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Managed Trade Is Not Free Trade

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As libertarians have long pointed out, trade agreements like the Central America Free Trade Agreement (CAFTA) and organizations like the World Trade Organization (WTO) are not free-trade agreements and organizations. Rather, they are managed-trade agreements and organizations that abdicate power to an international body, and in direct violation of the Constitution. As Congressman Ron Paul stated,

We don’t need government agreements to have free trade. We merely need to lower or eliminate taxes on the American people, without regard to what other nations do. Remember, tariffs are simply taxes on consumers. Americans have always bought goods from abroad; the only question is how much our government taxes us for doing so.

CAFTA and other international trade agreements do not represent free trade. Free trade occurs in the absence of government interference in the flow of goods.

If there is any doubt about the insidious nature of “free trade” agreements and organizations, then consider the recent brouhaha in Congress over an amendment to the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Act, 2012 (H.R.2112). The amendment (H.Amdt.454), which passed by a vote of 223-197, states that “none of the funds made available by this Act may be used to provide payments (or to pay the salaries and expenses of personnel to provide payments) to the Brazil Cotton Institute.” What the amendment effectively does is prohibit the $147 million annual payment the United States makes to Brazil to settle a WTO dispute over cotton subsidies.

What is the United States doing paying $147 million a year to the Brazil Cotton Institute? How many Americans know that their tax dollars are being spent this way?

In response to a 2002 Brazilian complaint to the WTO about certain features of the U.S. cotton subsidy program, the United States agreed last year to begin making the $147 million payment so it can continue to subsidize American cotton farmers and still be “trade compliant.” (From 1991 to 2004, U.S. farm subsidies for cotton production averaged $1.7 billion per year).

In 2004, a WTO dispute settlement panel ruled against the United States. The WTO’s appellate body ruled against the United States in 2005 after an appeal of the settlement panel decision. The settlement panel and appellate body reports were then adopted by the WTO membership, which means that the United States was obligated to bring its policies into line with WTO recommendations or negotiate a settlement with Brazil.

Key findings of the WTO were that

  • U.S. domestic cotton subsidies have exceeded WTO commitments of the 1992 benchmark year, thereby losing the protection afforded by the “Peace Clause,” which shielded them from substantive challenges;
  • the two major types of direct payments made under U.S. farm programs — Production Flexibility Contract payments of the 1996 Farm Act and the Direct Payments of the 2002 Farm Act — do not qualify for WTO exemptions from reduction commitments as fully decoupled income support and should therefore count against the “Peace Clause” limits;
  • Step-2 program payments are prohibited subsidies;
  • U.S. export credit guarantees are effectively export subsidies, making them subject to previously notified export subsidy commitments; and
  • U.S. domestic support measures that are “contingent on market prices” have resulted in excess cotton production and exports that, in turn, have caused low international prices and have resulted in “serious prejudice” to Brazil.The “Peace Clause” is article 13 of the WTO’s Agreement on Agriculture that exempts domestic support measures that comply with the agreement’s requirements from being challenged as illegal subsidies through dispute settlement proceedings, as long as the level of support for a commodity remains at or below the benchmark 1992 marketing year levels.Naturally, Brazil is upset about the passage of the amendment and is threatening to retaliate. The resulting trade war will be bad for consumers in both countries.Although I applaud the 95 out of 236 Republicans and 128 out of 184 Democrats in the House that voted for the amendment to end the $147 million payment to Brazil, it should be noted that this was an amendment to a bill to fund the Department of Agriculture and the Food and Drug Administration. The bill, which passed by a vote of 217-203, was rejected en masse by all Democrats — including Rep. Ron Kind of Wisconsin, the author of the amendment in question, mainly because it included cuts to the Women, Infants, and Children (WIC) program.

    This means that the vast majority of Republicans in the House voted to fund programs that are not authorized by the Constitution. The federal government has no authority to regulate, subsidize, inspect, or monitor any form of agriculture, food, or drugs. It’s that simple. The United States should stop subsidizing its cotton farmers, not because such subsidies are outdated, not because we can no longer afford it, not because cotton farmers are receiving too much money, and certainly not because another cotton-producing country objects to them. The United States should stop subsidizing its cotton farmers because it is a blatantly unconstitutional activity and an illegitimate function of government.

    The United States has free-trade agreements in force with seventeen countries (Australia, Bahrain, Canada, Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore). The most well-known of these agreements is the North American Free Trade Agreement (NAFTA) between the United States, Mexico, and Canada. NAFTA took effect on January 1, 1994. All remaining duties and trade restrictions were supposedly eliminated by January 1, 2008. But as the late economist Murray Rothbard explained:

    Genuine free trade doesn’t require a treaty (or its deformed cousin, a “trade agreement”; Nafta is called a trade agreement so it can avoid the constitutional requirement of approval by two-thirds of the Senate). If the establishment truly wants free trade, all it has to do is to repeal our numerous tariffs, import quotas, anti-“dumping” laws, and other American-imposed restrictions on trade. No foreign policy or foreign maneuvering is needed.

    A real free-trade agreement eliminating tariffs between the United States, Mexico, and Canada would have been a paragraph, not the hundreds of pages that NAFTA is.

    Government-managed trade is not free trade. Free trade does not depend on trade agreements, and neither does it depend on factors of production, absolute advantage, comparative advantage, or efficiency. Free trade is ultimately about freedom: the freedom of individuals and businesses to buy and sell products and services from and to any other individual and business in any other country without government regulations, restrictions, subsidies, tariffs, quotas, “dumping” laws, embargoes — or trade agreements.

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