Common Sense on ‘Free Trade’

August 23, 2018 Updated: August 27, 2018

I must confess that I am a heretic on “free trade.”

I have an undergraduate degree in economics and an MBA in finance. I grew up in a small-business family and have had a business career. Nevertheless, I firmly believe that what I learned about free trade is largely wrong and that what is called “free trade” is more like a “free raid.”

Faulty Assumptions about ‘Free Trade’

  1. Consumers and the economy inevitably gain from the lower prices that result from the specialization that international trade allows.
  2. Businesses and citizens can rapidly adjust to the resulting dislocations that it creates.
  3. We will start a catastrophic trade war by protesting unfair trade practices.
  4. Trade will encourage totalitarian countries to behave better.
  5. Most products are “commodities.” That is, they are indistinguishable from each other, so they can be produced anywhere.
  6. We are taking care of national security issues.
  7. We need to hire foreigners extensively because Americans won’t do many jobs.

Argument No. 1 provides the standard justification for trade. This is based on the theory of “comparative advantage,” which states that two countries will benefit from the specialization that trade allows.

However, let us imagine that a hypothetical coffee pot company, “Capable Coffee Pots,” is selling its coffee pots in America at $50 apiece. It is just breaking even, because $50 is the cost of production and it can’t raise the price because of intense competition. The owner decides that if she moves the company to “Nation X,” she can offer it for $30 and still make a profit.

American consumers would now pay $20 less per unit ($30 instead of $50), but America would lose the full $50 paid domestically for labor and materials, which would be transferred to Nation X. If there are a million sales at the new price, the consumer savings of $20 million would be reduced by a $50 million loss to the domestic economy, for a net loss of $30 million. It, therefore, follows that a nation’s financial loss due to the trade-related reduction of jobs and material expenditures within its borders will normally exceed consumer gains from lower prices.

The standard response from economists has been argument No. 2, the notion of quick adjustment. This is false, as it may require decades to adjust to economic change. Some factories will close permanently and some people will be unemployable because they have no relevant experience or education. One only has to look at the loss of enormous numbers of manufacturing jobs. While some of this loss is due to computerized automation, many of these jobs have simply been transferred to other countries.

Argument No. 3, that we will start a tariff trade war, is nonsense. We are already in a trade war that we are losing badly. In addition to its unfairly high tariffs, Europe has “value added” taxes, which add charges at every stage of manufacturing production. However, these are subtracted out when their goods are sent to us, giving them an unfair advantage.

In addition, we largely support wealthy European nations who contribute little to the NATO alliance.

As to the claims that the Smoot-Hawley tariff caused the Depression, I am skeptical, as trade was only a small part of our economy and many other factors (whose relevance are still debated today) undoubtedly played a role.

Argument No. 4, that trade will lead to responsible behavior, is provably false. China was admitted to the World Trade Organization (WTO) in 2001, but continues to steal our technology and intellectual property, and produces most of the world’s counterfeit products.

The Epoch Times has been extensively covering Chinese trade issues, including substandard working conditions and currency manipulation, so I refer readers to its articles. There is no reason to believe that technological advancement will modify its behavior: Some of the cruelest societies in history, such as Nazi Germany and Rome, were technologically advanced.

In response to argument No. 5: Most products are not commodities. Catastrophic consequences can result when food and drugs have dangerous unknown additives, or critical parts for aircraft, surgical implants, and infrastructure that appear normal fail, or when vital electronic devices are loaded with malicious software.

As for argument No. 6, since a full and open analysis of trade-related national security issues would reduce profits, existing trade safeguards must be purposefully ineffective. As one illustration, in 2010, the Committee on Foreign Investment in the United States, (CFIUS), authorized the “Uranium One” deal that transferred control of 20 percent of our uranium to Russia.

Finally, the problem with argument No. 7 is that Americans will, in fact, do virtually all jobs. In most major job categories where there are large number of noncitizens, such as construction work, cleaning, and taxicab driving, the majority of jobs are held by American citizens. If there is a shortage, raising wages will increase the supply.

There are not only adequate numbers of Americans available for technology jobs, there is substantial unemployment. Employment visas such as the H1-B1 visa were intended to provide for shortages of domestic talent; instead, they have become a way to avoid paying American technical people market wages.

Businesses are employing foreigners through a process I call “salary charade”—paying middle-level wages for upper-level jobs. One of many confirming indications is the number of people who must train their replacements, who therefore must have the requisite skills! There is no way to reliably monitor this practice, even if government bureaucrats and the two political parties had any interest.

By the way, foreigners identified as geniuses are legitimately covered under the “O” visa.

The Big Picture

Here is my synthesis of the above issues.

The notion that issues of international trade can be reduced to poorly defined platitudes such as “free trade,” “trade wars,” and “protectionism” is ludicrous. Stating that one would like a world of free trade, safe products, and respect for intellectual property is like saying one wants a pill that cures cancer—how do we get there? The analysis must be realistic, not simplistic.

Overwhelmingly, other countries need our enormous markets and often our military might. They buy much less from us than we do from them—after all, this is what we mean by the term “trade deficit.” Accordingly, the risk incurred as a result of asserting our interests is minimal. Even if they bluff in the short term, our gains will exceed the costs many times over. The United States is the proverbial elephant, who, while normally a peaceful vegetarian, can easily overwhelm any other creature.

Trade is no different than other business and political relationships that inevitably require negotiations. For example, if there were never any labor strikes—which cause a short-term loss of income—overall wages would be lower.

Despite the recent reduction in the unemployment rate, there is a continuing economic squeeze on our middle class, which carries a high level of debt.

We are only asking for balance in our economic and military relationships, so we have a moral case as well. It is in the interests of other nations to stand on their own two feet, and it is insulting to them to assume that they can’t. My proposed solutions, outlined next, would therefore succeed.

My Solutions

Here are my six proposals:

  • The Defense Department and the federal health services would have the final say on all trade deals. They would be charged with reducing our dependence on other nations for our defense, technological and medical needs. We don’t want to be dependent on other nations, including European countries that are often at odds with us.
  • Reliance on international trade courts should be reduced in favor of bilateral agreements that are fair and reciprocal. These courts favor our trade adversaries at our expense and undermine our sovereignty. Furthermore, the decisions can be easily evaded—for example, incorporating an offending company under a new name.
  • Since most infractions committed by our trading “partners” can’t be enforced, a general tariff would be imposed on each country, based on our assessment of its overall trade practices and its commitment to peace. This tariff would perform the same evaluation function as a person’s salary in reverse—more productive behavior would mean a lower general tariff. It could be adjusted upward or downward on a regular basis as appropriate, but mostly upward in the short term.
  • Each country should be subject to an appropriate minimum purchase level of our goods.
  • We can transfer more of our trade activity from China to India, a vibrant democracy with 1.2 billion people.
  • My proposal for technology jobs would be to add an annual, cumulative surcharge, payable to the government, on each job filled by noncitizens. For example, an annual 4 percent surcharge would result in a 20 percent surcharge after five years, meaning a job paying $80,000 would cost the employer $96,000. This approach would reduce the ability to circumvent the system, while allowing the employers (many of whom are billionaires) adequate time to adjust.

I hope the reader has found this article valuable.

Arthur Wiegenfeld is an independent investor in New York City. He has training in economics, finance, physics, and computer simulation. Comments to artsdy@gmail.com

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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