Entries Tagged as 'free trade'

Free Trade Isn’t A Cure-All

June 10th, 2011 at 10:48 am 5 Comments

The American economy has entered a period of turmoil unlike any it has seen in decades.

The solutions, to me at least, do not seem radically easy or clear, but the first step in finding a solution is to clarify our language in talking/thinking about the problem. If we are serious about finding ways of addressing some of the serious structural problems of the economy, we must be willing to offer a thoroughgoing analysis of the whole economic order.

The trends of “globalization” have had a huge impact on the American economy in the past 20 years. Yet I think there have been some confusions in our contemporary discussions of globalization, so here are a few (mildly polemical) challenges to contemporary assumptions, focusing on trade and manufacturing policies.

The decline of manufacturing is not like the decline of agriculture. The shrinking manufacturing sector is often mistakenly analogized to the drastic drop in the number of Americans working in agriculture from 1870 to 1950. The current trade deficit, driven by manufactured goods, disproves that analogy. The story of the Industrial Revolution in America is not the replacement of agriculture by manufacturing but the incorporation of agriculture into a new, broader economy. Throughout industrialization, Americans still produced enough food to feed themselves and those in other nations.

For the most part, we still do produce enough food to do so. The number of Americans working in agriculture has declined drastically, but, due to increases in productivity, the output has only increased. While it is true that productivity has increased in manufacturing and that automation has cut down on the number of needed factory jobs (the US still does produce a lot), such an increase in efficiency does not tell the whole story of the decline of American industry: if it did, we would still be producing huge quantities of shoes, computers, tools, and countless other items. The fact that factories are closing down while our trade deficit has skyrocketed over the past 20 years is a sign of how different the fates of manufacturing and agriculture have been.

We do not live in an era of free trade (or: cheap imports do not equal free trade.) Some of those who criticize the reigning trade hegemony counterpose “fair trade” to the dominant “free trade.” This criticism is mis-aimed. We may not have “fair trade,” but we certainly don’t have “free trade,” either.

The current global trade order is not free trade but actually a species of neo-mercantilism. Many developed nations have opened up their economies to an influx of goods from poorer, often autocratic, mercantilist countries. Most importantly for the case of “free trade,” there is often a great disparity in openness between trading partners. These disparities are especially stark for the United States. U.S. policymakers have in a variety of ways unilaterally opened up the American market while allowing other countries to stack the deck against U.S.0 businesses and workers.

We are told that this flood of imports is “free trade” when, in fact, numerous barriers are put up against American products.

Consider our relationship with the People’s Republic of China, our second-largest trading partner. It would be a stretch to declare that this relationship is “free trade.” The PRC manipulates its currency as a de facto tariff against U.S. goods — and piles further outright tariffs on US goods. The price of entry into the Chinese market is often, in part, a joint-venture agreement, in which a foreign company provides intellectual property and other advanced technologies while local Chinese contacts supply workers and land for factories.

Mandating that businesses open up factories in a nation in order to have access to it is not exactly classical free trade.

These agreements are very often deleterious to U.S. workers and U.S. companies. The office-supply manufacturer Fellowes, for example, opened up a joint-venture manufacturing facility in the PRC. For a few years, this factory led to some considerable profits for Fellowes.

In  2010, this stream of profit came to a sudden end, when Fellowes’s Chinese partner moved to take possession of the facility:

The dramatic moment was in early August, 2010, when Zhou, under the aegis of Shinri, blocked the gates of the joint venture facility with security guards and trucks, preventing people from going in and goods going out, effectively shutting down production. Shinri expelled and confined the managers, moved funds from the joint venture to a Shinri-controlled bank account, sent packing the 1,600 joint venture employees, and at night, drove a truck into the facility and stole Fellowes-owned injection molding tools, some of them weighing several tons.

Fellowes’s former partner now has taken possession of millions of dollars of equipment and technological know-how—all without paying a cent (or a yuan) for it. The Chinese government appears to be giving cover to what many would consider theft. Fellowes is but one of many companies that have had their investments and technologies confiscated by the politically connected of the PRC. Without a basic respect for property rights, there can be no capitalistic free trade.

Trade policy does not happen in a vacuum. In part to cope with the throes of industrialization, the United States passed various worker and consumer protections in the twentieth century: regulations for environmental protections, worker safety, wages, and other areas. When the U.S. economy was bounded by tariffs, these regulations helped ensure that an increase in industrial production went along with an increase in the standards of society. However, in our new era of neo-mercantilist globalism, the role of these standards has become considerably more troubled for U.S. workers.

Consider the case of environmental standards.

As the decades have gone on, our environmental standards have become increasingly invasive and onerous. Government more and more regulates chemical usage, energy sources, waste disposal, land use, and other aspects of environmental production that affect industrial policy. The presumed beneficiary of these regulations is the public at large through the protection of the environment. Our laws tell companies that, if you manufacture in the U.S.A., you must face numerous obligations and pay increased costs due to all these regulations. Our trade policies, however, tell those very same companies that, if they manufacture their products abroad, they need not worry about any U.S. environmental or worker regulations.

One might wonder how the environment is helped when U.S. policies incentivize heavy industry leaving a country with some environmental regulations (such as the U.S.A. or many European countries) and going to a country with far fewer (such as the PRC or India).

I recognize that economic prosperity is often correlated with an increase in environmental protections, so a wealthier India may eventually introduce further environmental protections. But there seems to be an often radical disproportion between how politicians talk about environmental policies and what our trade policies actually encourage. The debate over “global warming” reveals this disproportion at the height of its absurdity.

In the name of “global warming,” the federal government has banned the classical incandescent lightbulb in order to cut down on carbon emissions; meanwhile, through trade policies, it has encouraged a gross increase in carbon emissions through encouraging manufacturing to move to nations with radically less efficient and more polluting forms of industrial production.

“Global warming” advocates often stress that the world is at a tipping point for carbon emissions and forecast the deaths of potentially hundreds of millions of people if carbon patterns do not change right now. Many of these same advocates, however, seem to see no problem with the continued destruction of American manufacturing.

A “cap-and-trade” scheme or carbon tax, without any attention to broader global industrial questions, would do little for American employment or lower carbon emissions. If environmentalism is more than NIMBYism and self-righteousness, we need to consider the effects of our current trade policies upon domestic policies.

To acknowledge (or to wonder about) the limits of neo-mercantilist globalism is not to embrace isolationism; on the contrary, this kind of critique opens up further ways of engaging with the broader community of nations. It would be foolish to turn our economic or political backs on the world, and a tariff war would very likely create more problems than it would solve.

But it would equally foolish to allow our thinking to be frozen by hazy myths and knee-jerk assumptions.

The theory of free trade does have much of value to it. Under the right conditions, trade between nations does lead to a rising tide for all boats. There have also been many benefits to the current neo-mercantilist order, though some of the implicit tensions of this order have risen to the surface during the last few years of economic turmoil.

Yet, living within this order, the United States must find ways to renew its competitive edge and successfully compete with mercantilist powers. It might also, with its allies, consider how best to revise this order so that it better advances the ideals of freedom and prosperity.

Originally published at A Certain Enthusiasm.

What Congress Really Thinks of Canada

May 12th, 2011 at 8:40 am 12 Comments

What do American members of Congress really think of Canada? Well, it depends on the issue. Indeed, a Fraser Institute study examining 1,830 mentions of Canada in Congressional debate between 2001 and 2010 shows mixed results.

When it came to Congress’ perspective on the Canadian health care system, border security, and cross-border trade (excepting pharmaceuticals), American members of Congress were generally critical and negative.

On the other hand, American politicians were generally positive about Canada in terms of defense and foreign policy – recognizing their neighbors as a strong ally – as well as being rather supportive about Canadian energy policy, especially additional exploration and development of the oil sands.

The authors of the study, Alexander Moens and Nachum Gabler, found that there was a good deal of misinformation about Canada. Canadian border security, for example, was often mentioned in the context of Mexican border security, as if there were no difference – and of course that meant that the perception of Canada on border security was generally negative.

An even more egregiously erroneous point that members of Congress referred to was the false assertion that the 9/11 hijackers infiltrated the United States through Canada. There were “7 comments made in the U.S. Congress [between 2001 and 2010] saying that one or more of the 9/11 attackers came from Canada. And factually, we know that none did,” said Moens.

At least a sense of friendliness in foreign affairs remained, however. Although there was some concern on the part of the authors that Canada had alienated the United States over the last decade by declining to partner with it in joint missile defense and over the war in Iraq, Congress’ view of Canada as a reliable ally remained strong. “Overall the sentiment was enormously positive, in both chambers and for both parties, in terms of defense and foreign affairs,” said Moens. “This remains an important resource for Canadians… to draw on this positive sentiment.”

Although there were some small differences between the Republican and Democratic parties, views of Canada were often bipartisan. “The Democrats were somewhat more negative than Republicans [on NAFTA and trade relations with Canada], but they were both generally negative… [and] on the border and the question of whether there was a terrorist threat emanating from Canada, both parties were quite negative,” Moens told FrumForum.

Moens also pointed out that he and his co-author were also surprised about how frequently Canada was talked about in Congressional debates, and that Congress mentioned issues of bilateral importance, but also considered whether policies Canada had already adopted would be good for the United States.

So: Canada, a model for the United States? Might be a stretch. But there’s still hope.

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The Fair Trade Racket

March 9th, 2011 at 12:57 pm 23 Comments

“Fair Trade” coffee is promoted everywhere, from companies such as Starbucks to my university’s campus. Its advocates argue that the premium paid helps support the livelihoods of farmers and the quality of life in their communities. In reality “fair trade” hurts farmers by distorting the prices of the markets they work in and locking poor farmers out.

Imagine you are a farmer in Vietnam or Kenya deciding what market to get into. There is a vast excess of coffee suppliers so the price of coffee should be low and discouraging further entrants into the market. However, “fair trade” coffee is subsidized, and is sold at an artificially high price, and this entices more farmers to get into coffee production. This further feeds the already injurious surfeit of providers.

We’ve seen what happens when markets get distorted like this. The Coffee Crisis of the 1990s was characterized by plummeting and unstable prices. Coffee-producing nations rigged prices and subsidized local industry until the bubble eventually burst to the detriment of farmers worldwide.

The negative impacts of “fair trade” would not be mitigated by its universal adoption. Rather, this would compound the problems. Not only would supply increase but fewer farmers would be able to partake in the program. High entry fees (roughly $1600) and first world intermediaries taking almost 90 percent of premiums keep out the poorest farmers. Typically fair trade contracts are sent to areas that are already developed. A 2008 report by the Adam Smith institute sums it up well: “In practice, then, Fair trade pays to support relatively wealthy Mexican coffee farmers at the expense of poorer nations.”

Overall, by its nature, “fair trade” coffee creates a harmful set of incentives, luring the world’s poor into an already bloated market – the recurring trap of good intentions.