Trade Embargos Are an Unworkable Myth

Napoleon “did not realize until it was too late that the only closed political economy is the world economy. Britain could not be starved into submission by blockade unless she were totally cut off from the world. As long as Britain could trade with any nation outside France, it was thus trading indirectly with France.”—Jude Wanniski, The Way The World Works

Seeking to prove that Fidel Castro was still among the living last year, Cuban officials released a photo of the ailing dictator, one in which he was wearing an Adidas track suit. Adidas is a German company, and presently there’s no Germany/Cuba trade embargo as there is between the U.S and Cuba. But had Castro been decked out in Nike (Beaverton, OR) gear, the picture wouldn’t have been any more remarkable.

The reason is that while Nike is an American firm, its brand is international. If it happened to be that Castro preferred Nike track suits, he could simply have had one purchased in one of the many countries in which Nike sells its goods, and which have more open trading relations with Cuba.

We can and do export to Cubans through our commercial dealings with other countries. Just the same, as any smoker knows, our embargo on Cuba has not kept some of the world’s best cigars from the hands of Americans. To stop trade with Cuba would require a blockade to cut Cuba off completely from the outside world.

Both John McCain and Barack Obama have said they’ll maintain the five decade long embargo on Cuba. While this writer says they’re incorrect, all the talk about the Cuban embargo misses the point. Even if we lifted it, the problem remains that so long as economically unfree Cubans have very little to give us in return for our goods, there won’t be much wealth-enhancing trade between the countries.

Sadly, the false view suggesting that embargos are effective has been used as an excuse for centuries by countries to craft foreign policy alliances. Today they subsidize domestic goods in case those alliances break down, or to block corporate takeovers. The silliest policy of all is to impose embargos in the first place. So long as anyone in the world economy wants to buy, there will be a seller.

In the 18th century, the British government sought to build up reserves of gold because its fungible nature made it tradable for all manner of world goods. It was said that England must maintain good relations with Portugal to insure a reliable supply of the yellow metal. But as Adam Smith wrote in the Wealth of Nations, “Gold, like every other commodity, is always somewhere or another to be got for its value by those who have that value to give for it.” Even if Portugal had imposed an embargo on England, its gold “would still be sent abroad, and though not carried away by Great Britain, would be carried away by some other nation, which would be glad to sell it again for its price.”

Future events proved the wisdom of Smith’s words. National security issues were raised during England’s Corn Law debates in the 19th century. At that time the debate was about food. The theory among those who supported farm subsidies and tariffs was that if England’s agricultural interests were undercut by free trade, there would not be food to supply the troops or England’s citizens in times of war. Those who defended the Corn Laws forgot that England had been at war in 1810 with nearly every European power, yet still managed to import 1,491,000 quarters of wheat from those same European powers.

In the late 1970s, the United States imposed a grain embargo on the Soviet Union to punish its invasion of Afghanistan. Whether or not this was a good political move, thanks to more open trading relations between the Soviet Union and some of our non-embargoed trading partners, Soviet silos were still filled with U.S. produced grain.

More recently, the U.S. political class blocked a bid by the China National Offshore Oil Corporation (CNOOC) for California-based oil company Unocal. At the time, Reps. Duncan Hunter, Richard Pombo, and forty other congressmen sent the Treasury Department a letter asking for the deal to be reviewed for security concerns, while former CIA director James Woolsey told Forbes that the bid “is a conscious long-term effort to take over... as much of the American economy as possible.” Woolsey’s fear suggesting that Chinese oil demand would detract from our own economic interests gained political traction despite all the history showing its absurdity.

Indeed, whether or not CNOOC owned Unocal was and is largely irrelevant. The Chinese, like us and everyone else, demand oil from what is a world supply. The real reason CNOOC wanted to acquire Unocal was that many of its holdings were near China. Ironically enough, in a recent speech at the Gilder/Forbes Telecosm conference, economist John Rutledge noted that once Chevron’s acquisition of Unocal became official, its own representatives were in China negotiating the local sale of oil pumped from what were formerly Unocal wells!

In modern times, no commodity has been more misunderstood from the trade/embargo perspective than oil. Going back to FDR, every U.S. president has sought alliance with oil-rich Middle Eastern countries based on the discredited fear that, absent good relations, the oil will stop flowing our way.

What’s missed here is that oil is only wealth once it’s sold. Aside from the fact that most U.S. oil imports arrive from Canada, we’ll be the certain recipients of Middle Eastern oil even if every country in that region chooses to place an embargo on us. Once again, no-one controls the ultimate direction of any good once it's been sold.

The above naturally flies in the face of the ever popular and bi-partisan notion of “energy independence.” The latter term is an offshoot of the embargo myth, and is rooted in the false belief that absent an “American” oil supply, we could potentially be cut off from the world’s supply of oil. That this is logically impossible has not kept presidents going back to Richard Nixon from pursuing this false goal.

Whether increased domestic drilling is a good or bad idea, the idea of energy independence is a mirage. Indeed, even if U.S. wells produced every barrel of our domestic needs, our supply and demand would still combine with world supply and demand on the way to a world price. Just as oil producers that don’t like us can’t keep their oil from reaching our shores, neither can we embargo their access to our products in what is a world market. Suffice it to say, given the drastic impact of the dollar’s diminishing value on the price of oil, it seems a bit of a reach to assume that domestic discoveries whatever their size would reduce in any substantial way the price of a barrel.

There’s no accounting for the final destination of goods. Embargos don’t work, but they do make world trade more costly. Nations need to remove the barriers that retard the inevitable process whereby individuals exchange what they deem surplus for the surplus of others.