Fortune issue: January 12, 1998
First Principles
ECONOMICS
Why Pay More for Ketchup?
By N. Gregory Mankiw
In October 1996, with the presidential election days away, President Clinton won a small victory: He got Mexico to raise the price it charges Americans for tomatoes. In November 1997, Clinton suffered a big defeat: He had to give up his fight for fast-track authority when negotiating future trade deals. What's the connection? In a strange way, the tomato victory helps explain the fast-track defeat. In both cases, free trade was the right policy, but politics stood in the way.
The economics of Mexican tomatoes is straightforward: When you go to the store to buy tomatoes, do you prefer to pay more or less? If you answered "less," you might ask why your President negotiated a price increase on your behalf. The answer is that he did it not for you but for tomato growers in Florida, who hate Mexican tomatoes--and not because of the taste.
In the tomato case, as in the fast-track debate, there was much talk about "fair trade." According to fair-trade advocates, importing Mexican tomatoes is okay if the Mexicans play by the same rules we do. If they "dump" products on the market below cost, or if they produce more cheaply because of laxer labor standards or fewer environmental safeguards, then that's a different story.
But why should it be? In The Wealth of Nations, Adam Smith put the case for free trade very simply: "It is a maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy." American consumers benefit from Mexican tomatoes because they are a bargain--regardless of whether the low price reflects good Mexican soil conditions or poor Mexican labor standards.
Just because something benefits millions of consumers, however, doesn't make it good politics. Anybody who eats French fries with ketchup bears part of the burden of higher tomato prices. It is a good bet, however, that most of the nation's ketchup eaters were not aware of the Clinton tomato policy when they cast their ballots. The voters who did pay attention were the less numerous, but better organized, Florida tomato growers.
Policy and politics diverged again in the fast-track debate. Clinton was asking Congress for something all recent Presidents have had--the authority to negotiate trade deals that Congress would consider without amendment. This power is crucial if the President is to continue the multilateral process that over the past half-century has moved the world toward freer trade and greater prosperity.
Although economists are united in support of free trade, opinion polls show the American public is more skeptical. The public's view is partly based on the false analogy that trade is like war--some countries must lose for others to win. This is reinforced when populist xenophobes like Ross Perot warn voters about a "giant sucking sound" arising when American jobs go abroad. It also doesn't help that the President is inconsistent. Clinton the policy wonk is a free trader, and he deserves credit for the passage of NAFTA and GATT. But Clinton the candidate backs away from free trade, as he did in the case of the Mexican tomatoes.
Because of the public's ambivalence--and the opposition of interest groups that fear foreign competition--fast track went down to defeat. This may put an end to the multilateral approach to opening up world trade. But it need not mean an end to the free-trade movement.
In multilateral trade deals, each country accepts free trade only if the others do. These pacts mislead the public into thinking that our trade barriers are good for us and that we should give them up only if we get something in return. Actually, trade agreements take the form of "I promise not to shoot myself in the foot if you promise not to shoot yourself in the foot." We could just stop shooting ourselves in the foot on our own and remove our trade barriers unilaterally. This approach was used with success by England in the 19th century and by Hong Kong and Chile in recent years. If the U.S. wants to lead the world to freer trade, the honest way is to do so by example.
An open question is whether Americans would elect a President who speaks the truth about trade. During the NAFTA debate, Al Gore bravely stood up to Ross Perot on national television. But in the next presidential election, will he--or any other candidate--be brave enough to support free trade when facing the likes of Richard Gephardt, who led the opposition to fast track and who, like Gore, aspires to the Oval Office? The answer may determine not only the price of tomatoes but also the future of the world economy.
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N. GREGORY MANKIW is a Harvard economics professor and author of Principles of Economics.