The Heritage Foundation

Executive Memorandum #69 on Trade, Economic Freedom

December 17, 1984

December 17, 1984 | Executive Memorandum on Trade, Economic Freedom

Why a Department of Trade Remains a Bad Idea


(Archived document, may contain errors)

12/17/84 69

WHY A DEPARTMENT OF TRADE REMAI NS A BAD I DEA

T he Reagan Administration seems bent on resurrecting an idea that died a deserved death during the last session of Congress: creation of a new cabinet-level Department of International Trade and Industry (DITI). Its proponents claim that DITI would make the U.S. more competi- tive in world markets. In fact, DITI would deal a double.'blow to the U.S. consumer, first by raiding the Treasury for costly subsidies to exporters and then by fosteri ng trade protectionism that will hike the prices Americans pay for goods. P

DITI is to be created by fusing the trade functions of the.Depart- ment of Commerce with those of the Office of the U.S. Trade Representa- tive. This, it is said, would eliminate r edundancy and sometime contradictory voices on trade matters, and create a bureau better able to expand U.S. exports and to reduce overseas trade barriers to U.S. goods an d services. Some see DITI as the U.S. answer to Japan's Ministry of International T rade and Industry (MITI), alleged (incorrectly) to have been a major factor in Japan's stunning economic success.

If DITI were created, however, its results would likely be the opposite of those promised.

First, export promotion in a DITI probably would mean expanded programs of costly direct subsidies or loan and credit guarantees to U.S. exporters. Such subsidies are simply transfer payments, from the pockets of individual and corporate U.S. taxpayers in to the coffers of U.S. exporters fortunate enough to qualify. Such government measures divert funds from economically more worthwhile domestic enterprises, leading to a net loss of jobs and national income.

Second, a DITI would be more susceptible to prote ctionist pressure from U.S. special interest groups than are existing agencies. Career officials in bureaus created to help special groups or economic sectors tend'to accommodate these groups and sectors with little regard for the effects on the economy a s a whole. Already Commerce Department officials

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o ften succumb to protectionist pressure from U.S. industries facing competition from foreign goods. But now, at least, there is a healthy tension bet'ween the Commerce Department and the U.S. Trade Repre senta- tive's office, with the latter being less susceptible to special interest pressure. A merger would simply eliminate this tension, meaning local industry pressures would no longer be checked as effectively by the national'interest.. DITI, in shortl is almost certain to become a Depart- ment of Protectionism.

Third, a DITI would not necessarily do a better job than existing agencies in reducing overseas trade barriers to U.S. exports. The U. S. Trade Representative's Office, with its independence, lea n staff, and existence within the Executive Office of the President enjoys the kind of flexibility that probably would be lost in a new trade department.

Finally, those who envision a U.S. DITI as an answer to Japan's MITI misunderstand the dynamics and h istory of Japan's prosperity. Some believe that an "industrial policy" such as MITI's, targeting and pro- moting various industries, would help the U.S. economy in general and exports in particular. But MITI has a very mixed track record. In the early 195 0 s, for instance, it refused to help Sony, believing there to be little future for the Japanese electronic industry. In the 1960s, MITI attempted to force a merger of Japanese auto companies and to limit the models produced; Japanese auto makers wisely res i sted this pressure and went on to prosper. And MITI, meanwhile, has devoted most of its funds to supporting noncompetitive industries such as shipbuilding, petrochemicals, and agriculture. The most successful Japanese export industries, such as autos and electronics, receive little state support. The real lesson learned from MITI is that a U.S. version also would likely drain off taxpayer dollars to support noncompetitive industries, while successful firms made it in spite of such a department.

Many advoca tes of a U.S. Department of International Trade and Industry no doubt sincerely believe that it would make it easier ' to promote free trade. But history and the experience of other nations teach that a DITI would make it easier for trade to be restricted in favor of special interest groups. Such increased protectionism is not in the interest of the U.S. economy, workers, or consumers. Protection- ism means higher prices for consumers and increased unemployment in the economy as a whole for the sake of ext ra jobs in the privileged, pro- tected industries. The Reagan Administration should let the idea of DITI rest in peace, as it has since last year, and not attempt to resuscitate it.

Edward Hudgins, Ph.D. Policy Analyst

For further reading:

David R. Hender son, "The Myth of MITI," Fortune, August 8, 1983. Katsuro Sakoh, "Industrial Policy: The Supermyth of Japan's Super Success," Heritage Foundation Asian Studies Center Backgrounder No. 3, July 13, 1983. Benjamin Zycher, "A U.S. Department of Trade--Or Prot ection," Heritage Foundation Backgrounder No. 312, December 9, 1983.

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