The High Cost of Free Trade

The Wall Street Journal has a story on the troubles facing Chinese tech giant Huawei as it tries to enter the US mobile phone market.

A Chinese technology giant, whose telecom networking equipment is shut out of the U.S. due to security concerns, is bringing its high-end smartphone to American consumers for the first time.

But a number of obstacles are blocking Huawei Technologies Co.’s path to success in the U.S. smartphone market.

U.S. carriers, which distribute more than 80% of handsets in the country, are reluctant to work with Huawei—the world’s third-largest smartphone maker by shipments behind Samsung Electronics Co. and Apple Inc.—because of its low brand recognition and security concerns associated with its networking equipment, people familiar with the matter say. A 2012 congressional report recommended that U.S. carriers avoid using Huawei gear in their networks for fear that China might use it to spy on Americans. Huawei has denied such accusations, saying it operates independently of Beijing.

Much of what goes on in the modern age requires people to deny observable reality. China is an authoritarian state, run by a military government, that is highly paranoid of the outside world. Paranoia about the non-Chinese world is a feature of Chinese culture, a permanent feature. The type of government can change, but the Chinese elite will always view the rest of the world as smelly barbarians that must be kept under control. China is probably the most chauvinistic society on earth.

The result of this is that no Chinese firm operates independent of Beijing. Any company large enough to export to the rest of the world, or import from the rest of the world, is in bed with the Chinese government. More important, any tech firm big enough to play on the global stage is deeply connected to the Chinese military, because they could not be so big without the blessing and active support of the People’s Liberation Army. This is something everyone knows, except for the writers of the Wall Street Journal.

The result is trade with China comes with a hidden cost. If you move your electronics making factory to China, they will steal your technology. They will also do things like bake spyware and back doors into networking gear so the the PLA can exploit US communications networks. That means the US has to spend billions in counter-espionage activities in order to prevent the Chinese from running off with all of our secrets. This is just one example of the hidden costs of trade with China.

It’s not just China. We have so-called free trade with Mexico. The result was not trade in the way normal people think of it. What happened was dirty US manufacturers located their plants to Mexico. Companies looking to game the labor laws followed soon after. Mexico is not selling us more stuff and buying more of our stuff. Mexico is just a loophole in US labor and environmental laws. If you make lead-acid batteries, for example, putting the battery plant in Mexico in the right move.

The problem is those environmental costs don’t go away. The Mexican government estimates that 10% of their GDP is lost due to the effects of environmental degradation. Go to Mexico City and the air is like soup. Of course, environmental degradation does not stay local. Air pollution in one place goes global as the winds change. The fevered attempts to ban your car and lawnmower in order to reduce carbon emissions are mostly due to “developing” countries like China and Mexico.

Of course, you also have the labor problem. Making car batteries in the US means people working in a car battery factory. Move those jobs to Mexico and we do get slightly cheaper car batteries, but we get more unemployed people. The unemployed car battery worker is not taking up a self-actualizing career at the George Mason economics department. He’s going on the dole or drifting down the economic scale. At low levels, the trade-offs seem worthwhile, but once you scale this up the costs metastasize.

There’s also another hidden cost to free trade. Donald Trump rode to the White House on the promise of reorienting trade in the patriotic direction. All the beautiful people thought the issue was settled. Everyone they knew was a free trader. The same was true in Britain with regards to EU membership. Open borders and free trade are obviously all good with no bad, according to the beautiful people. In both cases, the Dirt People had other ideas and rallied to the banner of patriotic trade and nationalism.

The reason for this is so-called free trade erodes public trust. People assume politicians are crooked and dishonest. Even so, they expect their government to put their interests, the nation’s interests, ahead of the interests of foreigners. They may be crooks, but they are our crooks. Free trade and open borders break that contract as the state ends up siding with strangers over the citizens. The citizens soon begin to question the value of citizenship and their support for the state. The consequences are inevitable.

A good rule of life is that anytime a well understood word suddenly gets a modifier, you know a caper is afoot. Trade is something people always understood. One group of people trades their excess for the excess of another group of people. Mexico sends Canada sombreros, while the Canadians send Mexico beaver hats. Free-trade is something else entirely. It is a collection of loopholes, so well-connected industries can get all the benefits of the state, but shift the costs onto others. Those cost are often quite high.

Trade between nations is a good thing. America selling pop culture to China makes it tough for China to be bellicose and belligerent. China selling cheap manufactured good to America prevents domestic firms from becoming lazy and stupid. American cars are vastly better due to competition with Japan. China scrupulously looks out for her interests and America should do the same. If that means the snowflakes on campus have to pay a little more for their iPhone, so be it. In the long run, it is a bargain for them and their countrymen.

64 thoughts on “The High Cost of Free Trade

  1. Pingback: Free Trade Ain’t Free « Amerika

  2. ” A 2012 congressional report recommended that U.S. carriers avoid using Huawei gear in their networks for fear that China might use it to spy on Americans”

    I’m a little confused at the logic here. Is the idea to prevent the Chinese from horning in on the NSA’s monopoly?

  3. A career in economics at George Mason University and going on the dole. Isn’t that the same thing?

  4. Just wanted to say you are really on a roll with your posts lately. This is my first stop on my daily rounds of the intrawebz.

  5. Arbitrage is the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms.

    Now get this bit.

    Arbitrage provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. With advancements in technology, it has become extremely difficult to profit from pricing errors in the market.

    This is the hammer that is leveling wages globally.

    • not sure how arbitrage affects wages. it’s used a lot in stock market but to what ill effect i could not say.

  6. I don’t know the details of the Trump deal to save jobs at Carrier. Sometimes these sorts of things give up tax revenues just to defer the inevitable. But the symbolism of the whole thing is very powerful. I am enjoying the heck out of seeing so many irrational assumptions about how things “are” and “must be” simply destroyed. To think that we might actually see people in charge that have our own national and community best interests at heart, rather than first and foremost feeding at the Washington DC trough that sends our economy and society down the tubes as part of the process, is an exhilarating thing. It has been a long, long time since I have been optimistic about the general direction of things. It is a nice warm feeling.

    • It is exhilarating! I think that’s the real reason why Black Friday shopping was strong this year. I’d add the stock market rising too, but I no longer consider that any real indicator of economic strength; what makes it go up and down is completely incomprehensible now. In fact, nothing has really changed since Trump was elected. But I have the feeling that Americans are finally coming out of the defensive crouch they’ve been in the 8 years. There’s just a feeling that things are getting better, even if nobody can quite know how.

  7. Isn’t it interesting that in the post-WW2 years, as Japan rebuilt its economy, that US consumers would soon come to know the names of many, many Japanese brands: Sony, Honda, Toyota, Toshiba, etc. South Korea’s Kia and Samsung eventually followed.

    Now compare that with China: China has, since the 1980s, become a global economic juggernaut, but can you name one Chinese brand that has become a household word in the west? You can’t, because there aren’t any. And once you think about it, doesn’t that seem a little odd?

    Alibaba is probably the best known Chinese company name in the west, but have you or has anyone you know every used Alibaba’s services? The answer is almost guaranteed to be “no.”

    This is by design. As Z observes, there are no corporations in China truly independent of the CCP and the PLA. The last thing the Chinese government desires would be for a Chinese corporation to have an identifiable and independent brand identity in the global marketplace, because such a corporation would be in a position to resist the demands of the Chinese government, or if those demands became too extreme, to simply relocate their business elsewhere. As the article linked above illustrates, the impetus behind China’s astonishing economic transformation since the Maoist era was formed of the desire to enrich and serve the interests of the CCP, not to create a consumer society in China.

    • Having a lot of independent, global, branded companies does not fit well with the Confucian ethos either.

      The first Chicom company I ever heard of was Norinco. Some genius in the PLA figured out that he could get rich selling gweilos AK pattern rifles and crappy ammo. I’m sure quite a few PLA generals retired in luxury off their enemies.

    • Just a little update from today’s financial news:

      Headline: China Losing Control? PBOC Imposes New Yuan Outflow Limits For First Time In Two Decades.

      …Then, overnight, the PBOC added a fourth unique form of “capital control” when China’s central bank announced it would limit the amount of renminbi that Chinese companies and individuals can remit outside the country, “imposing a cap for the first time in more than two decades”, according to the SCMP, to stem the yuan’s outflow as the currency plumbs daily lows.”

      A fairly stunning development.

  8. I’d like to point out that the environmental maladies of the Emerald Ash Borer, Zebra Mussel, Chestnut Blight, Grass Carp, and numerous others are all due to ignoring or actively side-stepping agricultural import and customs regulations by our trade “partners”.

  9. Well, as my conservative friend assured me, real capitalism depends on slave labor in a Communist country.

    Without the shared proceeds from those profit margins, why, our pensions will dry up and disappear!
    We can’t afford to invest in ourselves!

  10. “The unemployed car battery worker is not taking up a self-actualizing career at the George Mason economics department.”

    But wasn’t that what Bill Clinton promised us when he helped China get admitted to the WTO? Weren’t we supposed to get all of the nasty, greasy, dirty manufacturing jobs, and all become computer programers and rocket scientists and neurosurgeons instead? What gives? Were we just out and out lied to from the git go on this whole free free trade deal?

    • It’s the same BS as “everyone is entitled to a college education” whether it is the correct thing for them. People buy this shit as if a piece of paper is going to magically get them into the job of their dreams when everything is being magically dumbed down and winds up being worthless except for the debt load.

  11. “Much of what goes on in the modern age requires people to deny observable reality.”

    That is the very definition of our era.
    The root of the new religion.

  12. Pingback: Trade between nations is a good thing | IowaDawg Musings & More

  13. The beautiful people prefer outsourcing manufacturing for the same reason that they prefer killing bad guys in drone strikes to housing them in Gitmo–it’s less icky. And so what if a few million deplorables join the unworking class, let them eat government cake and become clients. The middle class has held the Utopians back far too long. California has shown the way, be wealthy or be poor. Like Mexico. And who rules Mexico, or Cuba for that matter? White people, top to bottom. That is the Progressive Oz.

    –Bastiat–Whence does the state draw those resources that it is urged to dispense to individuals? Is it not from the individuals themselves? How, then, can these resources be increased by passing them through the hands of a parasitical and voracious intermediary?

  14. Whenever I see a Huawei or Xiaomi reviewed on CNet, I assume I’m just looking at a reverse-engineered Samsung or LG. I’d rather give my money to the Koreans.

    • A friend of mine still in the business came back from an Asia trip and said, “It’s amazing how interested the Korean are in protecting intellectual property rights now that the Chinese are stealing all their designs.”

  15. Z Man;
    I did business in Asia for US companies in the late ’80’s and early-mid ’90’s and can vouch for everything you say. In addition to stealing intellectual property there are numerous non-terriff barriers. Japan was particularly good at this, using regulatory subterfuge.

    A too-good-to-check but indicative story current at the time: The Ministry of Trade became concerned that Japanese were hurting the trade balance by buying too much French wine. So they contacted the Ministry of Agriculture who issued a regulation that on account of adulteration of European wine (actually it was Italy) and concern for the health of the Japanese people they’d have to sample one bottle of wine in every case for contamination. This would mean that every case box had to be broken open upon arrival. Plus who’s to say what qualifies as contamination.

    The French being more wily than us supposedly replied that they too were concerned about the health of the French people and that since there was evidence of dangerous radiation being produced by Japanese TV’s (CRT at the time), they were going to install an inspection system located in Limoges. But not to worry about throughput, they would put 2 inspectors on the job. This meant that EVERY set would have to got to Limoges before it could be sold.

    At this the Japanese reconsidered and said that maybe they could test a random few bottles of wine at their point of origin. The French likewise said that they’d be content to check a few random sets at point of origin. Message sent and received_!

    • Purely by luck in those pre-Internet days, I was able to follow the whole amorphous transformer core travesty from development by US firms to Japanese non-tariff barrier (we must take time to examine the effects of this new technology on our electric grid) to Japanese industry being completely spun up and selling them at “competitive” prices. I saw much more closely and personally the whole 802.11c fiasco (our residences are so close together, normal WiFi won’t work here). This time it was a fiasco for them. The rest of the world moved out without them. That was the beginning of the end for their electronic industry.

  16. If trade were really free, you’d see Ford F-series pickups everywhere instead of Toyota Hiluxes and Kia Bongos.

  17. you know, the top 1% have been self-serving and traitorous. so a wealth tax is in order i think.

    • I’m instinctively put off by a general wealth tax, which would include real and personal property as I understand it. I’ve been pondering off and on for years how to rope in those who accumulate wealth by what I call manipulation (i.e. what the Soros types do) and those who accumulate wealth by creating tangible goods and services. That’s pretty rough, but it’s as far as I’ve gotten.

        • distribute all proceeds from wealth tax to citizens, equally, anually. that will put the cat amongst the pigeons!

      • Remember that the cost of the waiver gains its own value as a tradable commodity: paying protection money is the currency of a patronage economy.
        You pay brigands to go away, or reward them with loot if they’re yours.

    • I keep telling my husband that I’d audit all the cast of Hamilton. Yes, let’s tax some of the folks that have managed to avoid it. Let’s tax non-profits and foundations. Let’s tax universities for their endowments. Let’s get rid of the Hollywood tax benefits that Glenn Reynolds mentions, the ones that date back to the 50s. I’m not in favor of taking everyone off the tax rolls. The unemployed pay taxes on their benefits. Paying taxes makes you reluctant to hand out more “free stuff”.

      • Imagine the foolishness, the weird classifications and strange arbitrages, that would disappear if we eliminated the “income” tax.

        For instance, women could do womanly things, instead of being “empowered” to pay income taxes- saturating the labor market so husbands are less valuable.

        Legal protections- the right of any citizen- are another matter. Being broke, robbed, screwed, and beat up is cause for complaint.

        I meant this as just one example of the cultural mutations caused by the State’s claim on us all. Who is the State?

          • Not offended,alzaebo. The effects of women’s suffrage are clear,worldwide. Married women,with a rational male partner,tend to vote more conservatively than single women. The Left saw this decades ago,it’s behind the push to get girls into college,put off marriage,get that degree. On the surface it seems plausible,but the reality is that girls do not generally choose the tough courses,STEM, they gravitate to the ones they are better at:social sciences,humanities,etc. Think Sandra Fluck,or any magenta haired lesbo slam poetess. I know this is a generalization of a complex issue,but refusing to see or discuss the issue is kind of silly and childish. Just like the Special Snowflakes filling college campuses,demanding their safe spaces from the Real World. Who begat these morons? My guess is,people who look and act like Bo Bergdahl’s parents. Good grief.

      • Unemployment benefits are taxes; that is, taxes are the source of those benefits, the ” insurance ” name notwithstanding. Why should this money be tax two or three or five or seven times? That becomes an exercise in silliness. The unemployed still pay sales taxes. Should Soros and the Clintons pay taxes on their ill-gotten gains? Yes, but taxing taxes won’t fix that. I doubt the husband and father who lost a job in the coal industry thanks to Obama and sees whatever benefits he now has being taxed will find the philosophical question of Soros’ tax avoidance a high priority.

        As for paying taxes making you reluctant to hand out more free stuff, well, not everyone understands TINSTAAFL.

        • ” Should Soros and the Clintons pay taxes on their ill-gotten gains”

          Well, why can’t those illegal gains be seized, rather than taxed?

          [from]: Civil Asset Forfeiture is a legal tool that allows law enforcement officials to seize property that they assert has been involved in certain criminal activity. In fact, the owner of the property doesn’t even need to be guilty of a crime: Civil asset forfeiture proceedings charge the property itself with involvement in a crime. This means that police can seize your car, home, money, or [SO-CALLED CHARITABLE FUND, LIKE THE CLINTON FOUNDATION] without ever having to charge you with a crime.

          Last time I looked, bribery was a crime. Global scale bribery of the sort that the Clintons may have been involved in certainly seems to illlegal, even if it can’t be proveen to be TREASONOUS.

    • At a minimum, since the Congress seems to be intent on removing the ability to utilize stretch IRAs for we deplorables (including Roth IRAs), can we at least eliminate the tax dodge of perpetual charitable foundations (Ford, Rockefeller, Pew etc.) which seem to always morph into leftest activist groups. Make them close-up-shop 5 years after the death of the founder as well.

  18. Thank you for this article, which is spot on. In the Adam Smithian sense, free trade between nations is driven by natural competitive advantages. The French climate is great for grapes and the English climate is great for barley and hops, so trading French wine for English beer makes perfect economic sense. Similarly, trading Mexican tequila for Canadian maple syrup makes perfect economic sense.

    In the modern corporate economy most free trade is simply tax, wage and regulatory arbitrage. Taiwan, Singapore, and China have no natural competitive advantages in making semiconductor materials and/or electronics. Globalist companies flock there only due to tax, wage, and regulatory arbitrage.

    I’ve had many a conversation over the last thirty years with highly credentialed professionals and policy drivers who can’t grasp (or won’t admit) this distinction. Hence, President Trump.

    • > Taiwan, Singapore, and China have no natural competitive advantages in making semiconductor materials and/or electronics.

      Of course they do, they sit closer to their work (Dudley Moore in Crazy People).

  19. There is no such thing as free trade, because trade or anything involving economics is never free from politics. This is something the right wing and libertarians who view economics from a theoretical/ideological perspective miss. What is good in theory for economics is often bad politics, and what would be best is often something politics will not allow. There are always compromises. Ideological true believers in free trade turn a blind eye to the other side of the table playing politics and serving their own interests.

    Another problem is only looking at the big picture. If the whole economy grows but 30% of the people get screwed that is bad politics and bad in general. This is generally true regardless of the numbers involved. This is the situation we currently find ourselves in. The economy is supposedly growing, but all of the gains are going to the financial class while the rest of us are getting screwed.

    The sales pitch for free trade was that the jobs lost to other countries would be replaced by equal or better jobs. This hasn’t happened in real life. The free traders were wrong and we shouldn’t trust what they say anymore. Broad based prosperity should be the goal of politics. Having a good job and supporting yourself what should happen, and what a lot of people want. No amount of governement cheese will make up for the lack of that. Supporting yourself gives moral satisfaction. Living off the government teat ruins people. Also, when I see these sales pitches, they seem to be directing most of the job gains to the educated. Not everybody is suited to college, some peoplere best suited to work with their hands and they should get the same respect and consideration. Right now, they don’t.

    • It’s the same thing they do on a regional level, when they shut down industries. They shut down logging due to the National Scenic Act in the Columbia River Gorge. They said that there would be lots of new industries to take the place of it. What you get is tourism and the low paying jobs that come with it. The development still comes, but only seems to enrich a few well placed folks. And housing costs double. We truly need to get the Federal government out of the state’s business and make job growth a major consideration for everything.

    • Zman introduced us to the salary class, with their economy of the intangible, versus the wage class, with their economy of the countable.
      Unreality versus reality.

  20. thezman: I noticed that your blog doesn’t have a “favicon”, but that you do have a disqus icon.

    So why not simply reuse the later for the former?

    How to:

    “Since WordPress 4.3, you can add a favicon or site icon from WordPress admin area. Simply go to Appearance » Customize and click on the ‘Site Identity’ tab.”

    or “Go to Administration Screen > Appearance > Customize Click Site Identify “

    • I have a favicon in my root directory loaded to wordpress. Not sure why it stopped working, but I reloaded it and it works now.

  21. Free trade in the abstract works just fine for everyone. The problem is that we don’t live in an abstract world. What is called free trade and what we tend to refer to as “the free market” don’t exist at all. They aren’t free because the governments, both foreign and domestic, set ground rules for commerce that distort those markets, and those ground rules are subject to continual change. Thus our “free markets” are really markets in rent seeking. And the best rent seekers tilt the field in their direction by buying off the politicians that set those ground rules. Thus, making a pretense that we somehow enjoy the benefits of “free markets” allows even worse shenanigans to go on than would if the reality of the situation was recognized and policy set accordingly. This is what Trump recognizes. As a consequence he has set goals for international trade in which the benefits to the economy and the American workers are balanced against the abstract benefits of more open markets that are recognized as not being free, but are in all circumstances regulated.

    • The difference between Trump and Bush or Obama is this. Trump is proud of what he has done for Americans. Bush is proud of what he did for foreigners. Trump wants Americans to cheer him for doing good things as president for Americans. Bush wants Americans to cheer him for all the good things he has done for foreigners. Trump thinks like a leader, while Bush thinks like a missionary.

      • Having had missionaries for parents I can say that this is true. In my case more for my Dad than my mom. It’s also how progressives and liberals think, too. Dickens really nailed the personality with Mrs Jellybelly in Bleak House. Caring more about some African tribe than about her own neighbors and family. Charity begins at home.

        • Liberals are the descendants of Christians and the Progressivism Cult is descended from the Christian Church.

  22. I spent the better part of election season arguing with a close Canadian friend. Canadians have these neuroses from being a smaller, weaker country that’s very closely tied to a large powerful neighbor. She was worried about what a Trump election would do to Canada’s trade deals with the USA.

    She didn’t believe me that most Americans have no idea that NAFTA involves Canada and beyond that, don’t care. They think of Canada as kind of like Minnesota and aren’t really bothered by free trade with another Anglosphere country with comparable wages and standard of living and laws. She was sure that dumping NAFTA would be a disaster for Canada and was surprised when Trudeau basically said it looked like American-Canadian trade deals would remain basically unchanged in practice.

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