Free Trade?

The subject of free trade is much in the news these days because of President Trump’s imposition of tariffs on certain Chinese products and the Chinese retaliation. Many observers are fearful of a full-blown trade war with China and other nations, with potentially devastating effects on the American economy.

In 1955 I worked for a plywood manufacturer.  Our major customers included perhaps 20 or more furniture companies and a very large luggage company.  The luggage maker was our best customer. The company used our plywood to frame their suitcases.

A few years before I became involved in the plywood industry this plant had produced beautifully veneered plywood for many top-line furniture makers.  That business was gone when I arrived, and even the production of less glamorous drawer bottoms and furniture backs was slowly declining.  The manufacture of these products was being taken over by the Japanese.  The Japanese were able to purchase fine Phillipine mahogany lumber in Luzon, ship it to Japan, produce the finished plywood, and ship it to the United States on Japanese ships at a lower cost than we could produce the same sort of plywood, made from less attractive gum and poplar, here in the States.

It was called free trade. The men who owned our plywood plant did not think it was free. They were constrained by laws and regulations mandating minimum wages, environmental restrictions, etc.  The Japanese plywood manufacturer suffered no such impediments, and his labor costs were a small fraction of those in American plants.

That was my first experience, on a personal level, of the effects of so-called free trade. Over the next forty years I saw its impact more widely in my home state of North Carolina.

The state once had vibrant textile and furniture industries.  Names like Canon (towels and bedlinen), Hanes (clothing), and Drexel (furniture) were known throughout the land.  Towns grew up around the factories, and generation after generation found employment in these industries. Wages were not high level, but those who wanted to work could make a reasonably comfortable income, and they were proud of their products.

Today, in 2018, these once booming industries are mere shells of what they used to be.  Most of the big textile and furniture plants are closed.  Only a few smaller, specialized manufacturers survive.  Many thousands of workers lost their jobs, and some communities were decimated.  The state and local governments struggled vigorously to attract or develop new industries to replace those that they had lost, often leading to dog eat dog contests with other states to keep or gain a business.  Often they were successful, but the results were uneven.  Some areas of North Carolina are experiencing unprecedented economic growth and prosperity, while other areas never recovered their vibrancy and vitality.  In many small towns the harmful impacts of factory closings were felt at every level of society, and economic despair was palpable.

The same thing was experienced in many other areas of the United States.  Baltimore lost its steel mills and the shipbuilding industry.  Detroit was almost destroyed by the changing automobile market and growth in automotive imports.  The rust belt expanded.

In 2016 a goodly percentage of Donald Trump’s vote came from those who had been adversely impacted, directly or indirectly, by free trade.  Many workers now had to work two jobs to earn even a portion of the income they had once earned at a good-paying union factory.  They felt that something was wrong, and Donald Trump promised to do something about it.  Most informed observers are convinced that the situation is irreversible, but it appears that the President is going to try.

There is a broad consensus among economists that protectionism has a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on the overall economy.  In a 2006 survey of American economists, almost 90% believed that the United States should remove its remaining tariffs and other barriers to trade.  It is clear that the vast majority of economists still feel that way, and they fear that President Trump’s present flirtation with tariffs and protectionism could lead to disaster.

Even economists will admit, however, that the removal of trade barriers can cause significant and unequally distributed losses in some sectors and lead to the economic dislocation of workers.  But they also believe that, in the long run, free trade is a net gain for our nation and for the world.

Who am I to argue with Harvard trained economists?  Nevertheless, an unemployed textile worker in Kannapolis, North Carolina, is unlikely to be impressed by arguments and statistics from pointed-headed intellectuals.

And is free trade really free trade? Are producers in foreign lands violating the rules?  Are they running some industries with virtual slave labor, and are they ignoring all conventions relating to the control of harmful factory emissions and the disposal of industrial waste?  Are they engaged in industrial espionage and other forms of cheating?

Let us look at the free trade situation as it involves China.

China has become enormously rich off its trade with the United States.  Everywhere you see products with the Made in China label.  Some years ago I visited a Cherokee Indian shop in the mountains of North Carolina, and even the toy bows and arrows were made in China. Without Chinese products, a Walmart store would be almost half empty space.

We seem to be more or less wide open to Chinese products.  But what about our products in China?

Borrowing data from Wikipedia:

China keeps close control over the use of technology within its borders, including full or partial blocks against many popular U.S. firms including Google, Facebook Inc, Twitter Inc and others.

Global carmakers can only operate in China, the world’s largest auto market, via joint ventures with local partners, with their stake limited to 50 percent.  This is part of a Chinese government drive to protect home-grown auto firms. China also imposes a 25 percent duty on imported vehicles, versus a 2.5 percent import tax in the United States.

Foreign financial firms face long-standing equity caps to participate in some services in China, including a 50 percent limit on life insurance and a 49 percent cap on foreign-invested securities broker-dealers.

In 2012, the WTO ruled China was discriminating against foreign payment card companies, and despite pledging last year to give “full and prompt market access” to U.S. payment network operators, no U.S. firm has yet been granted a license.

China has a strict quota system for imported movies, limiting the number allowed to be shown on domestic cinema screens through the scheme to 34 each year. Hollywood producers also receive around 25 percent of the box office, compared to nearer 40 percent they gain in other overseas markets.

China bans imports of poultry, poultry products and eggs due to avian flu concerns. It conditionally lifted an import ban on U.S. beef products in June last year.

The U.S. has complained about China’s price support for domestic wheat, corn and rice. It launched a challenge at the WTO in September 2016, which set up a dispute panel in September last year to hear the case.

At the start of 2017, Beijing raised import tariffs on ethanol from the United States and Brazil, the world’s top exporters, and slapped hefty punitive duties on U.S. distillers’ grains (DDGS), a byproduct of ethanol production used as an animal feed ingredient.

Access to the Chines pharmaceuticals markets, the world’s second largest, often goes hand-in-hand with forced price cuts.

China requires rail equipment suppliers to its domestic train networks, which are among the world’s longest, to prove that at least 70 percent of their supply chain is in China.

These facts prove that trade with China is not entirely free.  It has been much freer on our side than on theirs, and President Trump was probably correct when he said that China has been taking advantage of the United States for years.

We will not even discuss China’s blatant industrial espionage and thefts of intellectual property.

And what about the European Economic Union?  Compared to China, they play the trade game much more fairly.

Again citing Wikipedia:

The E.U. has more than a 33% tariff on U.S. dairy products. (In contrast, the U.S. tariff on E.U. dairy is 17.5 percent.) The E.U. also prevents most genetically modified American products from entering its borders.

The E.U. currently has a 10% tariff  on American auto imports, while the United States has a 2.5 percent tariff on imported European cars..

Countries don’t just use tariffs to block imports from coming in. There are things like quotas, lengthy inspections at the border, requiring additional documentation, subjecting imports to more safety requirements or subsidizing domestic goods to make them cheaper than imports. Examples include the E.U.’s “public health” restrictions on hormone-treated beef and GMO crops, as well as various safety and environmental restrictions on cars. And all countries subject some agricultural products to import quotas, meaning that only so much of the item can enter before hefty tariffs kick in. In the United States, only 4.5 percent of agricultural products fall under these tariff quotas. That’s far below the 9.5 percent falling under quotas in Canada and the 11.3 percent in the E.U.

So, it appears that free trade is not so free as many seem to think.  I believe that President Trump is correct in his attempt to level the playing field. He makes all of us nervous with his rant and bluster, but perhaps he knows what he is doing.  I hope so.  I do not believe there will be a true trade war. Perhaps, in the long run, the President will manage to get us get some better trade deals. Though unlikely, it may even be possible to bring back some our lost industries.

Negotiating a trade agreement is a very difficult and sometime contentious process.  The very complexity of a final agreement proves that trade is never entirely free.  It never has been. We must seek the best trade deals possible and be willing to walk away from the table if an agreement will be of no benefit to us.  In finalizing a trade treaty, our negotiators must also be keenly aware of any potentially adverse impact it may have on small towns and farms throughout America, and provisions must be made to mitigate any deleterious effects.

 

4 thoughts on “Free Trade?

  1. Politicians and many economists decry the nation’s growing federal deficit. Almost none, however, publically complain about our enormous trade deficit. In fact, many economists argue that the trade deficit is unimportant.

    The two, however, are not unrelated. The nation’s economy requires the circulation of money. Producers pay employees as they produce goods. Employees buy goods using the money paid. By selling goods, producers recover money paid to workers. This completes the circular flow.

    If employees spend money on goods produced in foreign countries, the loop is broken and money flows outside the country. This is alriight if equivalent money comes in resulting from the sale of goods to foreign countries. But if there is a trade deficit, there is then a net outflow of money.

    The loss of money can be addressed in three ways, all of which have negative consequences. A government can print money, which eventually leads to run-away inflation. A country can increase the money supply by relaxing the requirement on bank reserves associated with customer deposits. Tis also leads eventually to run-away inflation. Finally, a country can borrow the money back from foreign countries. This has consequences which will be discussed.

    Individuals and private companies might borrow some funds from foreign sources; but this in general does not suffice. To ensure a sufficient supply of money, government must borrow the remainder; and this is done most easily by the federal government.

    In this way the trade deficit contributes in a major way to the federal deficit. But it also contributes in another way. The loss of employment resulting from the trade deficit requires the establishment of social programs to assist the unemployed and under-employed. The federal government pays workers to administer these programs; and also pays out the associated assistance funds. These payments contribute to the federal deficit.

    A further discussion of the federal deficit and its negative consequences could be considered; but it is sufficient to note that this topic has been extensively discussed elsewhere. The point here is that the trade deficit contributes in a major way to the federal deficit.. The next topic concerns the reasons for the trade deficit and what, if anything, can bedone to address it.

    The United States has lower tariffs than those of most of our major trading partners; and it is the United States that suffers the world’s largest trade deficit year after year. And yet, it is the United States that is accuused of starting a trade war.

    The irony seems to escape the notice of our leading academics and economists, who continue in their unqualified commitment to free trade. The truth is that free trade does not currently exist; and probably never has. All countries, including the United States, support industries which they consider to be vital.

    In fact, in the United States, it is government supported industries such as: aerospace, energy, and agriculture which continue to enjoy staying power. Many other non-supported industries such as: ship building, commercial electronics, semi-conductors, digital cameras, flat screen displays, construction machinery, household appliances, automation equipment, etc. are lost or in decline.

    Most academics suggest that the United States should abandon these older industries and focus on industries of the future. However, as countries such as India and China continue to develop capabilities, idustries of the future such as information technology will be subject to take-over as well. Foreign comanies which enjoy the support of their respective governments will eventually dominate these areas as well.

    Government support of an industry need not be extensive. For example, a commitment to use domestically produced materials on government funded projects could ensure the long-term survival of a revitalized steel industry. Just knowing that the government is on one’s side can enable an industry to invest and develop capabilities for the future.

    Most foreign competitors are aware of this. It is time for the United States to move in this direction as well. In fact, the United States utilized these strategies during the 19th century, the period of our most rapid growth. During this time there was no federal income tax and the federal government was supported largely by the collection of tariffs.

    I am not suggesting that the United States should return to policies of an earlier century. I am arguing, however, that our current devotion to free trade is not serving the country well in the current century.

    Viewpoint by Thomas Potter

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  2. I think the President is using his negotiating skills expecting that any retaliation will be brief and we will get better trade deals before significant negative effects on American businesses. I hope it works but we shall see. Unfortunately many in the news media despise the President so much and will be very selective on their reporting to make him look bad. For example, a recent report on CBS showed interviews with farmers where they were expressing concerns about lost business due to a trade war. It was sad to watch and one could not help but have compassion for them. However the story never covered the imbalance, as you have written about here; the reason for the tariffs. The news media should report the full story and let their viewers make up their own minds.

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