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STL #11: Galt's Gulch Theory

My Thoughts On: August 16th, 2005

In Ayn Rand's book, "Atlas Shrugged", all the great minds of the world retreated to a hidden society in Galt's Gulch to live a perfectly free life. Does isolation really work, or would it take a super-human cast straight out of Rand's novel, with their mythical perpetual-motion motors, refractor rays and super-metals to do it? Where do human rights and the world economy intersect? This controversial (but distinctly Libertarian) theory of foreign trade addresses this very troubling issue.

Globalization is a dirty word in politics today, Libertarians should know the issue all too well since their staunch opponents have thoroughly demonized Globalization. Globalization is essentially the liberation of foreign trade. Libertarians typically believe in free trade and reject the common propaganda against Globalization. Let me present a case that challenges both the Libertarian and conventional view of Globalization and inserts another, yet unconsidered of, perspective on foreign trade, that is explicitly Libertarian in design.

Currently, free trade (Globalization) is secured by international free trade lobbies. These groups orchestrate trade conditions between nations, they include bodies like the World Trade Organization (WTO) and the International Monetary Fund (IMF), and for the United States we all are well aware of the much-mentioned North American Free Trade Agreement. What do these organizations do, and how are they helping make trade more "free"?

Well, they really aren't making trade that much more free. While it's easier to trade because of these bodies, the kinds of trades we have going on are very questionable, and definitely un-free. So questionable in fact that forces have risen staunchly opposing all free trade, which is equally as bad a policy as the regulated trade is. How can a sovereign nation, like the United States, create a fair and equitable trade policy?

First we must recall that sovereignty is in the hand of the individual, not the government. So in all truth, it is not ethical for the United States government to say to someone who is a state citizen "you cannot make that trade with the sovereign foreigner". It's not the position of government do to that, especially not because someone is concerned about environmental health, offshoring, or the evils of corporate multinationals.

Of course, not all foreign citizens have sovereign rights, and we'll discuss the impact of that here in a moment.

Statist Trade Protectionism

When Adam Smith deliberated in his novel, "An Inquiry Into the Nature and Causes of the Wealth of Nations", he touched on a lot of issues revolving around foreign trade that we need to explore first to understand the effects it has on our lives and economy.

First, a legitimate nation (a Libertarian government), however small, will probably need a means of financing itself. Now, we all know a Libertarian government would be inconceivably small, and a light tax burden, even so, only Anarcho-Capitalists think that there would need to be absolutely no taxes for a Libertarian society. A government based on the American Constitution would require some kind of tax, and Smith reminds us that a legitimate subject of taxation for a government is tariffs, and that this form of tax is more equitable and reasonable than most other forms of excises and personal taxation. Most Libertarians can easily see how income taxes and sales taxes are more dangerous institutions than international trade tariffs.

In Smith's time, and ours, we have a poor understanding of how foreign trade works, so it's hard to accurately say how well-off tariffs are in comparison to other forms of taxation. So we have to touch a little on how that works first.

A common misconception is that we lose jobs and income if our rate of exports fall under our rate of imports, this is the Trade Deficit Myth. If all our imports are a net gain (we purchase more than what we paid for) and all exports are a net gain (they buy for what benefits us more than what we sold) then it doesn't matter if imports/exports are unequal, because there is still net gain by the part of all parties. We may lose jobs to a nation that we have a trade deficit with, but the saved purchasing power we have from the produce we get cheaper will create a well of savings to ultimately finance new jobs to replace them, usually far more jobs than originally lost. In the modern American economy we essentially sell half of what we buy, and somehow we are still are creating new jobs. This is because, in part, of purchasing power savings that occur through cheap foreign trades.

Facts are, the largest overall negative impact on the economy and jobs is not the job loss itself, but the turnover rates going up (the temporary spite of workers who must find new jobs). Turnover rates level out over time and are periodic, recent turnover only spiked because of the tech recession. Thus no foreign trade policy needs to address trade deficits, it is a superficial concern... by itself. More on what happens you add factors in a moment.

Now, governments that fixate on trade deficit and would try to encourage exports through subsidy and discourage imports through heavy tariffs, to create a mega-trade deficit. To do this, they must have government authority to regulate the markets, and likewise, this engenders the creation of Socialist nations (this is why many small nations quickly become Socialist, to divert capital from free market nations). Whatever brings the export/import rate balance in their favor makes them think they "win" the fight of foreign trade. This is the first bad turn most governments make and Smith points it out quite clearly.

Import/Export trade deficits don't naturally "drag", or slow, the economy; this is shown by the general economic prosperity we and other nations have in spite of high trade deficits. For a trade deficit to drag the economy the trade deficit would have to be bolstered by an external force... government subsidy and targeted tariffs. A foreign nation thus can only "drag" our economy if they bolster the capital of specific foreign trade markets to create a mega-trade deficit gap for themselves, in their shortsightedness they believe it benefits them, but it detriments both of us.

Smith tells us that if we prohibit trade from a specific industry, then it gives a domestic industry a monopoly. Capital is funded to the monopolists at home, and this hurts the economy in a way very hard to estimate, by diverting capital from it's natural stream. If that money would've been intended in someone else's hands, had we conducted the foreign trade, investment would take an entirely different course that resulted in cheaper produce and ultimately that benefits the consumer (the person who trade is supposed to benefit). The result of prohibition of foreign trade in a particular industry is specific - it hoards capital in the hand of local monopolists. That's not good.

Taxes, likewise, have a negative effect on foreign trade as well. As a general rule, the taxation window of a product cannot exceed it's benefit of coming to the market. It has to remain at a low enough price to justify it being brought here or people will stop bringing it here. Taxes that are too high act as prohibitions. Who pays these taxes? Ultimately, the foreign seller cannot go beneath a certain window of profit, or the trade wouldn't happen. So assuming the tax is less than that (the prohibitionary level), it is paid out by the producer for the time being, but ultimately paid by the consumer in the form of higher prices. The danger a tariff brings to a market is that an entire foreign trade can be manipulated by the hands of politicians. And that's also not good.

Stuck in the Valley

So, we have a quandary on our hands. Is foreign trade good? Well, it seems so. Are tariffs and prohibitions bad? Seemingly, they are. Most Libertarians will concede that we need some tax revenue, but many will disregard the proposition of tariffs being used simply because of this understanding brought about through our vigorous defenses of Globalization. So why, as Libertarians, are we even discussing the issue right now?

For one, foreign trade is affected by a rule which is outside our own government's jurisdiction: the policies of the foreign government. This is one way which we are not estimating that the authority of some other government can effect our own economy. Foreign individuals are often not sovereign individuals with rights due to the unjust laws of their homeland. In this regard their oppressive governments can dictate what they do, through their policies. In this way a combination of all the pitfalls we just outlined as negative and oppressive to foreign trade... the diversion of capital through trade restriction, the use of tariffs to balance trade deficits, and the subsidy of domestic produce to create monopoly... all forms of Statist Trade Protectionism... are all things foreign governments can engage in, even if we do not.

In Libertarianism, it is the right and duty of an oppressed individual to alter or abolish forms of government unjust to him. If a foreign population cannot do this, then their national policies, in ways that they affect us, are a concession that they are not sovereign individuals in all regards. In this case, no Libertarian can justify trading with them, as you are not trading with another sovereign individual, but you are trading with two entities - the foreign citizen and the foreign nation, who is sovereign over their citizen. There are three people in that transaction, even if our government steps out, their government steps in. If a sovereign person consented to that transaction they are acknowledging the authority of the foreign nation to dictate the terms. That alone breeds more Socialist and Statist policies.

This makes life look bleak. Even if we make our own United States the perfect style of Libertarian government we are still drawn into the same conflict of interest in foreign trade, in this case, the foreign government's intervention. So all trade with non-Libertarian nations - which if practiced right would ultimately mean all nations that have not ratified the Constitution to become a member of our sovereign statehoods, or all nations that do not share a virtually identical system to our own - is in this pretense unfavorable oppression under the guise of beneficial trade. So our situation?

We're stuck in Galt's Gulch, where we are certain life and liberty are protected absolutely. While that's great in concept, who really wants to live in a gated community like that? I certainly don't hold the illusion that life is more efficient that way. Thus, I've devised a theory to calculate the justness of various degrees of foreign trade policy, and with this system one can meter the negative impact of non-Libertarian economic movements while not falling into the exact same pitfalls they have.

A theory to get out of the Gulch: Free Trade Protectionism

If we engage in the Socialist policies of arbitrary selective prohibition, trade deficit catering, or domestic subsidy/monopoly building... we become a negative nation to trade with an in a way that oppresses the rights of our own individuals and those abroad in the ways we've shown. We become another reason for someone else to go live in Galt's Gulch. We find ourselves asking businessmen and economists what trade deficits are okay, what aren't, should it be equal, should it be as high in our favor as possible, and what extents are we willing to interfere in the personal lives of our own sovereign individuals to make it that way for those businessmen... not good.

So, foreign policy of a free nation must, at it's base, have a level of uniformity and fairness... this means universally low tariffs should be the standard tariff if we are seeking a steady revenue stream, if there is to be a tariff as a base policy at all. Universal means on imports AND exports, and low means it must not rise so high as to act as a prohibitionary act against trading. So, as a general policy, we're fair... right?

Well, as discussed, there is that problem of Socialist/Statist nations who would, through their control over their citizens and their own Statist policies, funnel capital in manipulative ways that drag both our economies. The effect of that impact is they do their part to create terms and conditions to trade involving three parties: our citizen, the foreign national authority, and the foreign citizen.

Policies derived to cut the middleman out of that equation are what I'm going to call, in what may sound kind of odd to many of you at first, "Free Trade Protectionism".

"Free Trade Protectionism" can hold no base qualification to use Statist tactics for any purpose besides defeating the inequities caused by Statist Protectionism. In other words, a Free Trade Protectionist policy may not focus on trade deficits unless the trade deficit in question is created by foreign Statist Protectionism. The response environment is the action of Free Trade Protectionism, and yes, there are rules we can derive from this concept.

Free Trade Protectionism recognizes that there is an inequity between two nations if one artificially locks channels of production. A foreign nation may, by taxing their people, subsidize an industry to sell cheap to us. We can estimate the damage this subsidy causes to our economy and theirs by finding out the degree of subsidy and supplimenting a revenge tariff - like those advocated by Adam Smith - to reply to the subsidy. This does not necessarily mean a prohibition level tariff or a tariff to create parity between the foreign good and our domestic goods, instead, the tariff's end result should be to increase the price of the good to where it would naturally be if the foreign subsidy did not exist. Then we limit the capacity of the favored industry to become a monopoly, which will not only reduce it's lobbying power in the foreign nation, but limit the damage the foreign nation would incur on our economy should it change it's policies suddenly. The inequity of goods can be calculated by the rate at which a foreign nation subsidizes a good. The goal of the tariffs is to return the good's nominal price to it's real price level, making the end result of the government intervention nullified.

For instance, let's say a foreign government, to bolster it's exports, subsidizes one of their own businesses $5,000,000 (in US dollar equivalence), so that same business can produce it's 500,000 products and sell them to us $10 cheaper. A revenge tariff of $10 in this situation is ideal Free Trade Protectionism. We may still get the product cheaper but at least it's the cheapness of international productivity and not some redistribution method by foreign governments to con us into a dependency.

The purpose of proposing the Galt's Gulch theory of Free Trade Protectionism is to begin dialogue on the concept to see if it can work, devising methods to calculate the above for instance. All qualifications of Free Trade Protectionist policies should be derived from the resulting inequities they cause amongst our domestic industries. This is not to be confused with the inequalities of Trade Deficits, which the basis of Statist Protectionism policies.

A mega-trade deficit, altered by massive subsidy, would not exist if we had revenge tariffs to challenge the going rates of goods and thus reduce their capacity to import to natural levels. The closer we aim at natural levels - which can be calculated by analyzing imports - the closer we get to restoring the proper flow of jobs, as what would happen amongst free nations. For instance, in an oil-producing nation we will always have a trade deficit, and that's okay: the result of our trades with that nation is the vast benefits of having oil. However, to the degree that their government interferes with oil production (to make us more reliant on it) we should issue Free Trade Protectionism. That way, even though we still have a trade deficit, we don't have a trade deficit that is unnaturally manipulated by the foreign government, instead we have one that is reliant on resolving the inequity of international Socialism.

Foreign nations, to preserve their trade deficits, may prohibit our goods. Our response? Well, we shouldn't just prohibit the single good they prohibit, and deadlock. That engenders the flow of goods in other sectors of the economy, which was their intended goal by prohibiting our selected exports. They succeed in creating a domestic monopoly, and we may accidentally create a monopoly here which will likewise funnel our capital into select channels, this is not a good way to address how to make trade more free. A proper reply instead would be to raise tariffs against their other exports and reduce tariffs in a channel they are trying to block to nill. Then we've put them into a condition of losing in the general deadweight of their exports while they must fight against the building of a black market to import here cheap.

Ultimately the tier of Free Trade Protectionism exists separate from the tier of base trade policy. Base trade policy, IE, the general income from tariffs, should not be derived from Free Trade Protectionism. That way our base income is not reliant on this arbitrary field of guesswork. If it is, then the Free Trade Protectionism will become an excuse to engage in Statist Protectionism. Statist Trade Protectionism vs. Statist Trade Protectionism will merely make our own citizens AND those foreign citizens find their own Galt's Gulch. Base tariff income can not be arbitrary in this pretense which is my big problem with nations that try to encourage that type of protectionism... we'll find excuses against entirely legitimate trade partners to encourage select domestic businesses at the net loss to our general economy. That's why a foreign trade policy would be two tier, the base policy and the Free Trade Protectionism meant to level out trade barriers.

If a nation will not agree to trade under these terms, and seeks treaties, those treaties should be rejected. That is what Free Trade Protectionism is, a policy against the inequities of Statist Protectionism. If a nation whom we have a trade deficit against wants to play party to our perceived loss by granting us a special trade status that would help our trade deficit gap: we should not concede, even if it may pragmatically help the trade deficit gap. Ultimately any nation that bases all it's ultimatums on this point should indeed be walled off. Of course, putting a trade embargo on a nation doesn't end the effects of it's bad policies, but it does help contain them. For instance, their industries may route their cheaper trades through other nations, back the entire cycle with subsidy, so they can still sell cheap and still develop their monopolies even though we have a trade embargo with them. Should they do that, a revenge tariff against that respective third party nation may be in order.

Likewise, Free Trade Protectionism revenue may be substantial considering the inequities it has to level out. What should government do with that money? Apply it to national debts first and then save it for surplus to resolve future debt. If the savings are excessive, then it may on a limited bases be applied to the general operating expenses of government, but not to extended spending programs, in this way it only affects the other first-tier uniform tariff policies indirectly (by lowering the need for them, and likewise, any other tax solution a freer nation than today's would impose). Segregating the two policies from one another prevents Free Trade Protectionism from becoming the new Statism. The revenue stream from Free Trade Protectionism needs to be protected against general spending programs, to prevent politicians from creating exterior interests to justify bigger government and thus, more "Protection" of free trade, creating an interest to fabricate reasons for the policies. It is thus the second tier of a two-tier foreign trade policy designed to prevent government expansionism, unlike standard protectionism which is one-tier and entirely abused.

Free Trade Protectionism, in the form of trade prohibitions or revenge tariffs, should all subsist on stated pretenses. If a foreign nation hears our terms it puts the diplomatic issue before them to reform to less invasive trade policies. Ultimately this moves diplomacy of international trade barriers less to exclusive trade organizations and treaties and more to common understanding: trade free or be penalized. I intend to return more to this point as time progresses, to distinguish between Statist Protectionism and Free Trade Protectionism, and theorize more on how one may successfully implement a model designed to respond to the problem of foreign trade interference, and ultimately help to remove that unwanted middleman - the foreign government - from the equation. Subverting the foreign authority and making trading more dependent on the sovereign indivudal is the progress of liberty.

- Good ol' PA

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