Free Trade, et al

Posted, Sunday, June 7, 2009 1:02 am

I admire and respect your work, but now I must respectfully take a small exception.

Free Trade is the accepted mantra for prosperity and if well qualified, it can be, but it is not now. Our founding fathers stated that business had no loyalty to any country. Please know that both of our political parties take orders from the same power elite who also control our corporations, federal reserve, and media. They also control most of the western world including Canada.

Our country can return to prosperity and freedom by following our constitution, and dumping free trade except where it is also fair trade and does no harm American workers.

Other Economists also do not fault SH for the Great Depression. Look at our level currency prior to 1913 with no income tax.

Free Trade as used today is responsible for our loss of manufacturing jobs.

I wish I had time for a detailed academic discussion, but I do not.

Following is first paragraph of my last paper.

My purpose is not to agitate a civil war, that may already have started, but to prevent one at all costs, except for our freedoms. Americans were betrayed by a majority in congress of both parties for money and power. Our jobs, benefits, prosperity, and freedom are gone, or disappearing rapidly because government officials and judges openly violate our constitution. Every foreign born worker, every free trade agreement, every action by the private federal reserve bank, and every unconstitutional act are responsible for all of our unemployment and pain.

Andrew

Answer by R. T.:

I am not a rabid free trader worldwide but a realistic fair trader, especially between Canada and the United States, two countries where wages and democratic institutions are similar.

I do agree that the benefits of globalization in the United States since Reagan have gone disproportionately to the rich and not enough to workers, especially industrial workers. I also think that the lowering of taxes for the same rich segment of the population by the Bush administration was a mistake and was a factor in the increased government deficit (there was a surplus under Clinton).

The entry of China into the World Trade Organization in 1999 has perturbed international trade. This is because China (and India) with their large populations pose a problem to the workers of the rest of the world, especially in Europe and North America, even though consumers do benefit from cheaper goods.

On the other hand, trying to unravel too quickly the present world trade links can be catastrophic and can push the world toward a worldwide economic depression, that could be followed , if history is a guide, by wars.

As for the US, I see that the Secretary of the Treasury Timothy Geithner is presently in China begging on his knees that they do not dump American bonds. But it's American politicians, especially Bush-Cheney, who let the US deficit explode and who borrowed so heavily from China. Nobody forced them. The US is overextended around the globe and is doing it on credit. This cannot work.

The current economic crisis was created by political corruption in Washington D.C., excessive deregulation of the financial sector and an unhealthy mountain of unsustainable debt that was encouraged by the Greenspan Fed. This has little to do with free trade as such, even though some demagogues could use the recession as a pretext to turn protectionist. This has happened in the past.

I believe, also, that one needs to make a distinction between the Canada-US trade, where the same companies paying roughly the same wages operate in both countries (from a Canadian perspective, it can be said that there may be too many American companies controlling large portions of the Canadian economy!), and trade with China and India where wages and norms are very different.

New

The Myth of Free Trade and Protection

Posted, Thursday, June 4, 2009 1:26 am

It is not surprising that Ludwig von Mises would say "nothing speaks against free trade and everything against protection." History is written by the winners and the history of protection has most definitely been written by free traders. And a poor job they have done. It would be more acurate to call it the myth of free trade and protection than history. Let me put forth the defense of protection that free traders seek to cover up and pretend does not exist.

Let me make it clear that I am looking at this from the standpoint of what is good for the United States and not any other country. I do not doubt that countries that have staked their economic well being on exports to the United States, at the expense of our jobs, risk getting slaughtered as United States turns to trade protection. The turn to trade protection is a matter of when not if. Real incomes here peaked in 1973 and are down since. It may be years away but trade protection is coming.

Let us start with Smoot-Hawley. To free traders Smoot-Hawley is the boogieman that is going to get you if you have protection. Free traders expect that you will accept their version of Smoot-Hawley which is that things would have been just fine had the United States not passed Smoot-Hawley. There are several problems with that version. The Depression was well underway when it was passed. At the time Thomas Lamont “almost went down on his knees” the United States was already the world’s most tariff protected economy and had been for more than a hundred years. Tariffs were high before Smoot-Hawley was passed and those tariffs were not the highest we have ever had. Smoot-Hawley tariffs became effective in 1931 and did not last long as FDR began reducing tariffs. When the Great Depression got worse in 1937 tariffs were back to their pre Smoot-Hawley levels. International trade was small at the time. It was only 6 percent of the GNP before Smoot-Hawley and was 2 percent after. Not a big enough decline to justify the free trader claims. The United States remained a net exporter during the Depression.

United States experience with tariff protection has been just the opposite of what free traders predict. According to free traders a trade protected economy without foreign competition should have high prices, shoddy products, and producers should have no incentive to innovate. Society should slide into mediocrity and poverty. The United States became a protected economy in 1828 after which innovation, quality, and wages went up while prices went down. In fact from 1828 until after World War II, tariffs seldom went below 30 percent. From 1869 to 1900, GNP quadrupled while real wages increased 50 percent, and retail prices dropped significantly. Under free trade a century later real wages declined. If protection is bad how did the United States make the transition from a producer of raw materials and agricultural products in 1828 to an industrial power by the end of the century?

The theory of free trade is based on the Theory of Comparative Advantage developed by British economist David Ricardo. To really understand the theory some arithmetic is required but the non math version goes like this: Suppose England and Portugal have tariffs on wine and wheat. Consumers in both countries buy up local production and then imports if it is not enough. To buy imports the price is increased to include the tariff. Producers in both countries are protected from price competition from imports. Now suppose Portugal can produce wine at a lower cost than England can produce wine and visa versa for wheat. England could profitably sell wheat in Portugal at a price that would drive Portuguese wheat producers out of business. Portugal could profitably sell wine in England at a price that would drive English wine producers out of business. This does not happen because there is a tariff that increases the price to allow domestic production of both wine and wheat in both countries.

The free trade theory says eliminate the tariff. Let English wine producers and Portuguese wheat producers go out of business. Resources devoted to English wine production are switched to wheat production and Portuguese resources devoted to wheat production are switched to wine production. Because all producers are doing what they are best at total production will increase. Because of increased production all will live better. Society will benefit from increased productivity which will result in higher real wages.

What could possibly go wrong?

Assuming nobody is cheating, three things:

. Wine production exceeds market demand.

. Wheat production exceeds market demand.

0. Wine and Wheat production exceeds market demand.

If any of these happen the workers of one or both countries are in a world of hurt. Unemployment is going to happen and wages are going to decline. Before free trade wine and wheat production both met market demand. There is no real reason to expect tariff elimination to increase demand to meet increased production capacity.

Today General Motors and Chrysler are in trouble because there is a world wide excess capacity to build cars and free trade allows foreign production into the United States.

Protection served the United States well. It produced the highs from which we have descended under free trade.

____________________

Answer by R. T.:

You may be right that the world is going to move toward isolationism and proctectionism. Then, I would advise to tighten your seat belts. The world won't be a nice place to live.

I would only remind you of a few points:

1- Standards of living depend on productivity gains and these in turn require innovation, investments and economies of scales. Competition and productivity gains keep costs and prices low, thus increasing the purchasing power of incomes.

2- Employment levels and macroeconomic stability can be best attained through proper domestic stabilization policies, not through trade wars. There is no more reason to have overproduction with international trade than to have overproduction with inter-state or interregional trade. On the contrary, with flexible exchange rates, imports and exports would tend to equalize, except for the net capital flows going in one direction. By the way, General Motors and Chrysler are in trouble not because of free trade, but because other manufacturers within the US make better and cheaper cars.

3- Those who are opposed to military wars should also oppose trade wars, because the latter lead to the former. Autarchy has been tried before and it leads to poverty and wars. This does not mean that one needs not act locally when thinking globally. The two are not exclusive.

4. The US is having serious economic problems due to excessive foreign borrowings to finance far away military adventures and to an unhealthy deregulation of its financial system. The result has been an overvalued dollar that has hurt exports and encouraged imports. These problems have nothing to do with free trade as such, although this may be a convenient scapegoat to refuse facing the reality of the true causes of the current economic problems. Demagogues of all stripes will jump on the wagon and they will make things much worse and create a worldwide economic collapse.

New

Brave Objectivity

Posted, Thursday, June 4, 2009 12:10 am

Thank you for the article: A Fed Panic and a Massive Bailout of American Banks paid for by the entire World.

The Israeli Lobby has such a grip upon the American Government that everyone is terrified about making even the slightest comment regarding Israel--to do so can result in a loss of a job.

Your lack of fear regarding the above is commendable.

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