Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
Free Trade Has Been a Disastrous Policy for the USA
Many Republicans continue to espouse free trade under the impression that free trade is a conservative policy. Indeed trade is a conservative policy in the sense that both parties benefit from trade, each giving up goods of less value for goods of greater value. Adam Smith rightfully condemned mercantilist policies and favored a “free exchange”. He never used the term “free trade” and he was always thinking of a free exchange of goods for goods. It never occurred to him to prescribe a unilateral free exchange policy, which unfortunately most economists seem to favor to the everlasting shame of the discipline. The shame is that they never analyzed the consequences of a possible chronic trade deficits. Free trade is an appropriate policy 1) when both trade partners have a common currency, 2) neither imposes tariffs or subsidizes exporters, i.e., neither is pursuing mercantilist policies, and 3) labor and capital can freely move between them. These conditions are imposed upon the States by the U.S. constitution. They do not exist in international trade.
This is what Prof. Mankiw of Harvard wrote in 2016
"Among economists, the issue [of free trade] is a no-brainer. Last month, I signed an open letter to John Boehner, Mitch McConnell, Nancy Pelosi and Harry Reid. I was joined by 13 other economists who have led the President’s Council of Economic Advisers, a post I held from 2003 to 2005. The group spanned every administration from Gerald Ford’s to Barack Obama’s. We wrote, “International trade is fundamentally good for the U.S. economy, beneficial to American families over time, and consonant with our domestic priorities. That is why we support the renewal of Trade Promotion Authority (TPA) to make it possible for the United States to reach international agreements with our economic partners in Asia through the Trans-Pacific Partnership (TPP) and in Europe through the Trans-Atlantic Trade and Investment Partnership (TTIP).”
Perhaps in the first sentence, he is referring to the economists at Harvard but there is no espousal of free trade as a policy in any international trade theory text of which I am aware. The economists at the U.S Bureau of Economic Analysis are also unaware that “free trade is a no-brainer”; they show the excess of imports over exports as a reduction of GDP in the statistics they publish. In addition to the 13 chairmen of the Council of Economic Advisers, nearly all of whom presided during the U.S. transition to world’s leading debtor who echoed Mankiw’s foolish statement that free trade is good policy, the late Prof. Milton Friedman at Chicago and most of the economics faculties at Harvard, Princeton, and Yale embraced free trade as an appropriate policy. Prof. John Maynard Keynes at the Cambridge University was an exception, he wrote that the UK would never tolerate what he called “beggar-thy-neighbor” mercantilist policies by its trading partners,.
What economics theory does tell us, and it is a no-brainer!, is that balanced trade is beneficial to both trading partners even when one of the partners imposes formal or informal trade barriers or attempts to gain advantage by manipulating its foreign exchange rate.
The trade agreements have proven to be a disaster for the U.S. economy, decimating the our manufacturing sector and causing millions of American workers to lose good-paying manufacturing jobs, and converting the U.S. from the world’s leading creditor nation to the world leading debtor nation. The multi-lateral and bi-lateral trade agreements are good examples of crony-capitalism. Each country gains markets for a selected group of industries by removing protection from others of its industries. In addition, they enabled American firms to locate their production abroad and import their products to the U.S. free of duties. We can do without the multi-lateral agreements and the loss of sovereignty they entail. An example of the latter are provisions requiring compulsory arbitration of disputes. Another is the power granted the World Trade Organization to force the Congress of the United States to repeal a law that required labeling of the source of some meat imports.
Whatever the reason for our chronic trade deficits, which converted the U.S. from the world’s leading creditor nation to the world leading debtor nation, all that we need to balance trade is the single-country-variable-tariff, the so-called “scaled tariff”, which rises as the trade deficit widens and falls as trade is brought into balance. Tariffs that are imposed on trade surplus countries to bring trade into balance are not protective tariffs; they are trade-balancing tariffs authorized by international law.
The availability of the “scaled tariff” to all nations suggests that the General Agreements on Tariffs and Trade, initiated by Pres. Franklin Roosevelt in the 1930s, were foolish policies to begin with because multi-lateral trade agreements not only require each country to give up some sovereignty but benefit only selected sectors, government cronies while making the unselected sectors worse off, but that is a topic for another day.
Comment by Bruce Bishop, 2/27/2017:
While I am grateful to you for advocating balanced trade, no politically viable tariff will be sufficient to bring back a significant number of U.S. manufacturing jobs.
The pain of the tariffs will be felt, by millions of Americans, before a single job is brought back.
The Chinese cost advantage is so great that they could cut the price of everything they ship to us in half, and they would still survive.
We would have to start manufacturing from scratch -- we have no designed products. We have no factories, no equipment, no material sources, no infrastructure of machine shops, steel service centers, and the myriad other vendors necessary to support manufacturing. Worse, we have lost the decades of manufacturing experience and know-how that it took to produce a catalog of products for the market.
No investors will be willing to risk long-term investments in the hope that our government will stop being hostile to manufacturing, and suddenly become supportive. Not to mention, our culture, which is upstream from politics, has been openly hostile to manufacturing for decades. Hollywood has bashed manufacturing for decades, with movies like Silkwood.
The only way to bring back manufacturing jobs would be to implement hard limits on the trade deficit, as proposed by Warren Buffett back in 2003.
Response to this comment by Raymond, 2/28/2017:
Response to this comment by Bruce Bishop, 3/4/2017:
Comment by M, 2/29/2017:
@ Bruce Bishop. To diplomatically disagree.
1) Hollywood has no vote in Congress.
2) NAFTA was sold as a way to allow American corporations to leverage Mexico's wage advantage for ONLY highly manual manufacuting jobs, AND reduce illegal immigration. (It wasn't meant to strip mine American industrail production).
3) Corporations are not people. They don't "feel" hostility.
4) Trade deficits are financed by the mercantilst countries (China). They buy US Treasuries. It allows US citizens to (temporarily) have a higher standard of living, lower interest rates, and generally lower taxes. Things will continue as usual, Until the mercantilists put a STOP to it.
5) The Cost Advantage of manufacturing in China (and Mexico) isn't fully passed along to US consumers. Its soaked up by CEO & corporate management pay and benefits.
6) If China is unable to manipulate it's currency (down) and take market share away from domestic manufacturers, beacuse the scaled tariff increase to match the currency decline, then SOME jobs will return to the USA.
A scaled tariff is worth trying (First). It's a better idea than hoping coward politicians don't cave in and overspend. One more deep recession/depression and Socialism will be back in vogue. For some it never went out of fashion! (Feel the Bern)
Warren Buffet put his 11 Million dollar California house on the market. (to me) Mr. Buffet is calling a Top in the Real Estate market, and a recession is likely S-L-O-W-L-Y approaching.
Response to this comment by Raymond, 2/29/2017:
Response to this comment by Bruce Bishop, 3/4/2017:
Response to this comment by Jim M, 3/18/2017:
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