A Democracy Tariff?

Thinking about the latest Muslim uproar against freedom of expression in the West (the 'toon tantrums) prompted thoughts about energy dependence, oil addiction, and our important security interest in promoting freedom and democracy throughout the world. Wouldn't it be nice if we could use our economic influence to promote democracy and tolerance, as well as discourage our reliance on energy supplies from unstable parts of the world? Well, here is one idea how we might actually do this: renounce our membership in the World Trade Organization (which negotiates "most favored nation" agreements among participants) and institute a tariff regime that allows free trade with democratic nations and taxes imports from less free states.

How Might It Work?

We could establish a list of semi-objective characteristics that would define a democratic government. For example, countries might be required to have each of the following features:

• Free and fair elections with universal suffrage,
  
  
• A press free of government pressure and control, and
  
  
• A legal system that ensured due process and protected the rights of religious and ethnic minorities.

Countries meeting these standards would be allowed free access to US markets, with no import duties on their goods. Countries that did not meet these standards could also export to the US, but their products would be subject to a "Democracy Duty" of, say, 30%. This would provide powerful economic incentives for governments to implement pro-democracy policies, and would also create disincentives for American firms to establishing economic ties with undemocratic regimes.

Who Would Be Affected?

During the first 11 months of 2005, the fifteen largest exporters to the US accounted for 75.8% of all goods imported. (These figures exclude imports of services.) Of these countries, all except China (#2 supplier of imports) and Saudi Arabia (#14) would be considered democracies based on the criterion above, with the possible exception of Venezuela (#9).

What Would Be The Economic Impact?

For the US, this policy would certainly increase the domestic price of petroleum products and create incentives for refiners to switch to democratic suppliers (Britain, Canada, Iraq, Mexico, etc.), domestic production and alternative energy sources. The prices realized on world markets for non-democratic oil exporters would probably also decline somewhat, but to the extent oil supplies are fungible (and they are not entirely so because downstream infrastructure (mainly refineries) are optimized for certain types of crude and cannot quickly and efficiently switch to other grades and types of crude), this effect would be modest as other consumers switched to these undemocratic suppliers.

A bigger impact would be felt by China, as American buyers shifted purchases to other low wage economies like Indonesia, Thailand, Malaysia, and India. Prices of US manufactured imports would also rise, at least in the short term, which would also be popular with labor unions and domestic manufacturers.

What About The Domestic Politics of This Policy?

Interestingly, a Democracy Duty might appeal to groups across the ideological spectrum. On the left, labor unions and environmentalist would like the restrictions it would place on Chinese imports and the increased cost of imported oil. On the right, the notion of using our economic power to promote and reward democrat regimes throughout the world would also be appealing.

Of course, successful American export industries like aerospace and intellectual property might be hurt, because the US would be unilaterally renouncing the use of its own trade policy to advance the interests of its own export industries. Similarly, the State Department and multilateral bureacracies that are heavily invested the WTO and the endless rounds of GATT negotiations, would be mortified.

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I'm sure that I have only scratched the surface in terms of the implications of this sort of trade policy, but it is an interesting idea. Comments, anyone?