Trade and Trade-Offs

The Eden Treaty, named after the British negotiator William Eden, was signed in 1786 between France and England. It is notable for a few reasons. One is it reflected the new ideas from the Physiocrats, who promoted a more liberal trade policy between countries. Adam Smith was not technically a Physiocrat, but he aggressively argued against Mercantilism. In fact, he coined the term “Mercantilism” in the 18th century, to describe the prevailing polices of the time.

That’s the other notable thing about this deal. France and Britain were longtime rivals and both countries were committed to Mercantilism, yet they struck one of the first “free trade “deals or at least the first deal premised on philosophy of free trade. Even today, many free market types will argue that trade can overcome even the bitterest of rivalries. People like making money more than they like making trouble, so the theory goes. This trade deal is proof of that.

The most notable part of the deal is that it was a disaster for France. Soon after the deal was signed, there was a flood of British manufactured goods into France. Importation of British goods doubled. This put enormous pressure on the already distressed French industries, setting off riots and revolts. Naturally, this put pressure on the already strained relations between the provinces and the crown. Most historians count the Eden Treaty as one of the contributing factors leading up to the French Revolution.

What the French government did not understand when negotiating the treaty is that trade is not a static thing. Even if the French could vastly increase their sale of wine and linens to Britain, in order to offset the import of British manufactured goods, there would still be significant economic dislocation in the French economy. The wine merchants would be happy, but the French cotton mills in Normandy would be devastated, which is why riots broke out there soon after the deal was implemented.

Trade between nations can be a very good thing for both nations. It can be a terrible thing too. It’s not always easy to know in advance. World trade rapidly expanded in the 19th century as shipping costs plummeted and trade barriers fell. Not only did European economies boom, the quality of life for their citizens rapidly increased. In 1870, British life expectancy was 41. In 1913 it was 53. Food prices plummeted by 80%, thus eliminating malnutrition for most of Europe.

It was not just economics that changed with the global trade boom in the 18th century. Cultures changed too. Close to half a million foreign-born laborers worked in the heavy industries of French Lorraine and Germany’s Ruhr. It’s impossible to overstate the radical nature of this. For most of human history, the mass movement of people meant war. Suddenly, it was encouraged. Trade was so good that smart people were convinced it had made war impossible.

Of course, not long after publication of The Great Illusion, war broke out in Europe. Over the next five years the industrial powers of the world tried very hard to exterminate one another. Was trade the cause of war? Not exactly, but trade was not a magical solution to the age old problems of the competition between peoples. No matter how much commerce there was between the Germans and the French, the Germans, as sensible people, would still hate the French.

The topic of trade is a good place to start when wondering about what went wrong with American conservatism. One of the foundation stones of Anglo-Saxon conservatism is the understanding that there must be a balance between tradition and progress. Another is the understanding that 2+2 always equals four, for all values of two. Trade that benefits one part of the nation’s economy, will be balanced out by some detriment to another part of the economy, or even the culture, which always has to be put into the balance.

It is not zero sum game, but close enough to assume so. Therefore, trade policy is about picking winners and losers.This is where libertarians lurch into fantasy. They argue that “free trade” gets the state out of the business of picking winners and losers. In reality, it amplifies the state’s role in that process. The reason is, all trade deals are negotiated by men with agendas, friends, and selfish reasons to want some things and reject others. Men are not angels and neither are their governments, so neither are their trade deals.

Modern American conservatives took a long drag from the libertarian bong, with regards to trade, and came away believing all the fantasies about free trade. Worse yet, they have made global trade a totem. Anyone that questions the wisdom of anything related to global trade is labeled a heretic. The result is we have chubby nihilists at the flagship publication of American conservatism, cheering the destruction of large swaths of American society, all in the name of free trade and other economic fantasies.

Trade, like every other public policy, is about trade-offs. The point of popular government, however structured, is to debate these polices in public. While never perfect, it reduces the chances of trade-offs that benefit the few at the expense of the many. Trading citrus products to Canada for hockey pucks and beaver hats is good for both sides. Giving Ford a free pass to avoid US labor, tax and environmental laws by moving their plants to Mexico is an entirely different discussion.

It is what makes popular government fundamentally conservative. Pubic debate over public policy is not about protecting the poor from the predation of the rich. It is about protecting the powerful from one another and limiting their natural inclination to consume that which supports their position in society. The managerial authoritarianism of modern conservatism insulates the powerful the consequences of their behavior. The lesson of history, the lesson of Burke, is that this always ends in blood.

32 thoughts on “Trade and Trade-Offs

  1. Try googling economic causes of the French Revolution. It’s pitiful. Most entries talk only about the debt crisis in the immediate lead in to the King being forced to call the Estates General. The hundred years of burgeoning administrative centralization, wars, debt, distribution of privilege for profit, expropriation of properties for government projects, formation of government sponsored monopolies and the stock speculation bubbles engendered by these, especially the role of John Law, are all conveniently ignored. It’s as if the historians of the era know about all this and choose to overlook it because it interferes with the narrative that increasing “organization” means progress.

  2. I’ve become so cynical when it comes to the stooges of Conservative, Inc. that I think there’s another reason we’re hearing so much about trade this year. If you consider Trump’s top three issues – trade, immigration and not invading the World – there is only one that Conservative, Inc. can claim a principled stand against without giving the game away. Nobody but their big donors and Democrats want open borders, so they’ve never tried to mount a defense of those. Literally nobody not related to Bill Kristol by birth or marriage can argue that Bush’s foreign policy was a success, so they don’t try to hard to defend that. But there are indeed trade-offs in trade policy that allow for an arguments against tariffs and trade barriers and the very existence of valid arguments gave the rumpswabs in Buckley-land an opportunity to pretend they were opposed to Trump on grounds of policy. I recall that his early appeal came from his calls to build the Great Wall of Trump and at that time all the Sloppy Williamson types could come up with was insults – “ape”, “buffoon”, “clown”, “orange”, etc. I don’t deny for a minute that the so-called Right has bought into the Libertarian nonsense about trade, but I suspect that there big allegiance to it comes from the fact that their big donors buy into it as well. I bet if one of their big donors realizes tonight that he/she/xe would benefit from tariffs on Canadian imports, we’d see an article about “The Conservative Case for Tariffs” first thing tomorrow morning.

  3. Minor rant: retraining for dislocated workers is the biggest scam ever. It exists to funnel taxpayer money to community colleges. The education sector is like a giant engorged tick on the economy. But it’s a way to reward faithful Democratic voters.

    Back before the tech bust, I worked for an IT department. They weren’t willing to let me move out of the Help Desk, but they had training funds to burn. I was taking classes for a Novell CNE. In my class was an older guy, maybe early 50s, that had been a tractor mechanic in a rural area. They had training money and asked what he wanted to do. He said he liked computers. So they signed him up for all seven Novell classes, back to back, and put him up in a motel for the time he needed. The first day, he knew he was in over his head. I hope he got a nice vacation out of it.

  4. I certainly agree that all trade involves trade-offs. But this is true of local trade and investment as well as international trade and investment. The argument is sometimes made that somehow workers can ‘adjust’ to local disruptions better than international ones (i.e. if a smart competitor shows up from Texas and puts me out of business in Illinois, my 100 workers can find jobs quicker than if that competitor was from China.) I see no real world evidence of this claim and indeed, when we look at what caused job losses in manufacturing over the past 30+ years most economists who study the issue point to technology, not international trade.

    Also, I’m getting tired of correcting the record and defending Kevin Williamson — he never wrote an article for “National Review” that involved “cheering the destruction of large swaths of American society.” What he did suggest was that some small towns that were no longer economically viable (remember that Garbutt, the focus of his original article had less than 100 people or something ridiculous like that) should not be kept on artificial life support. Instead, working class men should go to healthier towns where there were jobs for their skills sets (my guess is that Kevin would be quite happy with a flourishing working class place like Elk County, PA.)

    Good economic and political analysis begins with a clear-headed assessment of the facts:

    • I read the Williamson article and it ignores reality. People have attachments to their communities and neighbors. They have houses they have to sell before they drift off. It’s difficult to move to a new community, without any connections there. And for older workers, it’s unlikely you will find a job to migrate to. I know that we are supposed to be a nation of footloose drifters. But if I owned a house outright in a dying community, I’d stay put.

      • It’s an economic system that privileges soft sociopaths. Sure, move for a job. Lose that free backup childcare from your relatives, learn a whole new area, swallow moving costs, rebuild your social network from scratch, force your kids to adjust to new schools, miss out on weekly dinners with family, etc. There’s huge non economic costs to moving.

    • Well, I’m gonna have to disagree with you on pretty much all of that, but especially the first part. If some competitor in Texas opens up shop and puts you out of business in tax-happy Chicago, your workers can move to Dallas and enjoy employment, lower taxes, less crime and all of their constitutional rights. If your company just up and moves it’s plant to China or Mexico, your employees are screwed as the job market in their specialty is now smaller and they can hardly move to Beijing.

      • The assumption here is that the company that moves the plant to China or Mexico must do so for a good reason. Presumably they are looking for cheap labor — but remember that usually cheap labor means less productivity and less pay. That’s why the labor is cheap (and why living standards in China and Mexico are lower than they are in the U.S.) So yes, some low-skilled workers in the U.S. are being “screwed” for their particular market — but you are wrong to immediately assume that no jobs exist in new markets for low-skilled workers and you are even more wrong to assume that with better skills they couldn’t get better jobs at a high-tech manufacturing plant. The U.S. still makes lots of stuff — we just do it with fewer workers who need to know how to run more complicated machinery. So yes, I have sympathy for the left-hand side of the bell curve that used to be able to support a large family doing piece work at a textile factory. Those clothing jobs aren’t coming back to the U.S. (well, I suppose if we banned all trade with every country in the world we could bring them back) so we need to figure out how to help those folks in other ways. Certainly, I’m all in when it comes to ending all low-skill immigration so we don’t have more and more folks competing for the remaining low-skilled jobs that are available. There are also ways to help business formation and growth (i.e. stop the EPA from destroying coal mining jobs, get rid of Obamacare, etc.)

    • The author of that post doesn’t appear to understand how the “financial account” portion of trade balance works. He thinks America’s overall account balances because – in the case of America’s financial account – American corporations reap huge profits on foreign investments, bringing back more income to the US than is extracted by foreigners investing in the US.

      No, America’s financial account reflects that foreigners invest in dollar-denominated financial assets in a greater amount than Americans invest in foreign financial assets. It’s not the income that is earned from the investment that is logged into the financial account. It is the initial trade itself, the exchange of money for the financial asset. The financial account reflects the transaction of a Chinese stated owned bank purchasing US treasury securities, or an American insurance company investing in a foreign corporation’s bonds. It is not recording the income that the American insurance company ultimately earns whenever it gets around to selling its interest in the bond in the secondary market, for that does not constitute international trade.

      Here is the US picture:

      There is a deficit in America’s trade account for goods and services. More money leaves the US via trade of goods and services than comes into the US via trade of goods and services.

      There is a surplus in America’s financial account. More money comes into the US via foreign investment into domestic financial instruments (in large part, US treasuries) than money leaves the US via American’s investing in foreign financial instruments.

      Accordingly, yes, America’s overall account balances, but only by the continued issuance of American debt and equity securities at a voracious pace, which of course is aided and abetted by the Fed’s monetary policy of artificially lower interest rates + (recently) multiple rounds of quantitative easing.

      This is like a deranged version of Hume’s species-flow mechanism. Yes, international trade balances, but in a world of fiat currencies, run by endless central bank money printing, where the world’s largest consumer economy is also the world’s largest bloated financial economy, American trade balances by means of America sucking foreign liquidity into the US debt and equity markets.

      The author also says:

      “This does not mean that we live beyond our means. GDP in the US is much larger than US consumption. Over time, we are becoming wealthier and wealthier.”

      This is astoundingly wrong. He fails to account for the role of debt. Throughout the “free trade” era, the ratio of Private Debt to GDP in the US has risen steadily, although it has contracted slightly since the 2008 financial crisis. Yes, GDP is greater than consumption, as GDP includes investment and government expenditures in its calculation, in addition to consumption. But overall, US private debt has grown at a greater rate than the US economy. This is indeed an unsustainable situation and does constitute “living beyond our means”. I would recommend the work of Steve Keen in this regard.

      “Most importantly, the current trade balance is not “unsustainable”, and there need not ever be a “day of reckoning.”
      The current trade balance is only sustainable so long as (1) the American financial economy can be sustained at current levels, and (2) the dollar can remain the world’s dominant reserve currency. Almost everyone agrees that the current values of US debt and equity assets are artificially inflated due to eight years of monetary stimulus. The degree of their over-valuation is the ultimate question.

      Further, while the dollar is not on the verge of being replaced as the world’s reserve currency, the process is in motion – see the latest work by Jim Rickards.

      When the American financial economy collapses, and the dollar starts to lose its status as the world’s dominant reserve currency (two separate events that nevertheless may ultimately end up occurring closely in time), the American account will be forced to balance in another manner, i.e. by the return of export manufacturing to the US due to the sharp devaluation of the dollar.

      As it stands, we’ve managed to balance our account by financializing our economy.

  5. My experience in high-tech in Asia in the ’90’s completely supports that of previous commenters about the realities of free-trade agreements. For example, not only were there no (non-military) American cars in Korea, there were no Japanese cars to be seen either (still sore about being a Japanese colony). There were more Toyotas wrecked in the Sahara Desert than were on the highways of Korea at that time. And we are still defending both for free.

    One reason I observed for these bad deals is the expat incentive structure: Over there you get to play big shot in the American expat community while back home you are just another schlunk in a 10 x 10 office nowhere near the corner.

  6. I’m a fan of autarky, myself. No dependence on other states for cheap labor and cheap plastic crap, no military entanglements, no over-leveraged empire, no giving away industrial technologies and military secrets to rival powers, namely China.

    If I were king, I’d cut every tie everywhere, make a fresh stable of nukes, build a missile defense system reminiscent of Israel’s Iron Dome, go completely renewable and nuclear, and expel the 100 million foreigners. And everything sold in America would have a little “Made in the USA” label on it.

    Perfect, Washingtonian isolation. Splendid.

  7. Perhaps impoverishing certain “red state” parts of the economy is part of the big strategy here. Everything else is fake or manipulated, why not?

    • Precisely.

      Mass nonwhite immivasion is another example of this same strategy. Just one more blunt instrument with which to club the working and middle classes senseless while the state’s long tentacles slip into their pockets.

  8. Made this comment about our “trading parners” in the East.
    War inflation, feeding financial colonization, is where the conservatives went wrong.
    (That includes domestic wars such as On Some Drugs, Some Poverty, Some Terror, Some Families, Some Illiteracy, and One Race, One Gender, as well.)

    Get out. Quarantine. Stop feeding the cats.
    What is the ROI on our multi-trillion $ “investment” in Pakistanistan, etc.?
    Who pays for the military, socializing the costs?
    Who makes money, privatizing the profits?

    Heaven forbid we should spend that money on American workers, skills, infrastructure, energy, and resources- that little thingie called the American economy.

    Why are we busy subsidising and protecting China’s shipping costs?
    “Protecting the world’s oil supply” my left cheek. It’s crony arbitrage.

    Higher cost means developing alternatives like nuclear, fracking, nat gas, coal-to-liquid, thorium, HE3, ceramic fusion, cheap silicon, nuclear hydrogen, railroads, pipelines, canals, the grid, etc. 
    You need lots of low skill workers to handle the physical aspects.

    Development and energy inflation instead of war inflation.
    Debt for appreciating assets. 
    Let the cronies pay for their own mercenaries, if it’s worth that much to them.
    See? You’ll still have a job!

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  10. Maybe trade deals should negotiated by transgendas, and Chubby Nihilists is a good name for an all woman band.
    ( Yes, I do like rubenesque women. )

    I always find it hilarious that the French are descended from the Franks, a Germanic tribe. So the French are really Germans. Disorderly, inefficient Germans, but Germans just the same.

  11. How many US built autos does one see in Korea, Japan or Europe?
    Trade barriers take many forms.
    Oh, those American apples are not red (or big, yellow, sweet) enough to meet our standards here in, say, Japan. Sorry, can’t allow them in, despite our “free” trade agreement.
    What’s that, American beef contains chemical X ! (or Y or Z or …) Sorry, can’t let that in to, say, Korea; does not meet our standards, and yes, do not fret, we do have a “free trade” agreement with the USA for beef products.
    What’s that, we found an insect, ONE insect, in examining 1,000,000 bushels of wheat. Sorry !! can’t allow that contaminated wheat into ….wherever. But we do have a “free” trade agreement with the USA.
    Wait a minute, Boeing gets contracts from the US govt. for military planes? That’s a govt. subsidy, so we Europeans will place a non-tariff, tariff on Boeing commercial planes (or perhaps provide extra “support” for Airbus) so that Airbus and Boeing fly on a level field.

    Free trade is oft times not free trade at all.

    (I still have not figured out how Germany has become an exporting powerhouse given the cost of doing business there; I would appreciate some help on this).

    By the way USA (read, the American TAXPAYER, that’s you and me folks) thanks much for providing our Western European (and other) nations military protection – for FREE !!!! – since 1945 (even though we Europeans really do hate your guts because you Americans are stupid, fat, lazy, profit seeking, hegemony seeking snakes, and worse of all, you Yanks are not as “sophisticated” as we Europeans).

    Add on top of this US govt. incompetence and deceit in negotiating and enforcing the free trade agreements and the US workers / citizens get totally screwed over.
    And on top of this have the US Congress (or more likely these days, the hundreds of federal agencies accountable to no one) impose a zillion rules, regulations, laws, edicts, prohibitions, taxes, taxes, taxes on US domiciled corporations AND TAXPAYERS, and then we have the total assholes in congress bitching about US corporations moving overseas.

    True, Trump is also bitching about this, but our only hope here is that he sees that fixing our regulatory and tax policy and rectifying our one -sided “fair trade” deals is the solution; this remains to be seen, however. Of course, when Hillary gets in (and it’s looking like she will, god forbid) the evisceration and total destruction of the USA will move ahead unimpeded.

    By the way, the author of The Great Illusion, Norman Angell, a Brit, was granted a private meeting with Kaiser Wilhelm II of Germany (known as Uncle Willy by his English royal cousins; grandson of Queen Victoria) to discuss his book. The Kaiser was very impressed by the book’s arguments that war would be futile given the economic losses sure to be inflicted upon the belligerents thereby making war obsolete.
    The Kaiser was so impressed that he could not wait to declare war in 1914.

  12. The real eye opener for me was shortly after China’s WTO accession and I worked on several projects to open the China market for our firm (financial services). The sum total of that experience was simple. On every level the Chinese rope-a-doped the agreed upon rules. They were clever at exploited loopholes–such as the silence on provincial versus national licensing and capital requirements (we were in the insurance business) which gave them the ability to opt for per province licensing with absurd per license capital contributions and a two year wait on each license. Effectively rendering entry impossible outside of a few trade zones. Two JVs we did under the agreement were little more than undisguised attempts (rather successful) to steal as much IP as possible then dissolve the agreement (who were you going to sue?). Won’t even go into how the bribery schemes were structured for the officials running the regulatory bodies. It was a sobering experience in “free trade”. And up to that point, I thought extracting from Venezuela (pre-Chavez–but close enough to know what was coming). Trump has a very good point about the structure of these deals. And people forget that he has done business all over the world (ran into him on a flight back from Dubai in 07) and actually negotiates with his own money.

    • Perfectly analogous experiences in the technology sector. All proposed deals to enter China’s market require a JV with a Chinese entity which gets full disclosure of and license to all IP of the US entity. Horrible deals, all of them.

      IIRC Boeing is contemplating a deal to begin aircraft manufacturing in China. This will begin the decline of aircraft manufacturing in the US.

      • Well, our betters regulated our maritime industry and 90% of passenger rail into oblivion.
        They just keep improving us.

    • There’s nothing on the level in China. I know of a company that sells a unique machine component. They invented this item and hold a patent. On multiple occasions, Chinese firms have faked their product, including the packaging, in order to make it look like their product was of low quality. The Chinese company behind it would then approach them about “licensing their product” or hiring the Chinese company to police the market place for them. In every case, the guy at the head of the Chinese company was connected to the Chinese military.

      • When you get close on some deals suddenly “consultants” come out of the woodwork with vaguely worded retention agreements. Usually looking for upfront cash retainer, plus a revenue based cut. Often they could be Heissman’d off. But backtracked one of these guys via our Hong Kong based attorneys. Turned out to be a former assistant to the head of the state owned enterprise participating in the deal. He was simply the cutout for the bribes. We walked away. Personally took the FCPA briefings seriously and had no desire to go to jail or at minimum spend some uncomfortable time with the US Attorney’s office.

      • Yes that is what the smart people say…but. One of the directors of my old firm was the senior commercial workout guy at a money center bank that begins with “C” in the late 80s/early 90s. So their commercial syndication guys got into Trump for a ton of money, where the developments went bad. Ended up on his desk. Now this was supposedly “super” senior debt where the covenants should have given “C” a lot of control….but not the case. Trump ran circles around these guys, eviscerated the normal covenants, and basically got their money at a preferred rate, but all control remained with him. Frankly, Trumps the guy I want negotiating my side of the deal.

    • The high tech company I worked for more than a decade ago actually had some very advantageous business relationships with our Asian partners… but they were worked out by a couple of slick Lebanese guys. What was that TV series? It Takes a Thief! We still had to watch them like hawks to ensure that they didn’t gray market our parts.

  13. This was the beauty of the Founders’ system. If a Senator were really doing his job – representing the interests of his state as a whole – free-trade fantasies could never make it into law. E.g. the endless conflict over tariffs in the Age of Jackson (I know, the North wanted protective tariffs, but the point stands). Problem was, pretty soon a prereq for being a Senator was a degree from Yale or Harvard — **divinity** schools — where they got the yen to save the world, and that was that. Much as in England – Lord Curzon wanted to rule India, but couldn’t do it as a very junior aristocrat, so he got himself elected MP of Nowhere-upon-Particular and worked his way up the Parliamentary ladder (I say this as a deep admirer of Curzon). When I’m dictator, “higher education” shall be a distributed system, to be punished by trebuchet.

    • Trebuchet sounds like one of those words you toss off to show how sophisticated you are. Tres chic, tre buchet.

    • A very interesting point you raise.
      US Senators used to be elected to the Senate by their respective state legislatures so it was clear the Senator was in Congress to represent his/her state (unlike today where an election for the US Senate has degenerated into a mini-national election where big $$$ interests from out of state enter into the fray to influence the voting blocs in the US Congress).
      This all changed in about 1913 with the adoption of the 17th Amendment to the Constitution which allowed for direct election, by the citizens of each respective state, to vote for their US Senator.
      The downside to this is that many voters are simply clueless; an uninformed electorate is allowed to vote.
      And the US Senators realize this and vote in accordance with their respective leaders in Congress in lieu of voting with the wishes of their own states’ government.
      As a result we have democratic US Senators from, say, West Virginia, voting in accordance with their party to bankrupt and destroy their own state’s coal industry, tossing thousands of workers into the unemployment lines. In this case, Senator Manchin does not give a sheet because he will get enough finanacial support from the democratic party and other, OUT OF STATE interests, to win re-election.

      The states really need to convene a Constitutional Convention to undo this amendment and also undo the 16th Amendment (the income tax) enacted in 1913.
      The ability of the Federal Govt to tax personal and corporate income is the KEY factor in the US getting involved in one damn war after another, having military presence all over the damn planet, and allowing the Congress to pay for the existence of the 100’s of Federal Agencies that now make law (contrary to the US Constitution).

  14. “…the Germans, as sensible people, would still hate the French.”

    I had a chuckle over that one.

    Everyone hates the frogs.

    • Was once asked by a Frenchman if I’d been to France. Told him, no, really hadn’t a reason to since in our family it was simply a place we went periodically to kill Germans, so you’re welcome.

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