Saturday, May 10, 2014

Free Trade, in Laypersons' Language

Our leaders in Washington talk as though the benefits of free trade are indisputable. And many Americans, having little faith in their knowledge of the rarefied field of macroeconomics, will passively accept this assertion. So I am writing to tell you about an exciting book by economist Graham Dunkley. It is called, simply enough, Free Trade. In easily understood language, he explains that free trade policies only benefit a country so long as certain conditions are met. Which is to say: a medicine delivered in small doses may be stimulating, but the same medicine in large doses may be fatal. 

Free trade has not fostered peace, as evidenced by China's recent belligerence.

Free trade theory rests on the assumption that gains from trade result from “comparative advantage.” For example, if country ‘A’ can produce manufactured goods more cheaply than country ‘B’ and country ‘B’ can produce raw materials more cheaply than country ‘A,’ the two countries can work out a mutually beneficial arrangement. To take a historical example, comparative advantage existed in the United States. The South produced cotton, but most of the textile mills were in the North. The North and South formed a mutually beneficial arrangement in which the North bought cotton and the South bought finished cotton goods. But this happy state of affairs did not last for long. 

In order for free trade to provide a greater benefit to a country than its alternative – protectionism – at least six conditions would have to be met. I’ll talk about each one below.  

1. Internal Mobility of Factors

“Internal mobility of factors” exists when the impact of importing goods does not damage domestic production capacity. “Factors” include resources, labor, capital, and intellectual property. If free trade were living up to its promise, we would see the following: when a company decides to move jobs to another country, the laid-off workers easily relocate and find work elsewhere. Also, the businesses that are shuttered by foreign competition are quickly replaced by new businesses and new domestic jobs. Instead, we see vast devastation in Detroit and other “rust-belt” communities.

The unsentimental reader may think, "if you have to relocate in order to be employed, that is a sacrifice you ought to be willing to make." But such reasoning overlooks the fact that when an entire industry migrates south, it disrupts infrastructure. Factories and roads and tracks built to support those factories go to waste. This kind of waste is expensive and counter-productive in terms of long-term, stable economic growth .

From the Rust Belt

2. Employment, Profits, and Wages

Free trade is advantageous to a country provided that the gains from trade are greater than the costs. Back when NAFTA was being sold to the American people, we were told that free trade would create high-paying jobs and stimulate economic growth. What the country faces today includes long-term unemployment, shrunken profit margins (for all but a few), and reduced wages. The patient, for whom free trade was supposed to be a tonic, is fading fast. And still, we pursue the same course of action, and seek to expand free trade.The prime example is the Transpacific Partnership. But there is also a Transatlantic Partnership in the works; the latter has been described as a "frontal assault on democracy."

3. Beneficial Terms of Trade

Free trade is, in principle, the application of free market principles to international trade. Trade is only “free” if multiple producers compete with one another on quality and price. If one country has the ability to influence prices internationally, the hoped-for gains from trade disappear.
In the case of China, the government keeps the cost of labor low. This has encouraged intense competition on price at the expense of quality. This has encouraged world-wide downward pressure on wages, and has reduced millions to a condition of slavery. And I think the lessons of the Civil War are peculiarly applicable to our times.

4. No Negative Externalities

Free trade is advantageous to a country if it does not produce negative side effects such as environmental degradation or exploitation of workers. Since NAFTA was enacted, air quality in Mexico country has worsened. It isn’t the direct result of more factories being built in that country. Instead, the country has faced economic turmoil in the years since NAFTA, and as a result, the government has reduced environmental expenditures by nearly a half (source).

The Clinton administration oversaw not only the passage of NAFTA but trade agreements with China. These trade agreements allowed American businesses to more fully exploit cheap labor in China. Hence,  

“China's pollution scourge has its roots in trade agreements set in motion by President Bill Clinton in the early 1990s that allowed U.S. companies to take advantage of cheap labor and lax environmental standards in the world's most populous nation—where coal energy reigns supreme. Many times the United States helped China finance dirty sources of energy (source).”
Sending jobs to China may have the happy result that Americans do not have to live and work under a perpetual cloud of dense smog, but United States trade policy is indirectly responsible for the poisonous conditions in China. And if those emissions are in fact contributors to global warming, it will not matter if the pollution is occurring in China or in the United States. 

In terms of exploitation of workers, I needn’t go into detail about the horrendous working conditions faced by Chinese and Mexican workers. The reader is undoubtedly aware of this. 

But many Americans are, I suspect, less willing to see the exploitation of American workers for what it is. We’d prefer to believe that America is better than that. And talk of “exploited workers” has an unwholesome, Bolshevist odor to it. 

I could refer to long-term unemployment and the wholesale replacement of full-time jobs with part-time jobs, but there is a lesser known but particularly heinous consequence of free trade that warrants mention. Before NAFTA was enacted, but especially after it was enacted, heads of companies can extort state governments by saying, “we will move to Mexico unless we get generous tax breaks.” This ends up hurting working Americans and really just about every American but for the favored few. 

Every hour of every day, state governments funnel $9.1 million to private business in exchange for commitments by business to remain in state. This equals $80 billion per year. When a state gives up revenue to business, its budget shrinks. And when its budget shrinks, schools are closed, roads go unpaved, police officers and fire fighters are laid off, environmental standards suffer, and the quality of health care worsens (source). 

5. Trade is Voluntary

In many instances, trade is not voluntary but is instead coerced by the International Monetary Fund (IMF) and the World Bank. These financial institutions only approve loans to struggling, developing countries if the countries agree to their terms. The World Bank, as Mr. Dunkley points out, “regularly forces countries to sacrifice food production for non-food exports or to export food even as people go hungry. Indian food activist Anuradha Mittal reports that three-quarters of countries with child malnutrition export food (Free Trade, p. 166).”

In fact, when poor countries are coerced into participating in free trade agreements, they are subject to price dumping and are forced to open their markets to imports that will eventually cripple domestic industry. Indeed, the devastation that coercive trade has brought down on poor nations makes the argument that greater protectionism would be a benefit to these countries. Usually, this discussion is framed in terms of rich countries benefiting at the expense of poor countries. But I am inclined to believe that the less affluent members of rich countries also suffer.   

6. Good Consumers

The benefits of free trade depend on people behaving a certain way, namely, maximizing their consumption of goods. Thus, if a government has committed to free trade policies, it is less likely to provide incentives for people to save money. The Federal Reserve’s policy of “quantitative easing” translates directly into low interest rates on savings, which is good for banks and corporations, but is troubling for those of us who yearn for a comfortable retirement.  

Free Trade is not “Free” 

The sentimental conservative will see the words “free trade” and envision what he or she believes to be a happy state of affairs in which there is minimal government intervention and the market is left to regulate itself. This does not describe the state of affairs achieved by so-called “free trade” agreements. Consider the following example, as reported in the New York Times

The United States and Mexico have reached a tentative agreement on cross-border trade in tomatoes, narrowly averting a trade war that threatened to engulf a swath of American businesses.
The agreement, reached late Saturday, raises the minimum sales price for Mexican tomatoes in the United States, aims to strengthen compliance and enforcement, and increases the types of tomatoes governed by the bilateral pact to four from one (source).
In fact, “free trade” agreements invite massive government intrusion into matters of commerce. So there is no sound argument to be made that “protectionism” implies greater government intrusion than “free trade.” And it should be plain from what has been said above that free trade is harmful to national sovereignty economic self-reliance, whereas it may be said that protectionist policies contribute to increased sovereignty and economic self-reliance.

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