Adam Smith's lessons for IT

COMMENTARY--It's been 227 years since Adam Smith published a five-book epic titled "The Wealth of Nations," which described how free trade and a division of labor were crucial to economic success.

Yet protectionists still refuse to acknowledge that obvious truth. Instead, we see them doggedly trying to choke off free trade by claiming that American manufacturers need to be protected from more efficient foreign competitors.

Micron Technology, the world's No. 2 maker of microchips, has recently been trying to do just that. The Boise, Idaho-based company is worried about Hynix Semiconductor, a South Korean company that's the third- or fourth-largest maker of microchips.

Micron claims that Hynix is competing unfairly by--I am not making this up--selling its dynamic random access memory (DRAM) chips at a lower price than U.S. companies do. Micron CEO Steve Appleton insists that this is unlawful and that American consumers should be forced to pay higher prices when shopping for computer gear.

In pursuit of this high-minded objective, Micron has been complaining to politicians in Washington, D.C. Micron's home state senator, Republican Larry Craig, responded by inserting language in an appropriations bill railing against South Korea. Rep. Butch Otter, also an Idaho Republican, complained during a hearing in May that "only enforcement (against South Korea) can ensure trade is fair, open and free of injurious subsidies."

The Bush administration took a more dramatic step. This summer, it sided with Micron and slapped a 44.3 percent tariff on Hynix's DRAM chips. At about the same time, the European Union levied tariffs of 34.8 percent. Earlier this month, Hynix appealed the decision to the European Union court that arbitrates disputes between companies and governments.

The Bush administration seems to be inventing excuses to help out a politically influential but financially hurting company.

Micron claims that Hynix illegally benefited from a multibillion-dollar debt restructuring its creditor banks arranged, which the Bush administration and the EU view as an unlawful government subsidy. Even if that is accurate, it won't last forever: South Korea eventually will find that other parts of its economy are ailing as a result and will stop. More to the point, South Korea's alleged profligacy is a great deal for U.S. consumers, who get cheaper prices at Korean taxpayers' expense.

But is South Korea actually subsidizing Hynix? Let's not concede that crucial point too quickly. T.J. Rodgers, the libertarian CEO of Cypress Semiconductor, wrote in a policy paper a few years ago that he once believed that "Japan was dumping DRAM chips into the United States, selling them below manufacturing cost. In retrospect, I believe that Japan simply got better at manufacturing than we were for a while and was able to produce the chips at extremely competitive costs."

Substantial evidence suggests that that's the case here, too, with Micron racing to the federal government after having trouble competing against a more efficient rival (and, last year, losing a bid to buy Hynix's DRAM unit). Hynix's main lender, Korea Exchange Bank, and other creditors say the government played no role in the debt-restructuring package and point out that foreign banks including Citibank were involved. Moreover, Hynix argues, the financial reform package was endorsed by the International Monetary Fund.

For its part, Micron disputes those claims. Micron spokesman David Parker said Tuesday that "we documented, I believe, in the range of over $12 (billion) to $13 billion dollars in illegal subsidization over the course of the period in which we filed the case. If you look at that, approximately 70 percent of that came from state-run banks. I'm not sure any of that was approved by the International Monetary Fund."

Other evidence shows the no-win situation Hynix found itself in when dealing with Washington, D.C. In an early ruling a year before the current spat, the U.S. government objected to Hynix's "decision to amortize R&D costs" over time, its choice to "cross-fertilize" research between memory and nonmemory products, and its decision to depreciate machinery and equipment over seven years instead of three years. This deck was stacked from the beginning. Given that level of scrutiny, the Bush administration was sure to find something to tout as a purported trade violation.

As in other protectionist schemes, the Bush administration seems to be inventing excuses to help out a politically influential (Micron gave $78,000 to the Republican Party during the last few election cycles) but financially hurting company. Of the stock's five most recent upgrades and downgrades, according to Briefing.com, all were downgrades and all took place over the last two months, long after the tariffs were imposed on Hynix. Micron shares have been trading in the low teens recently, down from a high of about $90 in 2000.

Defending free trade
The more important point is not that Micron is seeking a political advantage, which it is, but that it's not alone. Earlier this year, the American catfish industry successfully lobbied the Bush administration to slap tariffs of between 37 percent and 63 percent on imported Vietnamese catfish. The supposedly free-trading Bush administration levied tariffs on steel imports and imposed quotas on Chinese dressing gowns and bras, while sending aides to agree to a "free trade" framework with Latin American nations this month in Miami.

The more important point is not that Micron is seeking political advantage, which it is, but that it's not alone.

Individually, tariffs, taxes and other impediments to free trade have little effect on an economy as large as that of the United States. But together, they add up. Just as tariffs on DRAM chips raise the cost of computers, MP3 players and PDAs, tariffs on steel raise the cost of vehicles and appliances, and tariffs on fabrics raise the cost of clothing. Protectionism means that American consumers pay more and that any economic recovery is delayed.

Alan Greenspan, chairman of the Federal Reserve Board, warned of the Bush administration's "creeping protectionism" in a speech last Thursday at the free-market Cato Institute. "Over the years, protected interests have often endeavored to stop in its tracks the process of unsettling economic change," Greenspan said, according to The New York Times. He added: "Virtually all such efforts have failed. Consequently, it is imperative that creeping protectionism be thwarted and reversed."

Greenspan seemed to be echoing Adam Smith, the prescient economist who defended free trade in his 1776 treatise. "The gains of both (parties) are mutual and reciprocal, and the division of labour is in this, as in all other cases, advantageous," Smith wrote.

It's no accident that Cuba and Burma, virtually firewalled from the rest of the world, rank among the poorest places on Earth. Nor is it a coincidence that free-trading Hong Kong and Singapore, which top the 2003 Index of Economic Freedom, are among the wealthiest.

For the United States to retain its current dominant position in technology, President Bush might want to spend less time listening to corporations pleading for special favors--and more time reading Adam Smith.