Free Trade

Any debate about our economy always seems to be based upon political theory and not logical economic facts; from the right we are told that free trade creates jobs and economic prosperity.  You have Milton Friedman, the Van Mises Institute, the Cato Institute and the Heritage Foundation all being quoted in regards to anything regarding economics and especially when free trade is discussed.

From the left you really don't hear much because realistically the major left of center political party, the Democrats, really do not have an economic policy that is all that much different than the one espoused by the right.  It seems that democrats like globalization but do not speak all that much about free trade.  

Then of course you have Thomas Friedman, The World Is Flat:  A Brief History of the Twenty-first Century.   Here we are, only 11 years into the 21st Century and we already have people claiming to write a history of it; all of which centers around the concept of 'globalization.'

If we look at American history we realize that from our humble beginnings America grew and prospered in a largely protected economic environment.  Our trade then was not “free.” But after World War II, we wandered away from Alexander Hamilton’s vision of a relatively self-contained American economy in order to win the cold war. We threw our markets open to the world as a bribe not to go communist.  At the time there was not any big threat as we benefited from easy access to cheap raw materials and Europe was devastated by the carnage of war, and the rest of the world was so undeveloped they were irrelevant; we enjoyed a very enviable position as we had a manufacturing and industrial base that had not been destroyed by war.

Then in the 1970's we saw our first threat, Datsun's from Japan.  From that meager beginning we have watched our trade deficit hovers at around $500 billion dollars a year since 2000.  What started as a political response to the threat of communism has become an economic policy since the passage of NAFTA in 1994.

The reality is that this trade deficit represents a giant “reverse stimulus." It causes a huge slice of domestic demand to flow not into domestic jobs but foreign wages.  Our trade deficit helps Guangdong, Seoul, Yokohama, even Munich – but not Gary, Indiana, Fontana, California, and the other badlands of America’s industrial decline. Washington’s response? Yet more stimulus, leading to an ever-increasing overhang of debt, both foreign and domestic, the cost of whose servicing then exerts its own drag on recovery.

The math is very simple, productivity and consumption are prosperity.  Forget the inequality in wealth, forget redistribution of wealth, the fact is Americans consume but the productivity that generates wealth and supplies this consumption is performed in other countries.  Thus, the standard of living, or prosperity that consumption creates is being enjoyed in other countries.

Our 200 year tradition of shared prosperity is over because the great American job machine has been disassembled and moved to foreign countries and Americans now struggle with increasing inequality,  rising indebtedness, community abandonment, and the weakening of the industrial sinews of our national security.

Despite the 216,000 jobs added last month, the American economy has, in fact, entirely lost the ability to create jobs in tradable sectors. This cheery fact comes straight from the Commerce Department. All our net new jobs are in nontradable services: a few heart surgeons and a legion of busboys and security guards, most of them without health insurance or retirement benefits.  We no longer make anything that we can trade with other countries.

These are dead-end jobs, and our economy as a whole is being similarly squeezed into dead-end industries. The green jobs of the future? Gone to places like China, where governments bid sweeter subsidies than Massachusetts can afford. Nanotechnology? Perhaps the first major technology in a century where America is not the leading innovator.

Forget inflation, forget taxes, forget government spending, forget the Federal Reserve, and forget the deficit, our prosperity is directly related to our trade deficit.

The fundamental reality of free trade is that it relieves corporate America from any substantial tie to the economic well-being of ordinary Americans. If corporate America can produce its products anywhere, and sell them anywhere, then it has no incentive to care about the capacity of Americans to produce or consume. Conversely, if it is tied to making a profit by selling goods made by Americans to Americans, then it has a natural incentive to care about American productivity and consumption:  The prosperity of American corporations needs to be tied to the prosperity of Americans as a whole.

We opened our economic borders in an attempt to give other nations a way to build their economy's without succumbing to the threat of communism and if we do not return to a policy of strategic, not unconditional, economic openness, we may lose the next cold war – to a Confucian authoritarianism no less opposed to the idea of a free society than Marxism, and considerably more efficient. 

The House of representatives have taken the first step by passing a policy that would allow the US to apply compensatory tariffs against imports subsidized by currency manipulation; which was an idea originated by Kevin Kearns of the US Business and Industry Council.  This will allow American companies to compete in a globalized market place that is both FAIR and free.  Then we also need to establish a border tax to counter foreign export rebates implemented by means of foreign value-added taxes. 

We also need to understand that the first responsibility of any government is to secure its borders and to provide for the safety and well being of its citizens; and free trade, as it stands right now, is a threat to our security, our well being, and it is diminishing the opportunity of prosperity for future generations.