is no real alternative to free trade. The reason is that there is no other theory of how the world economy works--or ought to work. The essence of free trade is the idea of comparative advantage, propounded more than 200 years ago by Adam Smith and later elaborated by David Ricardo. It says, with blinding simplicity, that the best way for all to prosper is for each region to produce the goods it can manufacture most cheaply and efficiently and to trade them with other regions for the goods that they produce most efficiently. An appreciation of the virtues of unhampered trade across political borders inspired, at least in part, some of the momentous developments in modern history, including the U.S. Constitution and the creation of the European Community (then called the Common Market) in 1957.
One will search in vain through all the recent variants of the protectionist idea, from Clyde Prestowitz's Trading Places (1988) to Lester Thurow's Head to Head (1992), for a comprehensive alternative understanding of the world economy. There is, of course, much angry discussion of how other nations exploit the weaknesses of a system of open trade and of how the United States might do so--as if it does not do so already. "Managed trade," advocated by, among many others, the chair of President Clinton's Council of Economic Adviser, Laura D'Andrea Tyson, in her book, Who's Bashing Whom? (1993), is a remedial policy but not an economic theory. There may be a case for sheltering certain "strategic" U.S. industries from foreign competition and nurturing them with special federal assistance, as Tyson and her allies argue, but many economists remain unconvinced that anybody can identify the right industries. In any event, "managed trade" is an exception to free trade, not an alternative to it. The only true alternative to free trade is mercantilism, but the world's largest economy cannot be run according to mercantilist principles--nor, as the Japanese are learning, can its second largest economy.
What, then, accounts for the Clinton administration's Dr. Jekyll and Mr. Hyde act on trade? The most hopeful interpretation is that it represents an attempt to readjust the cost of America's historic leadership role in promoting open trade. …