The Myth of Free Trade

I wrote a series of short essays and posted them on the International Mensa Economics Forum.  I’ve now collected them and I’ll post them here.  There may be some overlap and repetition, but hopefully not too much.

This topic, free trade, has been in the back of my mind for a long time.  Two recent reports have revived my interest and cause me to develop my thinking further.

It has recently been reported that US corporations are stockpiling major cash reserves; the theory is that they’re waiting for an improvement in the economy before they invest.  Also, at this time the Boeing Aircraft Company is attempting to move the production of their new Dreamliner airplane to South Carolina.  There’s a connection here.

A little background: we have two sets of labor laws generally in the USA.  They’re set by states, and political systems and attitudes determine which sort of laws exist.  It is common in most industrialized states such as New York and Massachusetts and Washington to have ‘union’ labor laws.  These permissive laws allow unions to dictate to workers that they must pay dues to the union, whether they might wish to belong to such or not.  In other states, mostly found in the old South, labor is regulated by ‘right to work’ laws.  Unions have much less power in these states.  With greater power, unions can coerce manufacturers to pay ever-higher wages to workers by threatening strikes which will shut down the manufacturing plant.  This is the way unions survive.

Unions overwhelmingly support the US Democratic Party.  The Democrats depend on union members to provide funding and votes for their election campaigns.

So now the Boeing Company wants to move manufacturing of their new airplane to a right-to-work state, which would reduce the ability of the various unions to coerce higher wages by threatening to shut down the manufacturing plant.  The union(s) are challenging the company’s right to do this by complaining to the US National Labor Relations Board, an arm of the US Federal Government.  Which is, of course, controlled largely by Pres. Obama and the Democratic Party.  The matter is now going to court for adjudication.

Back to the corporations that are hoarding cash.  They currently have the right to move their operations overseas rather than pay prevailing US wages to workers.  In essence, they’re doing the same thing that Boeing is doing.

And by a series of ‘free trade’ agreements, the government can’t do anything to stop them.  These companies want the US market for their goods, but they don’t want to pay the workers here a fair share of the income from sales of their products.  Instead, the income goes largely to management, and management is composed of a series of interlocked oligarchs.  They manage businesses and sit on boards of other businesses and pay themselves hundreds of times what a production worker makes.  Upper management routinely receives salaries and benefits that bring them millions of dollars each year; and if stock prices or economic conditions waver, they simply lay off workers and ‘downsize’, with the intention of picking up necessary product from factories where the workers aren’t paid as much and can’t demand better wages or working conditions.  This has been shown by any number of researchers, who graph the income of the managerial elite (an ever-rising line) versus that of the production workers; either a flat or slightly-decreasing line.

This practice isn’t corrupt, but it certainly is exploitative.  And nothing can be done about it in the present climate, where ‘free trade’ is supposed to be so good for the economy.

Lacking all those free trade agreements, such as NAFTA here in the US Southwest, governments could adjust the price of goods coming into the country by imposing tariffs.  Take away the excess-profit motive and companies will start to pay American workers again, because they are here (no transport costs) and because they routinely work very hard.  They work longer hours, are at least as productive as, and take fewer vacations than is common in other industrialized nations.

Unions need to be controlled better than they currently are.  Unions, by the nature of their operation, must always demand more in wages and benefits for their members; but at the moment they’ve priced American labor out of the market.  There was a time when American workers were victimized by company executives, and unions were necessary to change conditions for the better.  But that’s no longer the case, and in many cases national agencies now protect the rights and safety of employees.  Meantime, unions have used the political process to aggrandize power and influence so that controlling them is going to take a major political effort, so I don’t foresee it happening without a change at the upper levels of American politics.

As an example, in New Mexico construction workers might receive $15 an hour for non-union jobs.  That same worker would expect twice that rate if the job was ‘union’.  Same worker, same kind of work, possibly unskilled or low-skill labor.

To summarize briefly: workers have no real protection except for national agencies, because companies can simply move their operations to a place where workers are paid less, where unions don’t have control, and where regulations aren’t so binding.  And nations can’t really do much about this because they’re hampered by free trade agreements.  And such agreements favor the oligarchs at the top, and they also favor nations who can produce goods cheaply.

Don’t expect Western economies to recover unless somehow these issues become addressed.

Western nations and probably most of the developed nations of the world share economies to the point that it’s not really just to lay too much blame on the nations that are now in trouble.

As a sign of how linked we all are, some $36 billion of the US stimulus money went to German and French banks, via AIG.  That money was borrowed, largely from China, and so it added to the US debt.

Greece is in the news just now; but a part of the problem is that Greece is in Europe, and they want the same sort of life that Frenchmen and Germans and North Europeans/Nordics want, with the government providing jobs and services such as vacations and retirement and health care.  And the Greek economy just can’t support all of that.  What sort of industries support the Greek economy?  Shipping, tourism, some agriculture (in the valleys; much of the land is mountainous and rocky), fishing (but that’s no longer what it once was, economically speaking) and probably a few things I’m not aware of.  But the Greek economy is not nearly so robust as the French or German or British.  This is also true of the Spanish and Italian economies, although both have more of an agricultural economy that does Greece, simply because of the landscape and the climate.  Plus Spain and Italy are dealing just now with refugees from Africa.

Some of their economic mess is clearly the fault of their governments, but not all of it.

There are  costs and profit to be considered, and other matters like depletion and intangibles must be somehow addressed, when discussing international trade.

For illustration, consider two nations: why should they trade anything?  Why not simply do business with persons in their own nation?  I think that the main reasons for trade involve the other nation producing something that the home nation can’t produce, or it produces something of better quality, or there are cost advantages involved because of local conditions.  Each of these can produce inequality, economic advantage, for one nation or the other.

Take cotton as an example.  The US produces much cotton, so why should it buy cotton from Egypt?  Egyptian cotton is prized for longer fibers (better quality) and possibly for lower costs (Egyptian labor is cheaper than what is usually available in the US, but offsetting this is the heavy use of machinery in the US, which reduces labor costs to something like parity), and so Egyptian cotton is imported to the US, but not in amounts that would threaten the home industry.  No real advantage for either, so trade can continue indefinitely.

But then there’s the case of mineral wealth.  It might be oil in the Middle East or Copper in Chile.  The US has oil and Copper, but neither are in the qualities or quantities they once were.  It’s cheaper to extract both in the named regions.  A complication here is quality of the producing nation post-extraction (pollution, conditions of the exhausted mine, etc) and depletion.  The actual production costs might be quite low; but if the mineral is sold at cost plus say, 10%, then soon the minerals are gone and the producing nation is left with a mess on its hands and no money to clean the land up.  If the profit is set higher, then the producing nation is left with excess money, dollars in this case, euros if the oil/copper are sold to European nations.  What to do with those dollars?  They can’t be maintained indefinitely without inevitably losing some of their value.

Another complication: political advantage.  Producing nations may decide to form a cartel and control prices to provide an advantage to themselves or to force the purchasing/trading nation to act in some way that they might not if left to their own devices.

Quite often, excess money is invested in military hardware.  Fast planes and tanks and ships and submarines are sexy and appealing to the ruling government, regardless of whether there’s a real need for them beyond what’s necessary for homeland defense.  This is almost always a foolish use of excess funds; only first-rank developed nations have the infrastructure in terms of manufacturing, trained populace to operate and maintain the purchased tanks or planes, an ongoing training program that keeps pilots or tankers at the top of their game, a modernization program to keep the hardware and training ‘current’, more or less; it’s not a simple purchase, buy it and use it, but an ongoing program.  Real costs are not a few millions worth of hardware, but a few billions in ancillary costs.  And if the program isn’t kept up-to-date, it’s not really very effective; note Libya as an example.  Whatever Khaddafi spent on hardware and mercenaries to operate it, it was money wasted.  Mubarak armed Egypt, with the purchased armaments aimed at Israel; his true enemy turned out to be the Egyptian people.   The funds expended might better have been used to build roads and schools and such that could have benefited his people.

Too often the excess money goes to benefit the few of the ruling class, rather than the many in the underclasses.  As such, the monetary advantage gained from selling mineral or other national wealth is essentially soon lost, when it might have been used to lift an undeveloped nation to fully-developed status within a couple of generations.

­­­­The only way a nation can compete as equals with another country is to either make things cheaper, make them better (e.g., of higher quality), or produce things that the other country simply cannot produce for themselves.  At one time, we could produce aircraft (Boeing and others) but now there’s a European consortium competing, Airbus.  We still produce farm goods, but improvements in strains available to plant have made other nations more competitive in this, and also development of farming regions and a farming infrastructure have helped to reduce American competitiveness.  We produced cars and trucks, but our manufacturers produced poor quality and they produced for the American market; Europeans and Asians produced better quality and their products could function easily in either part of the world.  The advantage went away.

So I’ve concluded that any long-term solution to the trade imbalance needs to start with Free Trade Agreements.

Why is trade imbalance so important?  Simply, it means that money/value inevitably flows out of the nation on the low end of the ‘balance’.  That drop in economic activity must either result in a decline in standard of living in the losing nation, or in debt.  The gaining nations in this imbalance have money to lend, and now it’s a kind of double-whammy; the excess funds from trade imbalance now generate even more excess funds for the nation favored by the imbalance.

There was once a mechanism to address this imbalance, by currency revaluation.  But that’s not possible for Greece or Italy or Spain, because they now use the euro, and Germany and France want to see the euro set at a level that favors exports for their nations.  It’s also not possible for the US, because the US dollar is the standard; it can’t be lowered unilaterally by the US.  So Europe and Asian and Middle Eastern nations set their currencies to a point that favors export of their products.  The imbalance continues.

None of the Western nations can compete with the Asians and others in the undeveloped world in terms of price.  German workers and French workers and American workers expect wages and benefits that are far above what are paid to Chinese and Indonesian and Vietnamese and even Indian workers.  The practices involving safety in those nations would horrify an American or German worker.  There would likely be a strike or at least some job action to correct those conditions; I’ve read that in China, injured workers are simply dismissed and new ones hired.  Medical care is paid for through state agencies, I imagine, but that worker doesn’t get the kind of disability retirement that is common in the developed nations.

Conclusion: we can’t compete on the basis of cost with the Third World.  And where we produce quality goods, those Third World workers can’t afford to buy what we’ve produced.  Plus there’s piracy, notably in China, where we produce things they can’t make on their own.  Music, computer programs, even the computers or cell phones that are US designed and manufactured in Asia get diverted to markets there to compete with those produced for American or European firms.  And copying things such as cell networks that were developed over here is much cheaper than developing new intellectual property, new processes, from zero.

It may be that the process, the cycle, is too far advanced to be stabilized or reversed.  All the work done by our people, all the things we’ve developed, may now go to benefit others in other parts of the world.  The nation that put men on the Moon no longer has a manned space program.  The workers who staffed Cape Canaveral have been laid off and have dispersed.  The Russians, who inherited the USSR’s program, just lost a cargo craft and there’s discussion of abandoning the ISS.

Work is still being done over here in the sciences, but intellectual advances go freely about the world, so that whatever knowledge might be developed in the supercollider, for example, will be shared, whether or not other countries contributed to the expenses of gaining that knowledge.  It’s the same with things such as the US space program, which was expensive but contributed much knowledge that now enriches the life of people around the world.  The expenses weren’t shared…but the benefits were.  We in the US, and some in Europe, benefited from discoveries made in other places; discoveries in mathematics, in astronomy, in medicine, any number of other sciences.  Some of this particular cycle is now beginning to change; China and India are producing engineers and scientists, and they are publishing work that will benefit the world.  Chinese engineers are building bridges and buildings, and the intellectual property developed in the doing of that will come inevitably to the West.  It seems likely, to me anyway, that intellectual exchange among nations and peoples is something that could fairly be described as ‘free trade’.  But economically, trade isn’t free; that’s why there are imbalances, and why debt begins to build among developed nations.

And unless this process can be arrested and reversed, nothing but decline is in the future of the developed world.


ADDENDUM: I wrote the first of my essays almost exactly two years ago.  This week, in Time Magazine, Joseph Stiglitz was interviewed.  He is a Nobel Laureate who coined the term “the 1%”.  And in the interview, he used the exact terminology that I’ve used here: ‘The concept of the free market is a myth.’  I feel a bit better about my writings in economics after that!


One Response to “The Myth of Free Trade”

  1. jlknapp505 Says:

    Reblogged this on Jlknapp505's Blog.

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