The Myth of Free Trade

Fred_Z Writes:

Even so, Trump’s anti-global, anti-trade protectionist rhetoric is quite mad. I like his anti-illegal immigration stance, but that is the only thing that makes sense to economically protect Americans. The American middle and lower classes are not being ravaged by globalism and free trade, they are being ravaged by wage competition from illegals and insane government environmental, regulatory, tax and subsidy policies.

How does Trump expect us to buy your exports if you refuse to buy our exports? David Ricard showed nearly 200 years ago that free trade benefits both sides, even if the other party is dumping below costs, and there is literally no credible counter-argument. Besides, you Yanks are utterly notorious for distorting dozens of markets, from sugar to corn, with ludicrous tax and subsidy policies.

Ah well, may we live in interesting times.

If I were going to list the things that have unraveled conservatism over the last thirty years, the embrace of libertarian trade myths would be high on the list. Trade has become a sacred item in the commentariat that can never be questioned and never be worshiped too much. Even the Left has found it impossible to make arguments against trade deals, instead embracing the globalism of their donors. It’s part of what has motivated Progressive support for Sanders over Clinton.

As is the case with so much of our current politics, trade is no longer a policy to be debated. You either fully support “free trade” or you are dismissed from the conversation. A similar thing happened with immigration over the years. All of the immigration skeptics were purged from the public square, leaving two types of immigration enthusiasts. You either hate white people or you are a shill for the cheap labor lobbies. Trade has followed the same path.

Despite the moralizing, trade is like any other policy. It is about trade-offs. There are benefits from lowering trade barriers, thus increasing trade between countries. There are liabilities that come from liberalized trade too. A good trade policy minimizes these costs so that the result is a net benefit. Bad trade policy fails to address the cost side and is a net negative. There is no free lunch, even with trade. There is always a cost side to every public policy.

Opening up trade with Canada, for example, hurts the America beaver pelt industry. Putting American beaver trappers out of work has consequences. Low cost Canadian beaver hunters will take market share from the Americans. Those workers will be let go, thus adding a cost to America. If those workers can be soaked up by a business that booms due to trade to Canada, then we very well may have a net benefit to America. If not, then not.

Trade with countries like Canada makes a lot of sense because Canada has things we want and we have things they want. Canada is culturally very similar to America, speaks the same language and maintains the same legal traditions. Trade between the two countries will require little additional policing as businesses on both sides have similar expectations of conduct. A Canadian firm that violates US law will show up in the US court to answer for it. Additionally, businesses on both sides know the governments of both sides will enforce the law equally.

On the other hand, trade with Mexico is a different animal entirely. Mexico is much poorer, lacks our cultural traditions and has a highly corrupt government. The reason American firms setup shop in Mexico is to avoid US labor and environmental laws. Carrier is not moving to Mexico because it is better. They are moving there because it is worse, thus allowing them to get away with things that would never be allowed to do in the Anglosphere. If the Mexican government complains, a small bribe solves the problem.

That’s the reality of trade with Mexico. It’s not the indigenous tortilla maker selling us tortillas so he can buy software and legal services from the US. “Trade” with Mexico is a variation of the sort of slavery that unraveled the Roman Republic. Instead of rich businesses bringing slaves in to work, they take the work to the slaves, all for the purpose of undermining their smaller competitors in the domestic market, who cannot afford to exploit the same rules.

Trade with Mexico has largely been a game of cost shifting. Other than weed and meth, Mexico is incapable of producing much of anything other than excess people. Trade deals with Mexico, however, have allowed global enterprise to shift their cost of doing business onto the American middle-class through declining wages, higher taxes and social instability. “Free trade” with Mexico has some real benefits to Americans, but it brings real costs too, costs that outweigh the benefits.

When you look at trade with China, the cost side starts to fill up with all sorts of indirect items. How much has Chinese hacking, theft and piracy cost America? I know a firm that has spent millions to keep China from pirating their product. A trick China uses is to flood the market with a sub-standard version of an American product, thus damaging the reputation of the American firm. How many dogs and cats were killed by Chinese pet food additives? How much will it cost us to defend Japan and Taiwan from Chinese aggression?

The point here is that trade is a good thing, but only when it is a net positive to the American people as a whole. Deals that allow plutocrats to shift their costs to the public so they can privatize profits are not good deals. Trump pointing that out does not make him a protectionist. It makes him a realist. It’s the innumerate phonies, clutching their copies of Atlas Shrugged, desperately trying to shut off these debates, who are divorced from reality. Trade, like all pubic policy, is about trade-offs. Those trade-offs are debated in a healthy society.

74 thoughts on “The Myth of Free Trade

  1. “On the other hand, trade with Mexico is a different animal entirely. Mexico is much poorer, lacks our cultural traditions and has a highly corrupt government.”

    I had to laugh at that one. Are you suggesting the US does not? We put everyone else to shame in that respect.

    Yours is the notion that even though government is a fuck-up in every other sphere, they actually might protect us in this one. You are drinking the kool-aid. Their motivations don’t change by the subject. They always aim to loot us.

    The problem is not free trade, but the fact that our government has its fingers in every little thing. Free trade rewards innovators and hard workers. If we don’t have that any more, then maybe we *should* turn into good little slaves.

  2. When I started in tech there were tons of semiconductor plants (called “fabs”) in California.

    California of course has “free trade” with the other states. Over the course of two decades I saw Intel close every one of the fabs in California as they moved their fabs to other states, namely Arizona, as California drove up costs, environmental regulations, and other anti-business insanity. These new fabs in Arizona are *literally* over a mile long – you drive past them and wonder when the building is going to end – and employ thousands. And now pretty much all fabs in California have been closed down and moved out of state.

    And the benefit to California? These fabs of course were just one industry of course, but a symptom of every other industry. So in the past couple decades while California’s population has increased, it has gotten poorer as manufacturing keeps moves out and illiterate immigrants move in. California GDP per capita was surpassed by Texas around 2010 or so (you can go Google it and check), and my guess the gross GDP of Texas will pass California in absolute numbers in the early 2020s.

    Now of course those other US fabs are starting to move overseas along with all those tech jobs. And along with them marketing jobs and sales jobs and support jobs. I am now seeing guys with 20-30 years experience get downsized, and they won’t get another job in tech again, or ever make over $100K again. It’s not that the semiconductor industry doesn’t exist – it is bigger than ever – but outsourcing and “free trade” is killing it in the US.

    In the meantime what tech is produced in the US – namely software – is having wages driven down and jobs taken up by mass H1B visas.

    So export of tech manufacturing and import of cheap technical labor. How this is a benefit to the US?

  3. As you pointed out, the theory of free trade rests on the idea that the workers displaced can find new employment (theoretically better employment). As my Macroecon teacher described it, it’s a pinprick of pain vs. benefits across the economy. But when it becomes a constellation of pinpricks tapping the economy faster than it can regenerate, it becomes a problem:

    Let alone the national security implications of such massive shipping of production overseas:

    • It’s what I find amusing about Libertarians. They strut around full of their rightness, but they can’t grasp the basic concepts of trade-offs and balance. Liberals suffer from this dementia as well. Trade with Mexico has some benefits, but it has liabilities too. Limiting trade with Mexico is about striking a balance. There’s a very broad range between the libertarian position on trade and isolationism. It’s their blind spot.

      • I don’t think it’s been mentioned, but currency fluctuation (or manipulation) is a de facto tariff.
        I’m in manufacturing, so I am sympathetic to the loss of manufacturing jobs. I think it’s part of the reason so much emphasis has been placed on housing– it’s the only manufacturing that can’t be outsourced.
        Our company relies on US exports, even though we have manufacturing plants in China and Europe. Our capacity is simply larger than the US economy can absorb.
        Companies benefit from setting up manufacturing in other countries. If the average American had enough resources to benefit from the subsequent rising stock prices from a profitable company, that would offset some wages pressure.
        The problem there is the stock market is (and may have always been to some extent) manipulated.
        The technology boom that has been beneficial in many ways, also produced pressure on brick and mortar companies to have unrealistic profits growth.
        Like you said, everything has benefits/costs and finding the balance is the key.

        • I think the balance lies in costing the things like environmental compliance, labor laws, national security and litigation expense. What happens is these costs are dumps elsewhere, often the US tax payer. If we applied a tariff to China, for example, due to their espionage costs, that at least puts the cost of that in the price of the goods.

          As I said, trade with like countries is great. We should have few if any barriers with Canada, despite their worship of the Canadian devil.

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  5. FYI, everyone talking about China’s low wages, pollution, toxic wastes, etc., you’re a bit out of date. China is upgrading its manufacturing right before your eyes. China will have to figure out what it’s going to do with its employees brought in from the rural areas to work for peanuts when they can’t master working on or with robots. China’s gonna have a lot of domestic social problems, I suspect. Oh, and it still hasn’t really developed a domestic market for all the stuff it manufactures. So it needs to export markets to survive.

    And oh by the way, I’m old enough to remember that in the 50s it was Taiwan making cheap stuff, in the 60s Japan, 70s South Asia (India, Bangladesh), then came the Philippines, Vietnam, Burma, Thailand. Now China. Trade and markets have transformed the post-WW II world into productive countries trading peacefully for mutual profit.

    Yes, there are trade offs to consider when discussing trade, free trade, and trade agreements. Yes, when foreign countries subsidize manufacture of their products, U.S. consumers get stuff at discounted prices. That’s good for us. Why would we want to raise the cost of those products by placing tariffs on their import? Honestly, I don’t want to pay more than I need to for stuff. I just don’t have all that extra money laying around to pay a premium for stuff I need to buy.
    Yes, when domestic producers cannot compete with imports, some workers are laid off. So was I when my Colorado company was bought by a Texas company. That’s life in the big world these days. So, you put on your big boy pants and go look for another job in your field, or use state DOL assistance to retrain into another skill, and you may have to live on state unemployment while you’re figuring it all out.

    If you place tariffs on imports to prolong the business lives of those noncompetitive domestic producers, you are interfering with the natural economic reallocation of those less-productive resources to higher productive uses. That retards economic growth, innovation and progress.

    • Your arguments are tired and outdated. You can’t compare Taiwan, Japan, and Korea to Vietnam and China– the latter two have been industrialized since the early 1990s, but they are still producing cheap worthless junk. Name a Chinese brand name that isn’t crap. You can’t.

      • It may be as you say. I am not knowledgeable enough to disagree. One difference that is immediately apparent is the form of governance of the two groupings. Might it be that the communist governing influence has retarded the progress of the two latter countries in comparison with the former group, which were aided by the West to devlop their manufacturing & trading base, post-war?
        So far as I’m aware, neither the Chinese nor the Vietnamese are lazy, stupid or unambitious. If they are ever freed to run on a loose rein, they may yet pick up their pace.

  6. Great discussion, but damn, I’m late. Had to work today trapping American beavers using my attractive bait.

    Z-man please give me a heads up if you like/hate one of my comments enough to base a post on it.

    Anyway, Z-man is right. There are trade offs. Some people will get hurt. But, like I wrote earlier “I have great sympathy for those who lose jobs because of trade with foreigners, but the easy, and wrong, solution, is to stop the trade, which brings in vastly more wealth than the costs of helping the displaced workers.”

    When China et al “dump” stuff in the US way below cost they are literally giving that stuff to consumers, as the commenter who mentioned Wal-Mart pointed out. I believe that all the credible studies show that the dollar value of the consumer benefit hugely outweighs the lost wages of the displaced workers. Is there someone out there energetic enough to google them up? All those American beavers have exhausted me.

    What is the solution? Take the stuff, tax it enough to pay off and retrain the workers and enjoy foreign idiots giving away freebies. Or something.

    I respectfully suggest Tim Worstall’s blog on economics to all of you. Well written, interesting, if occasionally crude.

    Great work, best blog around these days.

    • Interesting about China dumping steel– for which we’ve placed large tariffs. It’s now cost effective for our company to import assembled components from China than it is to import the steel. So guess what– workers that used to weld the assemblies are now displaced as the assemblies are built in China.
      (This is just observation on my part, since I’m not privy to the decision making process, but it is interesting that the change occurred around the same time.)
      It’s the law of unintended consequences.

  7. We seem to have an abundance of studies. Too bad we can’t sell some of them to Mexico.

    • I think America should send gender studies graduates to Mexico on a one way ticket and trade them for Mexican students. Though what Mexico would do with these useless graduates is beyond me.

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  9. One thing is for sure. Americans wouldn’t be able to afford smartphones (not even Apple’s) or big-screen tv’s without free trade and without having cheap labor in China work on building these products. The rest of the world would have these products but few in America would. If an iPhone costs 3-4 times as much (which it would if it was made in America) how many would be able to afford it? And if it were made in America, it might even cost more than 3-4 times as much. Apple wouldn’t be doing very well if it can’t sell overseas, and it wouldn’t be able to do that if it can’t build overseas. Add to that special taxes to make it difficult to buy Samsung Galaxy (which would be made in third world countries) and people in America would look with envy at the rest of the world.

    The same applies to big screen tv’s. If the only tv’s Americans can buy are made in America (though these are primarily Japanese and Korean firms) the price would go shooting up.
    And without competition from Japanese and European cars, American cars would be even more inefficient.

    You ignore that side of trade-off.

    • Free trade, Big Foot, Moderate Muslims, Santa Claus….

      Libertarians, like liberals, think there is such a thing as a free lunch.

    • If China, Taiwan and Korea can automate the production of high demand electronics products, (iPhones, smartphones, large screen TV, etc.) why can’t the US? Automation is the real game changer for every economy. It’s why so many products cost so much less. The initial cost to build the equipment may be higher at first, but long term, machines continue to cost a lot less than people plus they work 24-7, in the dark without heating or air conditioning. American can re-industrialize, they just have to want to do it and accept the fact it’s not going to be the assembly lines their fathers once worked.

      • If it were machines making the products, production wouldn’t be shifting to China.
        In the future, it probably will be robots building these things. Right now, obviously, for the most part, it’s human beings. If a mobile phone can be manufactured in China and the bottom-end worker there gets $1.50 an hour, or in America for $10-$15 an hour, how much do you think the same product (but made in America) will cost?
        (And in any case, thezman’s argument depends on American workers building these products, not on machines).

        Moreover, if they’d sell far fewer products, they’ll need to make a healthier profit margin on each product. Right now, they make very little on any individual item.
        Furthermore, countless jobs in Apple depend on sales made overseas.
        This is also a trade-off.

        • The argument is mute since workers – American, German, Chinese or anywhere else – are on the way out. And when we use the term “future”, we’re not talking 20-50 years, we’re talking 5-10 years or less. Foxxcon is planning on a fully automated plant by 2018 which means tens of thousands of Chinese workers will be displaced. At some point, the leveling factor for manufacturing will be the cost of energy to allow running a plant 24-7-365. Eventually, who ever has the cheapest electricity costs and cheapest access to raw materials will be the next global manufacturing leader.

          As quality improves through automation, defects and scrap rates drop and production increases. The results is lower prices per unit cost with an increase in consumption. The future is a $10 smartphone, and it could be made in America – just not with human hands. The US could do it since you have enough room in your country to take advantage of fully automated solar-powered plants across the south-west.

          • But we aren’t talking about ‘the future’, per se, we’re discussing the results of free-trade and globalisation and work opportunities for Americans. There is a trade off involved (as zman noted) and he completely missed this side of the trade off. Namely, that these products are only widely available to the American public thanks to relatively free trade. Otherwise, they’d be priced out of people’s reach in America, who’d look to other countries with envy.

            As for the future, solar power is fairly expensive. In any case, if smartphones don’t cost $10 it isn’t because low-end factory workers in china charge a lot for their work. Similarly, automated cafes don’t charge 10 cents for a coffee.

      • If you look at what gets moved to the slave labor countries, it often has an environmental angle. The death camps where Apple has some components produced are not hi-tech clean rooms. Then you have the currency games. Japan played the money game for years. Now it is China.

        If you make something that does not require the use of hazardous material or unskilled labor, China is not a great option. You go there because you would rather dump the chemical waste into the ground water and you really don’t care if workers are routinely maimed. I have client that sells a forged product. It’s a niche item that only they make so they have it made in China. If Ping falls in the vat no one cares.

        • Yet in China you’ll have a large, hardworking people, and what they get per hour is tiny in comparison with what you’d pay in America. And that’s without taking minimum-wage into account. The difference in cost is massive.

        • It’s not so much about Ping falling in the vat (though, you’re right, nobody cares if that happens to Ping, maybe not even Ping), as it is about the vastly increased cost associated with every marginal increase in environmental regulation.

          For many decades now the EPA has been out of Big Pollution dragons to slay and so has moved on to hunting down heretics and killing the wounded as they lay upon the field.

          In the ’70s NOX pollution in highly industrial areas made acid rain a big problem. EPA made rules, and things got better. Did they stop there? Nope. Kept making rules at a break-neck pace (many hundred a year, every year), but the air isn’t getting any cleaner (’cause it’s was pretty damned clean to start with, once the first raft of rules was implemented).

          So, for the first 1% of the rules they’ve made, EPA got 95% of air quality that we enjoy now, at a cost to industry of X dollars (have no figures at hand, roll with me here).

          Then, over the next 40 years, they’ve added the other 99% of rules that we have now, and gained maybe 5% better air as a result, but at a cost to industry of 30-50 times X.

          THIS today is what companies flee when they offshore. High labor costs used to be what drove them, maybe 25 years ago, but regulatory compliance costs have since eclipsed labor as the major driver of offshoring.

          The trouble is, it doesn’t have to be a choice between acid rain or no businesses (though environmentalists certainly like to frame it that way). The regulators have gotten wholly out of hand.

          I own and operate a machine shop and do a fair bit of fabrication work as well, which involves welding (mostly by electric arc). A naked electric arc creates ozone as a byproduct. Not much, but some (on the order of one part per million per hour of arc time). About five or six years ago EPA tried to promulgate a new rule on ozone production that would have put basically every welding shop in the country out of business overnight. They wanted any business or entity (even private people welding as a hobby) who produced more than 5 parts per BILLION per hour of ozone to obtain a permit from the federal government and install scrubbing equipment to contain and react the ozone. Estimated cost for the permit was ~$15k/yr. Estimated cost of the scrubbing device (using then current technology) was over $100k.

          If that rule had passed, every welder in the USA would have been put out of business unless he worked for a giant corporation would could pay the EPA vig and maintain the battalion of lawyers required to certify compliance.

          You wonder why your customer sent his forgings to China instead of Alabama? It ain’t ’cause he wants Ping to fall in the vat (which, FYI, there ain’t no molten metal in play when forging, orange hot hunks being slammed by giant trip hammers, sure, but no vats full of Terminator melting liquid metal). It’s ’cause the EPA has already done to the casting & forging industry what they just tried to do to the welding and fabricating industry.

          Luckily, enough big money people stood to lose money on that deal (and having seen what happened to the casters), that they decided to expend great effort and likely a whole shitload of cash in getting the rule snuffed. That it hasn’t come back makes me think that they paid all the right people the exact right amount of money the first time (honest bureaucrat: one who, once bought, says bought).

          As you say, trade deals aren’t anything like as simple as they’re made out to be, but your argument is just as stupidly simplified as theirs, just in a different direction.

          This stupidity filled shit sandwhich is quite large enough that there’s enough for everyone to have several bites. No need to fixate on just one scapegoat.

          • Did you ever consider that these regulations are actually designed to drive factory production offshore? You stumbled across the answer yourself: it’s the giant corporations who benefit most because they are the ones who have the resources to flee the U.S. The EPA fights their rear-guard action, wiping out smaller competition in the homeland. The giant corporations cry and wring their hands in public about “evil regulators”, but behind closed doors they are the ones making it happen because it benefits them in the long run.

          • Of course I’ve considered it, that why I said what I did.

            Big corporations in cooperation (witting or coincidental) with the radical left and environmentalist wackos drive much of what is wrong with the US economy.

            But the fact remains that a great deal of the reason business gets snuffed out in the US is because of regulatory burden, regardless of how it got there.

            No single action would do the US economy more good than to burn the entire federal regulatory edifice to the ground and start over again from first principles.

            I suspect we have as much of chance of making that happen as I do of transmuting my own dung into rubies and emeralds.

          • This individual speaks the truth. Working in the heavily regulated financial services industry where 60% of our work is for regulatory compliance, I see first hand how the bureaucracy costs the economy so much. Regulations will soon become so overwhelmingly onerous and time consuming that our industry will be annexed into the State and profit will vanish. The executives will be absorbed into the super structure of said bureaucracy and our money system will be fully integrated into the Federal Government. The sliver that remains outside of it presently anyway.

          • My point is, regulatory burden is a symptom of the problem, not the problem itself. Of course it needs to go away but you don’t fix problems by simply attacking the symptoms. Ultimately they are a distraction. The problem is globalism and the breakdown of borders, and the international elite that manipulates our gigantic federal bureaucracy. We need to completely dismantle the federal bureaucracy, that will take the bat out of the hands of these globalist scum.

    • “One thing is for sure. Americans wouldn’t be able to afford smartphones (not even Apple’s) or big-screen tv’s without free trade and without having cheap labor in China work on building these products.”

      Really? How can you be so sure? Back in the 50s and 60s, we built televisions in the U.S., and Americans could afford them just fine. That’s because we had an actual, fully-formed electronics manufacturing infrastructure in the U.S. that could support a TV industry You can’t make cellphones in the U.S. at any reasonable price today because the entire manufacturing infrastructure for them is offshore. We live in an entirely different world now. If we had never off shored our entire electronics industry, and instead gave it even a marginal amount of protection so that it maintained its presence and integrity, who’s to say that we wouldn’t be making cellphones cheaper and better than anyone else?

  10. This post is nonsense.

    “The reason American firms setup shop in Mexico is to avoid US labor and environmental laws.” Are you a mind reader now? I know evil lurks in the heart of man, but most corporations are run by people who are just trying to make a buck — and that means going to places around the world where labor is cheap (if you run a manufacturing facility where the skill needed to perform tasks is not complicated.)

    From “The Truth About Trade” by Scott Lincicome, who wrote this for National Review (which means you’ll run for the smelling salts, but you should run for a good counter-argument, because you don’t have one):

    For these and other reasons, it is widely accepted that U.S. manufacturing “decline” has been limited to employment, and that these loses were primarily cause by productivity gains, not trade. Indeed, even the most pessimistic academic studies on imports and manufacturing jobs have found only a limited connection between the two. Autor, Dorn, and Hanson found in 2013, for example, that “import competition explains [only] one-quarter of the contemporaneous aggregate decline in US manufacturing employment” between 1990 and 2007. Other studies have been even more sanguine. For example, a recent Ball State study attributed almost 90 percent of all U.S. manufacturing-job losses since 2000 to productivity gains. “Had we kept 2000-levels of productivity and applied them to 2010-levels of production,” the authors write, “we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.” Thus, it is simply wrong to blame import competition for the disappearance of American manufacturing jobs of the supposed destruction of U.S. industrial capacity.

    Second, despite its harms to some manufacturing interests, free trade also has generated broad-based benefits for U.S. consumers, businesses, and workers. In The Payoff to America from Global Integration, economists with the Peterson Institute found that past global-trade liberalization through the WTO and other efforts generated between $2,800 and $5,000 in additional income for the average American and between $7,100 and $12,900 for the average household. The consumer gains from trade disproportionally accrue to America’s poor and middle class. A 2015 study by Pablo Fajgelbaum and Amit Khandelwal finds that these groups, because they concentrate spending in more-traded sectors such as food and clothing, enjoy almost 90 percent of the consumer benefits of trade. These benefits are even more concentrated for Chinese imports, since poor and middle-class American consumers are more likely than their richer counterparts to shop at “big box” stores such as Target and Walmart that carry a lot of made-in-China goods.

    American businesses, of course, also benefit. More than half of all imports (including those from China) are inputs and capital goods consumed by other American manufacturers to make globally competitive products. Raising these firms’ costs via tariffs would mean fewer employees, if not outright bankruptcy—a particularly bad outcome given that downstream industries (e.g., steelmakers) typically employ far more workers than their upstream counterparts (e.g., steel users). Non-manufacturers benefit, too – whether they be retailers such as the Gap, transportation and logistics companies such as FedEx, or multinational firms such as Apple, which assembles iPhones in China but generates most of their final sale price through marketing, design, engineering, and even manufacturing done in the United States. (Chinese manufacturers themselves earn only a few dollars from an iPhone’s assembly.) U.S. exporters such as Caterpillar and Boeing also gain from trade, and many foreign markets wouldn’t be open without reciprocal trade agreements, such as NAFTA. According to the Business Roundtable, in 2014, U.S. free-trade-agreement (FTA) partners purchased 13 times more goods per capita from the United States than non-FTA countries did.

      • There is only one “negative” — some people will lose their jobs, just like some people lose their jobs when new company X develops a better product than old company Y. Ford put a lot of horse carriage makers (and related horse businesses) out of business.

        From today’s WSJ:

        Alan S. Blinder
        April 21, 2016 7:10 p.m. ET

        International trade is, once again, a hot-button political issue, making this an unpropitious time for rational discourse about the subject. Nonetheless, here are five issues on which the overwhelming majority of economists, liberal and conservative, agree.

        1. Most job losses are not due to international trade. Every month roughly five million new jobs are created in the U.S. and almost that many are destroyed, leaving a small net increment. International trade accounts for only a minor share of that staggering job churn. Vastly more derives from the hurly-burly of competition and from technological change, which literally creates and destroys entire industries. Competition and technology are widely and correctly applauded—international trade is not so fortunate.

        2. Trade is more about efficiency—and hence wages—than about the number of jobs. You probably don’t sew your own clothes or grow your own food. Instead, you buy these things from others, using the wages you earn doing something you do better. Imagine how much lower your standard of living would be if you had to sew your own clothes, grow your own food . . . and a thousand other things.

        The case for international trade is no different. It’s not mainly about creating or destroying jobs. It’s about using labor more efficiently, which is one key to higher wages.

        But there is a catch: Whenever trade patterns change, some people will gain (either jobs or wages) but others will lose. The federal government could and should help them more, but it doesn’t. So Americans who do lose their jobs due to international trade have a legitimate gripe.

        3. Bilateral trade imbalances are inevitable and mostly uninteresting. Each month I run a trade deficit with Public Service Electric & Gas. They sell me gas and electricity; I sell them nothing. But I run a bilateral trade surplus with Princeton University, to which I sell teaching services but from which I buy little. Should I seek balanced trade with PSE&G or Princeton? Of course not. Neither should countries.

        4. Running an overall trade deficit does not make us “losers.” The U.S. multilateral trade balance—its balance with all of its trading partners—has been in deficit for decades. Does that mean that our country is in some sort of trouble? Probably not. For example, people who claim that our trade deficit kills jobs need to explain how the U.S. managed to achieve 4% unemployment in 2000, when our trade deficit was larger, as a share of GDP, than it is today.

        A trade deficit means that foreigners send us more goods and services than we send them. To balance the books, they get our IOUs, which means they wind up holding paper—U.S. Treasury bills, corporate bonds or other private debt instruments. That doesn’t sound so terrible for us, does it?

        One exceptional country—the U.S.—is the source of the world’s major international reserve currency, the U.S. dollar. Since ever-expanding world commerce requires ever more dollars, the U.S. must run trade deficits regularly. That’s sometimes called our “exorbitant privilege,” since we get to import more than we export.

        5. Trade agreements barely affect a nation’s trade balance. Much of the political angst is directed not at trade in general, but at specific international trade agreements. The North American Free Trade Agreement allegedly shipped U.S. jobs to Mexico; the Trans-Pacific Partnership will allegedly ship U.S. jobs abroad as well.

        There is a grain of truth here. Some U.S. jobs were indeed destroyed when Nafta liberalized trade with Mexico—and those people deserved better treatment from the government than they got. But Nafta also created a number of new jobs in the U.S. (See No. 2.)

        But there’s more. “Trade” and “trade agreements” are not synonyms. We traded with Mexico long before Nafta, and that trade was growing. Our trade with China has burgeoned in recent decades without a succession of trade agreements.

        Most fundamentally, but least understood, a nation’s overall trade balance is determined by its domestic decisions, not by trade deals. Think about the accounting involved here.

        As noted above, borrowing from abroad is the bookkeeping counterpart of running a trade deficit. One implies the other. The amount we borrow from abroad must equal the gap between our total spending as a nation (including government spending) and our total income (including the government’s income from taxation). Spendthrift nations like the U.S. have trade deficits because we don’t save much. But these saving decisions are domestic; they do not derive from trade agreements.

        America’s chronic trade deficits stem from the dollar’s international role and from Americans’ decisions not to save much, not from trade deals. Trade deficits are not a major cause of either job losses or job gains. But some people do lose their jobs from shifting trade patterns; and the government should do more to help them. Importantly, trade makes American workers more productive and, presumably, better paid.

        • For starters, your unwillingness to consider the trade-offs is fairly typical. All public policy is about trade-offs. An unwillingness or inability to recognize it makes you sound less than honest. Further, comparing the natural churn of innovation, the car maker supplanting the buggy maker, to offshoring is preposterous. In the former, the workers move from one industry to another where the result is a better product. In the later, the workers move to the unemployment line and we get the same product.

          Again, you guys in the Cult of Free Trade can’t imagine there’s anything but a free lunch. There is no free lunch. Encouraging American companies to move operations over the border to avoid US labor and environment law is simply socializing cost and privatizing profit.

          • You are the one who sounds like he’s in a cult: “socializing cost and privatizing profit” — do you chant this with your followers before pinching a bit of incense to a picture of Pat Buchanan (PBUH) during prayers?

            I quoted from an article that cited all sorts of different studies showing that most manufacturing job loss is due to innovation and technology and that furthermore, most international trade has been benefiting U.S. consumers and the economy. Your response? The chant — “socializing cost and privatizing profit.”

            No, that’s not how trade works in the real world — the fact that you don’t understand how complex modern economies work is not my fault. By the way, one angle you did ignore and I’m happy to consider is military security — if the Chi-Coms are stealing our trade secrets for their military than I’m fine with ending trade in certain goods even if that jacks up the price for certain electronics. There is an example of a real trade off — sometimes our standard of living might suffer because we need to keep weapons away from our enemies.

          • There’s also the concentration of wealth that is often facilitated by trade deals with third world countries.

            How about that? It took you a while but now you have the three liabilities of trade with countries like Mexico. You have job losses, national security costs and the economic distortion that comes with globalism.

            How hard was that?

          • ZMan, you forgot the fourth negative. Third-world labor in third-world jurisdictions produces third-world quality. The product might be 30% cheaper, but only lasts, say, a third as long…the net effect over time is that the customer winds up spending twice as much (.7x + .7x + .7x = 2.1x) for the same value. Corporate profits go up, and the consumer is impoverished in the long run, while being told that they are benefiting from the arrangement. You can’t capture that effect using statistics like the ones that Jeffrey S. likes to cite because they are snapshots at one moment in time, when the real phenomenon of desołation happens over a generational timeframe.

  11. “The point here is that trade is a good thing, but only when it is a net positive to the American people as a whole.”

    So, your argument is that a 2000-page treaty — sponsored by corporate and foreign lobbyists of every stripe, written by corporate lawyers, negotiated by self-interested politicians who don’t read the bill and interpreted for the Dirt People by ignorant commentarians who have an axe to grind — ultimately can and should result in a “net positive to the American people as a whole.”

    From which turnip truck did you fall on the way to the office today?

  12. Agree with all. There are innumerable cross currents. Not yet mentioned–giantism and calcification. By the 1960’s the few American automakers left in business were badly run companies manned by badly run unions. There was nothing to be done about it, proven by the fact that nothing was. Then unfair trade and globalism dealt with it. Americans bought foreign autos and foreign automakers set up non-union shops in America. The socialist mind would like nothing better than to close the US to outside pressure and leave the entire field to the direction of the state. They’ve been thrown off their original plan, but nature’s busybodies find every environment so target rich that they have forgotten what it was.

  13. “The reason American firms setup shop in Mexico is to avoid US labor and environmental laws.” True but there is ripple effect as well. Anyone else notice that the US government’s role in the economy has been growing over the last 30 years? Put another way, the Code of Federal Regulations (CFR) detailing regulations issued by federal executive department agencies and equivalent regulation at the state and local level has grown tremendously with ever increasing demands on all businesses, small, medium or large that operate within the U.S. The overwhelming part of this regulation did not exist 30 years ago. One measure of this growth in the regulatory state is the amount of bookshelf space occupied by copies of the CFR. As an attorney I’ve watched as the CFR went from occupying say, all 6 shelves on a single bookcase to all six shelves on two book cases of the exact same size plus additional shelves on a third bookcase. As large businesses outsource certain core activities, they begin to lessen their resistance to more regulation here because it really won’t affect their money-making operations in a foreign jurisdiction. Work force rolls in the US shrink. More importantly, this means those who within government who push for more regulation have fewer opponents and can press for more regulation, which leads to more incentives to export functions, and so on.

  14. I am not versed in this issue. My gut told me years ago that free trade benefitted what (credit to the Zman) I now call the Dirt People, the people who go to Walmart to buy clothes and food cheap for their family, because they are on very tight budgets, which is why I am a big Walmart fan. The Dirt People do not shop at Banana Republic or Whole Foods. I assumed that if we taxed goods made in China, the Dirt People would suffer. This is the basic premise I have been going on. This post helps a lot, as do the comments, but the issue seems so complicated that maybe Trump’s straightforward approach is the right one: if you play games with is you will be in for a world of shit. How this ultimately affects the Dirt People, I don’t know. I welcome anybody’s thoughts on this.

    • James, the problem was that we kept opening markets to others, but they never opened theirs to us. I’m not ignorant of the arguments that the Euros and East Asians made prior decades: We need to grow our economies, recover from the war, maintain full employment so the Reds don’t take over our unions, protect our small businesses, and various others. Some or all of these arguments may have been valid through the early 70’s (though I would argue that we didn’t have to give up our entire shoe industry to keep Italy from going Commie, to give just one example). Once wages caught up with American levels, there was no legitimate reason why would could not sell F150s in Germany and Philco radios in Japan. But our “friends” responded first with BS “technical” and “cultural” barriers (your trucks are too big or pollute too much, your radios give off too much secondary RF radiation to work in our dense urban areas). Later, when those excuses ran out, some countries started manipulating their currencies. The basic scam is pretty easy to understand: take the current account deficit and buy the same amount of debt from the country you are trying to sell stuff to for cheap. That keeps your currency from getting stronger with respect to the target country and keeps the price of your exports at the same low level.

      The Japanese seem to have been the first to use the currency manipulation scam. Their debt to GDP ratio is now greater than Zimbabwe’s. It goes without saying that the Japanese GDP is quite a bit higher than Zimbabwe’s.

    • James, are you telling me that my box of Kelloggs Cornflakes is made in China? My can of Campbell soup? How bout my Kraft mac and cheese? They ship all the tomatoes, CocaCola and Jimmy Dean sausage in from China?

      I did not know that.

      Yeah, most everything else is crap but if my “local” Associated Foods store gets their box of Tide from somewhere different than Walmart I got to say the Chinese stuff at Walmart is getting close to the real thing.

      • No, of course not, but am I wrong about lots of things being cheaper at Walmart because they’re made in China? I would honestly like to know if I’m getting this wrong.

  15. “They are moving there because it is worse, thus allowing them to get away with things that would never be allowed to do in the Anglosphere.” Say what you will about colonialism, it had its upside for the colonized — the British had every incentive not to trash the Raj, while Union Carbide has plenty of incentives to wreck the place. Compare and contrast with the Opium Wars, where China was just strong enough to avoid being annexed outright, but not strong enough to fend off the original predatory globalist firms, the East India Company and Jardine Matheson. Speaking of, Great Britain managed to rack up what is still one of the all-time great per capita standards of living while pursuing the exact opposite of free trade, so….

    • Actually Severian, that is exactly wrong. From the 1840’s to 1860’s Britain removed all trade barriers and effectively had completely free trade with all countries, even those that kept trade barriers against us. It was very successful and that is when Britain really became prosperous.

      Zman, you talk of protecting, say, beaver trappers.(I didn’t know they still did that!) What you are doing is giving succor to a few at the expense of the many. You are disadvantaging all those who could buy the pelts more cheaply and all those employed to process the pelts and sell on a manufactured product. It is a small tax spread over many people but the net effect of protectionism is always to depress the GDP of the whole country. Yes, the effect of removing tariffs will be bad for the trappers, but that is the fault of the tariffs distorting the economy to their advantage, not of the readjustment of free trade.

      • I never said anything about protecting anyone. I’m simply pointing out that opening up trade with Canada is not all good and no bad. It is a trade off.

      • “effectively had completely free trade with all countries.” Except, you know, with that vast swathe of the earth you called the Empire, of course…. 🙂

        • Especially with the empire but also with the rest of the world. We even dropped all trade barriers with you ornery ex-colonials! And it worked and Britain became rich! Any trade barrier is to protect a minority interest at the expense of the rest of the population.

  16. The United States government is the largest business on Earth and the president is effectively its CEO, yet we persist in electing people for this position with zero business experience. Among the consequences of this folly are the crappy deals with which we stockholders are saddled.

      • MBA does not equate to being a business man. Just means you spent money to be part of some school’s alumni organization and use their supper club in Manhattan. Besides Bush ran every company he controlled into the ground. So case in point

        • Bush ran every company he controlled into the ground
          That’s true. And Donald Trump has filed for bankruptcy four times, so be careful what you wish for.

          • This is the old bit about pushing old ladies. The guy who pushes an old lady out of the way of a bus is not the same as the guy who pushes an old lady into the path of a bus. Technically they both push old ladies, but the differences kind of important.

            In Trump’s line of work, bankruptcy is a fact of life. Some deals fail. His stack of success more than off-set the failures. Then there’s the fact that Trump did not file for bankruptcy, it was one of his ventures.

          • My point exactly. Merely saying “electing a CEO is the answer to our problems”, as the original poster did, overlooks the fact that the US Government is not a business as well as the fact that plenty of businessmen are abject failures when removed from their narrow band of expertise. That’s not to say business experience wouldn’t be useful to a president, but to imply that being head of state is virtually the same as being the head of a corporation is simplistic at best.

  17. This probably misses the point by a mile, but I work as a musician and love and rely on Fender electric guitars. The original Fenders, manufactured in Fullerton, CA, from about 1950 to 1965 have appreciated enormously – ridiculously actually. Two pieces of wood screwed together with some wire and plastic that sold for $180 – $300 in those years now goes for $8,000 up to $50,000. Impossible.

    Fender was purchased by CBS in 1965, which immediately proceeded to short cut, mass produce, and generally misunderstand the appeal and purpose of this gear. CBS/Fender wandered in the dark for the next 20 years progressively making worse products and wrecking the brand until they hit on the idea of reissuing guitars built to the original specifications.

    Fender does this at their custom shop in Corona, CA, and also at factories in Japan and Mexico. The U.S. made custom shop guitars are nice but pricey: $2,000 and up averaging around $4,000. The Japanese and Mexican models all sell for well under $1,000 but some of them are spectacular. I have a lovely 1985 Japanese Custom Telecaster, a reissue of the 1964 model for which I paid $600. An actual 1964 version of this guitar now goes for more then $20,000 and I can assure you there is nowhere near $19,400 worth of difference between them. I also have a $350 Mexican Telecaster from 1995 which should be nothing special but for some reason has astounding tone – note separation, sustain and bloom – sonic qualities usually found only in the best vintage models. And I’ve got my eye on a friend’s 2008 Mexican-made Roadworn Stratocaster, one of the best Strats I’ve ever handled, from any year.

    I don’t pretend to know anything about economics or trade policy. I don’t know why the foreign Fenders are so great compared to their American counterparts. Maybe there’s a lot of junk circulating and I’ve just been lucky to pick up a few winners. I assume the price differences are because like Carrier, Fender can produce them cheaper out of the country owing to lax labor and environmental law. I can’t imagine a guitar manufacturer cares about ensuring social stability in other countries. Maybe the U.S. doesn’t need to make things anymore and is becoming a total service economy?

    • My guess is, there are great craftsmen everywhere– some places more than others, but every place has at least a few– and they are attracted to work for brand names like Fender. Every bell curve has an extreme right end, and you seem to be a discerning customer who is capable of isolating the units at the far right end of the Mexican and Japanese bell curves.

  18. Robert Gordon at Northwestern has done some interesting work on immigration and wage levels. One finding was the likelihood that immigration controls beginning with the 1924 Act had a significant upward impact in wage levels for American workers. While it is tough to fully control for other factors, it does appear to explain the majority of the differential between wage growth and productivity growth. If you have the patience to grind through it, his “Rise and Fall of American Growth” is a simply fascinating history of productivity in the US economy. Should be mandatory reading for the political set.

  19. Another good post, but yeah, I remember the whole NAFTA debate from the early 1990s. I remember that the deal with Canada made alot of sense, from the standpoint of the US (though maybe not for Canadians), but the one with Mexico made no sense at all, exactly on the grounds you cited. I think the opinion I formed in has held up over the years. Of course, as with keeping other opinions that were considered to be just common sense when I was younger, that means I’m some sort of hater.

    • Ross Perot doesn’t get enough credit for pounding the table on NAFTA in 1992. He saw the future and stood up and told us about it. He was getting traction with his message and started getting death threats. Perot doesn’t seem like a shrinking violet so he must have determined they were credible threats, not the usual crackpot stuff. He quit the race for a few critical months to secure the safety of his family, and by the time he got back in, he couldn’t catch back up.

      • yeah, but he picked up some extra votes anyway. They called the race for Clinton before we’d finished voting on the West Coast. He got a lot of protest votes then.

  20. We have had plenty of problems with Chinese industry here in Europe. The latest trick is the use of CE Mark. You have probably seen it on any number of products, primarily electronic devices. This “Conformité Européene” certifies that the products have met EU health, safety and environmental requirements. In order to get around this requirement, the Chinese started including the letters CE for “Chinese Export”. Unfortunately the idiots in Brussels didn’t think about securing CE as a trademark when it was issued, but the Chinese modified the placement of the letters just enough that it would probably get around any trademark anyway.

    • I have a client that is small, but sells globally. They have a patented niche item that is used in manufacturing. Chinese firms took used components, cleaned them up and put them in the packaging of the original. They sold these at a discount causing a zillion complaints to come in from unhappy customers. Since there’s no one in China willing to crack down on this sort of the thing, the company had to come up with a solution. They now require the retired part to be returned in order to keep them out of the hands of Chinese pirates.

      China has always been a bandit culture. We get the term “sand bag” from tea merchant doing business with the Chinese in the age of sail. Not much has changed.

      • There is a saying used by people who do business in China, “the negotiations don’t start until after the contract is signed”. It is a very low-trust business culture, and their attitude towards contractual obligations reflects that reality. America and western Europe became economic powerhouses because of our high-trust business culture; getting in bed with the Chinese has only succeeded in bringing us down to their level. When you lie down with dogs, you get up with fleas.

      • U.S. charges woman for exporting underwater drone technology to China

        “A Florida woman was charged with conspiring to illegally export U.S. technology used in underwater drones to a Chinese state-owned entity, according to an indictment unsealed on Thursday.

        Amin Yu, 53, of Orlando, Florida worked from 2002 until February 2014 to obtain systems and components used in marine submersible vehicles at the direction of her co-conspirators at Harbin Engineering University in China, according to the charges.

        Yu was charged with 18 counts, including acting as an illegal agent for a foreign government, unlawful export and money laundering. Yu fraudulently and knowingly exported materials in violation of U.S. law, the indictment said.”

    • Had similar experience setting up insurance operations in China. Three observations. First, licensing and capital requirements got rope-a-doped despite clear WTO requirements, Second, as a result “partners” show up at the door looking for JVs. These are simply designed to transfer your IP to the local Chinese firm, then the JVs dissolve. Third, there is a remarkably well developed graft system where any deal involving a state sponsored enterprise suddenly has “consultants” demanding a share of equity and cash flow in return for vaguely defined “services”. In reality, once you investigate your new friends, they turn out to be past associates of government officials and are simply the bag men for bribes. None of us felt like going to jail for FCPA violations, so simply declined these deals.

  21. One problem with our trade policy is that it has all been carrot and no stick. We have used free trade as a mechanism to help rapidly build our allies’ economies as the Cold War began, and as a means to help ensure “social stability” in Mexico and China (which was also the original goal of unconstrained Mexican immigration when Nixon opened the floodgates in 1970). As Trump keeps pointing out, our “friends” keep gaming the system ( not just with currency manipulation but also with non-tariff trade barriers).

    As you point out, Z, we don’t even have interest-based goals for trade policy anymore. It has become ideology or a religion depending on what side of the rift you are on.

    And I’m sure in the break room between TED Talks, the elites express disappointment that Billy Bob lost his job at the plant and has given up trying to find a new one, but they cheer each other up by reminding themselves that even on the dole, he lives ten times better than a Bolivian farmer.

    Horsecrap! They work for their countrymen. Not some guy on a farm in Oaxaca or a sweatshop in Lahore.

    • We would do the Mexican people more good by enforcing our laws on Mexican goods. That would force some positive behavior of Mexican producers. But, that’s not in the interests of global business.

      • Hell, we would have done Japan better if we’d retaliated against their non-tariff trade barriers in the 70s. They’ve become a bunch of deviant debt junkies. Europe is more complicated, but it beggars belief that we couldn’t have sold just a few dresses in Italy and some GE appliances in Germany over the past 50 years.

        Every time I drive through this small, Mid-Atlantic town, I’m reminded of the human cost of this madness. The authors of it need to be held to account.

  22. David Ricard[sic] showed nearly 200 years ago that free trade benefits both sides, even if the other party is dumping below costs, and there is literally no credible counter-argument.

    The RIcardo myth of the unalloyed good of free trade will never die, it seems, even though Ricardo himself undid his own arguments at the time he was making them, which he surely knew (but he had a theory to sell, so to hell w/ contradictions, eh?).

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