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1. Is Wandel durch Handel Dead?
“The case for optimism,” Kevin Williamson wrote for the National Review on March 1st, “after the fall of the Berlin Wall is expressed in the German slogan Wandel durch Handel, the belief that the world’s closed societies and their repressive governments could be improved, if not necessarily brought all the way around to Western-style liberal democracy, by trade, which would bring both cultural contact and economic development.”
The idea is that as a society becomes more affluent, the “newly empowered bourgeoisie will feel more urgently the need to protect property rights and personal choice; that contact with the United States, Europe, and Japan will make them want the openness and individual liberty those nations have; and that this situation will push the influential classes in those societies inexorably in the direction of liberal democracy, with the state either being dragged along unwillingly or being entirely transformed … Liberal democracy would be spread by affluence like a happy infection.”
How has that worked for the Russian people (or, through a cousin of the transitive property, Ukraine)? Not much better than the Chinese, it seems.
2. Permanent Normal Trade Relations
In case you don’t get the reference, the United States conferred China with “most-favored-nation” status in 2001 (China was admitted to the World Trade Organization the same year). Russia got it in 1996 but it’s about to be revoked.
The term “most-favored-nation,” by the way, is a vestige. U.S. trade legislation now refers to the concept as “permanent normal trade relations.” It essentially means that the United States will grant a nation with such status all trade advantages that any other nation also receives.
As Reihan Salam argued in The Atlantic a few years ago, “[i]n 2000, Congress made the fateful decision to extend “permanent normal trade relations,” or PNTR, to China. As the economists Justin Pierce and Peter Schott have argued, the permanence of PNTR status made an enormous difference: Without PNTR, there was always a danger that China’s favorable access to the U.S. market would be revoked, which in turn deterred U.S. firms from increasing their reliance on Chinese suppliers. With PNTR in hand, the floodgates of investment were opened, and U.S. multinationals worked hand-in-glove with Beijing to create new China-centric supply chains. The age of ‘Chimerica’ had begun.”
If carrots don’t work, will sticks? There’s been a lot of discussion about sticks lately, economic sanctions. Will they work? Do they work historically? These are loaded questions. On one hand, ever hear of Apartheid? On the other hand, reasonable people disagree over the impact economic sanctions had on the apartheid regime of South Africa. Also, assuming Apartheid ended sooner than it would have because of sanctions, there are plenty of counter-examples.
Cuba and Burma come to mind as examples of nations where the intended target of the sanctions fared far better than the people of that nation. And sanctions can result in unintended consequences. Instead of regime change in Cuba or Burma, for example, embargos may have had the polar opposite effect of strengthening those regimes.
Three things are clear: (a) there are different types of economic sanctions one country (or many countries) can impose on another; (b) a full trade embargo on all imports and exports, is the most effective trade sanction there is because it's the most draconian; and (c) a full trade embargo has the benefit of preventing rent-seeking behavior in that context.
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5. Rent-Seeking Behavior = Bad Behavior
Circling back to our friend, Kevin Williamson, one of the points he makes about tariffs and other sanctions (but not total embargos) is that they can cause (and be caused by) “corporatist rent-seeking behavior, with tariffs and other sanctions designed not to produce changes in the policies of governments abroad but simply to benefit domestic business interests.” What is “rent-seeking behavior,” you ask?
Well, dear reader, as Peter Eickelberg writes for Financial Poise in Shakedown Street: A Tale of Unethical Business Practices, “the beauty of human endeavor as it relates to economics is that each of us has the chance to create things of real value through industry and creativity and to get rewarded through voluntary transactions that increase our and society’s overall wealth. This is a noble and even a divine calling … In economics, rent-seeking behavior is the act of using economic resources and one’s own power (typically at the expense of others) to obtain wealth without injecting resources back into society.”
As Eickelberg writes, “[s]ome businesses don’t seem to create sufficient value to attract revenue voluntarily and rely on tricks to squeeze it out of you. Notable rent-seeking examples include cell phone contracts, forced valet parking, or the car wash that doesn’t reveal its exorbitant prices until you are trapped in the entrance. And some states’ laws fine you for pumping your own gas because they have had to force-create low-skilled jobs — which is paid for with higher gas prices.”
Be sure to check out Eickelberg’s article to read his scathing attack on the oppressive police state that is the City of Portland, Oregon. To understand the misery and suffering (no, they are not the same thing), watch this video that was smuggled out by a pair of freedom fighters.
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