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Home > Social Issues
Trade Truth #3: 'Trade' Talking Points
by Bob Powell, 6/12/08
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Here are short statements on what's called "trade" for a sound byte world. They are for those who want concise statements to oppose "free trade" rhetoric. There are so many facets to "trade" issues and so many false beliefs that there are quite a few of them. Sorry.

I hesitated to call these "talking points" because that's come to connote "spin." These are facts and solid logic, not spin. "Free trade" advocates rail against "protectionism" and make false and misleading statements like,

  • "We must not wall ourselves off from the world"
  • "This country was built on "free trade"; we can't retreat to the policies of the past.
  • The Great Depression was caused by Smoot-Hawley trade barriers. (It most definintely was not ... my response to this myth added since I sent these points to a limited distribution.)

Such statements are either red herrings or outright false.

Notes:

"Free Trade": It's not "trade". Trade is when you make something, I make something and we trade. What's going on is "transfer of the factors of production" ... primarily the transfer of jobs to low-wage nations (also called labor arbitrage), nations w/o environmental protections. That's not trade. What's called "trade" should always be in quotes.

Trade War - What is it?: A nation engages in a trade war to increase its exports at the expense of other nations' exports. It can do this many different ways: e.g., increase tariffs to discourage imports, devalue its currency, subsidize industries, subsidize exports. When a nation increases exports compared to imports, that nation's economy is better than it would otherwise be. The problem is that other nations may retaliate by also change policies to make their industries more competitive.

Protectionism and Provoking a Trade War: Some say that protectionism would provoke a trade war. I submit that, with a $708B trade deficit in 2007 ($768B in 2006, $531.5B in 2015, with a goods trade deficit in 2015 of $763B), we're already in a trade war. And the U.S. has surrendered!

But "trade" increases exports and creates jobs: That's true, but U.S. policies favor import-growth over export growth. "Free trade" advocates talk about the rising level of exports and export-related job gains. They don't talk about imports at all, especially not import-related job losses and how offshoring undermines U.S. wages.

NAFTA & Mexico: Free trade advocates ignore how Mexican imports have slammed exports on all counts: absolute level, growth, and acceleration.

They're quick to note that U.S. exports to Mexico tripled after NAFTA went into effect in 1994. They don't mention that:

  • the major effect of NAFTA has been to increase imports by a factor of five.
  • before NAFTA exports were increasing 46% faster than imports, but now imports are increasing 85% faster than exports
  • imports are now accelerating and exports are decelerating.

But the "trade deficit" fell in 2007: Yes, it did ... by $50B. But that's not because the falling dollar helped increase the growth of goods exports. In fact, Goods Export growth decreased in 2007 by $2.4B/yr compared to 2006, even with a dramatically-falling dollar. The U.S. produces less and less tradable goods, so a falling dollar doesn't help that much. Without a falling dollar the growth rate of goods exports would likely have fallen even more than it did.

The goods trade deficit in 2007 improved compared to 2006 because Goods Import growth fell by $76.4B. The U.S. economy is stalling.

Isn't Oil the Problem? You'd think so, but:

It's less than 20% of the "trade deficit" problem. The U.S. petroleum deficit is less than 20% of the overall "trade" deficit.

The U.S. exports oil??? Yes. It's interesting that the U.S. exports about 11% as much petroleum as it imports AND that the U.S. is exporting 25% more ($2.9B), measured in chain-weighted dollars, in 2007 than in 2005. By the same measure, imports fell from 2005 to 2007 by 3.8% ($5.4B).

Drill to get more of "our" oil? Once oil companies have the leases, it's no longer "our oil," it's "oil company oil" and they'll sell it wherever they can for the most money. Conservatives do not believe in the concept of "our" or paying attention to "the whole." They believe only in individuals working in their own self-interest, which is exactly what the individual oil companies do. They do not operate in the national interest.

GDP Depressed: Thanks to "free trade", the U.S. has experienced 3 decades of major anti-stimulus because a negative trade balance subtracts from GDP.

GDP = Consumer spending (C) + Investment (I) + Net Exports (E) + Government Spending (G)

From 1980 through 2008, the cumulative "trade deficit", the "trade debt", has totaled over $7 trillion, with $5.1 trillion of that from 2000 through 2008. "Free trade" has been like an anti-matter black hole that has sucked prosperity from the U.S. economy.

Job Losses: Colorado Springs is a disaster area for manufacturing and IT. While the nation lost 23% of manufacturing jobs since the peak in 98, Colorado Springs has lost 39%. For IT since the peak in 01, the nation lost 19%, Colorado Springs lost 48%!

Retraining for those who have lost jobs: People retrained in IT when they lost their manufacturing job. Retrain for what now? Besides we're losing high-tech, too.

Technology Losses: The U.S. had an Advanced Technology Products "trade" surplus in 1991 of $38.4B; in 2007 it's a $53.5B deficit. The U.S. is losing, not just low-tech, but also high-tech capability and the jobs that go with it (link).

What Causes Offshoring: Every corporation logically sees that it can increase profits when selling into the U.S. market by offshoring jobs to take advantage of low-cost foreign labor (and using H-1B and other visas). When every corporation does this, they're no more competitive against the others than before. In the process they've undermined U.S. wages, which increases competitive pressure that promotes even more offshoring. Therefore offshoring has been rapidly accelerating.

U.S. wages are so undermined that, had compensation continued to track productivity since 1980, U.S. wages in 2004 would have been 68% higher and we wouldn't need those cheap products from China.

Protectionism: If you're not willing to protect the U.S. economy, what are you willing to protect? If you're not, "Why do you hate America?"

Protectionism: Ha-Joon Chang explains in Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism that today's economic superpowers -- from the U.S. to Britain to his native Korea -- all attained prosperity by protectionism and government intervention in industry. The irony is that it was originally the Republican Party that promoted protectionism.

Protectionism: Thomas Friedman has famously said that the "world is flat", but it's also tilted ... very tilted. That's because of U.S., and other nations', policies:

What policies? Take your pick. There's currency manipulation, competitor countries have national health insurance (removing the cost from industry), tax policies, capital subsidies, theft of intellectual property, lack of labor & environmental standards.

Protectionism: The U.S. actually engages in "reverse protectionism" that drives corporations to offshore jobs. Pick a few:

1. Companies can defer paying taxes on income from foreign subsidiaries ... indefinitely.
2.  Tax loopholes, such as moving headquarters to a tax haven.
3.  Allowing R&D and other investment tax credits for companies that move manufacturing off shore ... the U.S. doesn't fully benefit.
4. Corporations engage in flawed transfer pricing schemes to avoid U.S. taxes, e.g., they sell components to foreign subsidiary with very low profit markup, and buy back product after manufacture with a very high foreign profit markup.
5. Corporations are allowed to write-off the cost of shutting down a factory in the U.S. when it transfers the work to a factory in a foreign country.
6. Corporations are allowed to write-off the cost of bringing new foreign employees to the U.S. and requiring its U.S. employees, as their last duties before being fired, to train the foreign employees to do their jobs.

Currency Manipulation: Stopping China's stopped currency manipulation might make U.S. goods 40% more competitive, but we've got well over a 100% problem. Correcting that one issue won't correct our "trade deficit." We've got a multifaceted problem and that's just one facet.

Trade Deficit Kills the Dollar: "Free Trade" has created a $708B trade deficit in 2007 and an enormous trade debt (the accumulation of the deficit) that has so many dollars in foreign hands that it's caused a falling dollar.

Devalued Dollar & Inflation: A trade deficit in the hundreds of billions for decades has too many dollars in foreign hands which has led to massive dollar devaluation and inflation. This is essentially theft from everyone who holds dollars. Besides, a devalued dollar hasn't increased the growth of good exports and, even if it did, a devalued dollar, with accompanying inflation, is bad.

Selling Off America: "Free Trade" with so many dollars in foreign hands has led to the "selling off" of America's infrastructure -- e.g., roads, ports -- and companies ... and the profits go offshore, too. The politically correct phrase for "Selling Off America" is "Foreign Direct Investment".

But Don't Foreign Companies Create Jobs in America?: Some, yes. But mostly they buy U.S. companies and those jobs are immediately reclassified as jobs in foreign-owned companies, which causes that "foreign company jobs" number to increase.

Trade War - What is it?: A nation engages in a trade war to increase its exports at the expense of other nations' exports. It can do this many different ways: e.g., increase tariffs to discourage imports, devalue its currency, subsidize industries, subsidize exports. When a nation increases exports compared to imports, that nation's economy is better than it would otherwise be. The problem is that other nations may retaliate by also change policies to make their industries more competitive.

"Fair Trade": So many factors affect trade that trying to create a "level playing field" for each is virtually impossible. Factors: currency manipulation, competitor countries have national health insurance (removing the cost from industry), tax policies, capital subsidies, theft of intellectual property, lack of labor & environmental standards.

Therefore Create "Balanced Trade": "Free trade" or "fair trade" won't correct our out-of-balance "trade deficit." The solution: "balanced trade. Those who promote "free trade" are "unbalanced."

How to Create "Balanced Trade":

Use Warren Buffett's outcome-based Import Certificates mechanism: If a country purchases products or services from the U.S., then it can sell that amount back to the U.S. If it does not want to sell to the U.S., it can sell its Import Certificates to another country that does want to sell to the U.S. This effectively deals with what he describes as "a shifting maze of punitive tariffs, export subsidies, quotas, dollar-locked currencies, and the like."

This market-based mechanism would produce the desired outcome: balanced trade. This is necessary because anything out of balance will be, WILL BE, brought back into balance. The more out of balance it's allowed to become, the more severe will be the correction ... and we're headed for a very severe correction. [Note: fracking is being pushed in the U.S., not for energy in the U.S., but for export to help offset the enormous goods trade deficit ... $763B in 2015.]

Instituting a policy to create Balanced Trade would not be "starting a Trade War" ... it would end the war being waged against the U.S., which has effectively surrendered!

For a more complete discussion see: What to do about the 'trade deficit'?

Labor & Environmental Standards (and Democracy): The costs of environmental degradation and injuries to workers are not fully built into the costs of products; they're externalized (socialized) onto the public at large. Individuals can't go to the market and "purchase" clean environment or safe working conditions. Only governments can create those conditions. If a government isn't a democracy, it doesn't represent the interests of its citizens. We shouldn't be "trading" with China without them.

Not including labor & environmental standards in trade pacts is another subsidy that promotes offshoring.

Illegal Immigration: Subsidized U.S. farm products in competition with unsubsidized Mexican farm products drove Mexican farmers off the land. They went to the cities for our "offshored" jobs. Now that those jobs have been going to China, they're illegally immigrating into the U.S. to try to survive. That's why illegal immigration has increased so much since NAFTA.

Are Poverty Wages for Ag Workers Necessary? No. Corporations maintain agricultural workers must be paid poverty wages and therefore we "need" illegal immigrants to do this work. The truth: farm workers could be paid ten times as much, over $125,000/year, and the increase in price for tomatoes would be 16 cents/lb and for apples 12.3 cents/lb.

It's a myth that Smoot-Hawley caused the Great Depression. This is false for many reasons, which makes it somewhat complicated to explain. What's happening today is all too much like what happened in 1929 ... only worse.

The Smoot-Hawley myth (see Smoot-Hawley Fiction) is an example of Jay Forrester's observation (he founded of the field of system dynamics at MIT) that in dynamically complex systems we are very adept at discovering a proximate cause of our problems that is obvious, logical, and wrong. As Thomas Palley notes in the excerpt below: "The rooster crows at dawn, but does not cause the sunrise. Smoot-Hawley did not cause the Depression."

Reason 1: Unequal distribution of wealth
Reason 2: Bursting of a speculative bubble

From Main Causes of the Great Depression by Paul Alexander Gusmorino 3rd : May 13, 1996

"... the main cause for the Great Depression was the combination of the greatly unequal distribution of wealth throughout the 1920's, and the extensive stock market speculation that took place during the latter part that same decade."

Unequal distribution of wealth is important because it causes a downward spiral of demand and economic activity.

Reason 3: Smoot-Hawley was passed 8 months after the October 1929 stock market crash.

From FREE TRADE AND PROTECTIONISM (Your Job and Your Way of Life) by Alfred E. Eckes, Jr. [Alfred E. Eckes, Jr., is Ohio Eminent Research Professor in Contemporary History at Ohio University.]

The Smoot-Hawley Tariff was said to have caused or exacerbated the Great Depression, but when one looks at the facts and goes into the archives and reads the record, one comes to a quite different interpretation. How could the passage of the tariff in June 1930 somehow have spooked the stock market in October 1929? Furthermore, Smoot-Hawley really wasn't much higher than the previous tariff. Two-thirds of U.S. imports under Smoot-Hawley came in duty-free, and when the tariff was enacted, more items were added to the free list than were taken from the free list and made dutiable. Nonetheless, the conventional wisdom is that it raised the American tariff to a record level. That's not supported by the data.

Reason 4: The Smoot-Hawley Tariff wasn't a big increase from tariffs already in place.

In The Great Betrayal (1998) Pat Buchanan quotes an economist who points out that:

"... from 1929 to 1933, America's GNP fell from $104 billion to $56 billion, a loss of $48 billion. However, net exports fell by only $700 million, and domestic spending declined by $47.3 billion. In other words, net exports decreased by 1.5 percent of the fall in GNP, as domestic demand fell by the remaining 98.5 percent! It is patently absurd to fuss over that 1.5 percent fall and overlook the other 98.5 percent." p. 249.

Also noted in Could Globalization Fail? by Thomas Palley, YaleGlobal, 13 April 2006

The Smoot-Hawley tariff was passed in June 1930. Its economic effects were minor for the US given the pre-existing high tariff structure and the minimal extent of US engagement in trade. Indeed, those effects may even have been beneficial in that spending switched from imports to domestically produced goods. Yet, for 75 years, free traders have sought to blame Smoot-Hawley for the Depression and thereby make a case for free trade. The rooster crows at dawn, but does not cause the sunrise. Smoot-Hawley did not cause the Depression.

 

More Detail on Job Losses:

Manufacturing job losses - The nation's lost over 4 million manufacturing jobs, that's 23%, since the peak in March 98; Colorado Springs has lost 10,500 manufacturing jobs, that's 39%.
Information Technology job losses - The nation's lost over 700,000 IT jobs, that's 19%, since the peak in March 01; Colorado Springs has lost 7,000 IT jobs, that's 48%.

 


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