T Nation

Is Free Trade Immoral?

Opinion article from The Wall Street Journel…

Trade is a “moral issue,” declares Senator John Edwards. The Democratic Presidential candidate is in high dudgeon that “bad trade agreements,” by which he means those signed by Bill Clinton, are stealing jobs away from American workers.

It should be no surprise by now that his main competitor, Senator John Kerry, has responded by saying, “Me too.” Just as Mr. Kerry parroted the rhetoric of Howard Dean on Iraq, the man who voted for Nafta now claims there is no difference between him and Mr. Edwards on trade. This scion of a Boston Brahmin family that made its fortune from the China trade is now accusing “Benedict Arnold companies and CEOs” of exporting American jobs.

So the Democrats’ main economic message for 2004 is that free trade is immoral and unpatriotic. Voters need to appreciate how rare and remarkable this is. The last Democrat to make this case was Walter Mondale in 1984, while the last candidate to win on a protectionist platform was Republican Herbert Hoover in 1928.

This year the two Democrats argue that trade pacts that don’t require other countries to adopt First World labor and environment standards either force the U.S. to lower its standards, as Mr. Edwards claims, or create an unlevel playing field on which American workers cannot compete, as Mr. Kerry says. Both want to close tax “loopholes” that supposedly encourage companies to move jobs overseas.

We called the two campaigns to ask which labor and environmental standards should be forced on the rest of the world, but they wouldn’t be specific. Nor would they elaborate on what loopholes in the tax code they want to close. Perhaps that is a good sign; the vaguer the fulminations against free trade, the easier they would be to repudiate later on, just as Mr. Clinton flip-flopped on China trade in his first year in office.

The rhetoric is still worrying, however. Mixing morality and economics is a tricky business. As Adam Smith wrote, rather than relying on the benevolence of the baker to provide us our bread, we trust to his self-interest; the transaction benefits both parties. So it also is with trade, but the mistaken idea that selling is more virtuous than buying when the exchange is with foreigners continues to have mass appeal.

When politicians who know better pander to this prejudice, the risk of trade wars increases and asset markets decline to account for that risk. If the Democrats campaign as protectionists through November, one of the first consequences of this “morality” could be the destruction of a large chunk of American wealth.

One might also ask the Democrats, is it moral for a government to deprive Americans of their freedom to enhance their standard of living by buying foreign goods and services? Or is it moral to stop foreign people from working their way out of poverty by closing access to the U.S. market? The moral imperative of trade looked very different to John F. Kennedy, who proposed an Alliance for Progress to open the U.S. to goods from Latin America because reducing poverty saves lives.

It is also hardly moral for the U.S. to foist its own policies on other democracies as a precondition for trade. Mr. Edwards complains that past trade deals allow companies to profit by “paying people pennies a day to work in disgusting conditions.” Even if this is true in some places, the legacy of trade is that it raises living standards over time. In any case even the world’s only superpower doesn’t have the right to micromanage the developing world’s economic policies, and it would be bitterly resented if it tried. Isn’t that “unilateralism”?

We doubt either Democrat would be able to rewrite past trade agreements. More worrying is that they’d stop the current momentum for new trade agreements, with significant damage to the U.S. economy. Notwithstanding the hand-wringing over Indian call centers, America is a world leader and innovator in services, and so both Presidents Bush and Clinton have pushed to liberalize trade in services. Freer trade would give some countries openings to export lower-level services to the U.S., reducing costs for consumers. But American workers would also benefit from new, higher-paying jobs as local service companies expand to serve a global market.

If the Democrats really want to call free-traders immoral, perhaps we should look at the rights and wrongs of employment in America. A National Association of Manufacturers study two months ago found that the primary competitive challenge facing manufacturers was not competition from cheaper foreign workers, but the extra cost of doing business in the U.S.

The costs contributing to the loss of jobs were high corporate tax rates, mandated employee benefits, tort litigation, regulatory compliance and energy. In other words, the Democrats’ agenda of higher taxes, more regulation and coddling the tort lobby makes them the biggest sinners of all.

The American worker must really be asking what is going on? All the blue-collar jobs are (or already have) being exported to countries like China. All the white-collar jobs are being exported to countries like India. And now immigrants from countries like Mexico are being imported to take any job that is nailed down and cannot be exported.

As part of Bush’s new immigration policy there is a clause that says employers can imports workers from any part of the world as long as they can’t find an American to do the job (the old farm labour argument). All an employer has to do is offer such a low wage that no American will take the job. This would place massive downward pressure on wages. This would extend to all areas of the economy (not just farm workers or other low paid jobs but accounts, doctors, engineers etc).

The above deliver cheaper production costs to the owners of capital (i.e. the fortune 500 types) but everyone else gets fucked (either no job or lower wage job). Makes you wonder who really has the ear of government. This is unless you believe Alan Greenspan ?that job loss is a sign of a more efficient American economy? paraphrased (no I am not making this up).

Having said that protectionism would be a disaster because other countries would retaliate with similar measures. When the depression hit the US government and other countries followed similar measures. These measure made the depression much worse and much longer than need be.

So what is the real cause of the de-industrialisation of America and what is its solution? The answer is in your wallets the US Dollar. On a superficial level the reason why East Asian nations have a trade advantage (as such the reason American jobs are migrating to East Asia) is that the East Asian nations largely have their currencies pegged (i.e. do not freely float) to the US dollar. But they are pegged below what they would be if they were allowed to float. As such East Asian production costs are very cheap to America. This is why jobs are migrating to East Asia. If the East Asian currencies were allowed to float they would likely rise against the US Dollar since these nations run large surpluses with America and have higher interest rate in general (US interest rates about 1% China interest rates about 5% where are you going to deposit your money?). When their currencies rise largely their production cost would rise to and thus in time there would be less incentive to move production from America to East Asia. If America wants to remain an industrial nation it needs to break these currency pegs!

Also the US Dollar is a Fiat currency (like all other national currencies in the world at present). Fiat means that it is created by decree (i.e. out of the printing press, bank entry or basically out of thin air). Fiat currencies as opposed to commodity currencies (e.g. gold, silver, rum, tobacco etc) cause untold problems for the average citizen while delivering untold riches to those in power (i.e. governments, banks central or otherwise). But this is another topic.

From the Wall Street Journal

Are they going to be arguing for their own interests (i.e. bigger corporate profits and the protection of their US Dollar denominated fortunes) or the well being of the American worker?

Either the US Dollar can fall making the American economy more competitive or the wages of the American worker can fall making the American economy more competitive.

The strong US Dollar policy of Clinton and Rubin (treasury department via Wall Street banks) caused a lot of these problems.

Do you think that the Wall Streeter who have built fortunes denominated in US Dollars really want the US Dollar to decline and thus their relative fortunes? Looks like the American worker has to suffer lower wages and a standard of living.

If you think that exchange rates are not important then why are most other countries pursuing weak “dollar” policies to help their economies.

http://www.gold-eagle.com/editorials_04/benson030104.html

About sums it up. The form of money is the main economic problem in the world. At present all money is Fiat. It causes all other sorts of problems. Long term wealth, peace and prosperity will only be created if there is sound money (e.g. gold or silver or oil based) again.

Oh man, so much of my thesis to copy and paste in response to this…will do later after cardio

It’s a pretty well-established fact that China keeps its currency extremely low. Their argument seems to be that they can’t compete in the international marketplace if they were to have a floating exchange rate (I think it’s currently fixed at 8.3 yuan(?):1 dollar).

While you could, in theory, force China to adopt a dirty float and leave them with some control, that just won’t happen. Maybe Clinton probably had the best shot when China was trying to get MFN status, I don’t know I was more concerned with getting a prom date than economics back then. Arguing that the artificially low exchange rate was predatory to domestic industry as a whole probably wouldn’t stand up in front of the WTO. As much as I’d like to see more nations getting rid of the fixed x-rate, I don’t see it happening in a lot of cases, it’s just too lucarative if you’re cranking out cheap products with very few inputs besides labor, like soccer balls. One of my classmates is trying to calculate what China’s x-rate should be right now, and is finding their government’s published data pretty bad.

Jobs going overseas, bad politically but economically generally ok. People (generally) only care about how much they pay for good and services, and foreign labor allows domestic companies to make greater profits, (in theory) lowering prices, and leading to greater product innovation. That said, if the trickle-down effect that some economists support, works, it would by neccesity take years before consumers see the benefits.

But say Kerry/Edwards get elected, and try to push through all those policies. Chances are it wouldn’t happen cause the lobbyists would throw piles of money at Congress. Computers and all their hard/software companies, clothes manufacturers (SE Asia), phone companies (India), would lose tons of money if those trade policies (environmental, labor rec’s) were enacted. Howard Dean endorsed a similar position last year sometime but moved away from it pretty quietly.

All in all, I don’t see an end to China’s fixed currency unless they have an economic disaster, which given their productive resources would be the bubonic plague. And domestic manufacturers will keep going abroad if it’s cheaper. You could argue that this would push the world economy much further into much deeper comparative advantage, with the workforce of a nation being directed to a handful of lines of production.

So…how does going back to the Bretton Wood system fix this? It gives the currency greater security, but I’m curious how decreasing capital flows by curtailing the money supply would bring jobs back to the US.

Low consumer prices are great, except when you go from an $18 and hour manufacturing or other skilled trade job to an $8 an hour pizza delivery job because that’s all that’s left. That $20 cheaper price on shoes really makes no difference at that point.

What we are doing is exporting our first world standard of living to second world countries. It improves the standard of living there, but it reduces it here. How gracious of us to sacrifice like that. My only bitch about that is the people that make the decisons aren’t sacrificing shit and the rest of us are doing it against our will.

If you accept a Fiat currency system the only way it work somewhat is if there are floating exchange rates.

Either the US breaks the currency pegs which are causing its industry to migrate or its waits 10, 20 years when foreign nations de-peg their currency themselves (by that time America will no longer be an industrial nation). When the currencies are de-pegged it is going to cause massive pain. But IMHO it would be better to do it now while America still has some industrial base left.

The arguments put forward to support the de-industrialization of America are completely vacuous. Cheaper production costs at the expense of American living standards? A more efficient economy that needs less and less workers? America owes the rest of the world a living?

The US (or for that matter any other country) cannot redeem its currencies in gold. The Breton Woods system where only governments can redeem or a true gold standard where private citizen can redeem would not work. Trying to redeem at about current market value (i.e. 400 to 500 per ounce XAU/USD) you would sent the government broke as its tries to cover its obligations. Or if you set the rate at a feasible level (i.e. 10,000 or 20,000 per ounce XAU/USD) you would cause massive dislocation and inflation.

The best solution is a true floating currency system in the short term. Long term there needs to be a gradual move back to a free banking system. People need to be able to use any form of money they desire. History has proven time and time again that this is gold. A gradual relaxation of legal tender laws would be the best means to achieve this. In other words the government needs to get out of the money business.

None of this will happen of course since it is not in the interests of the powers that be.

In amongst this currency turmoil to come there will be calls for world monetary union. This is the worst possible outcome.

but I’m curious how decreasing capital flows by curtailing the money supply would bring jobs back to the US.

I am guessing by this that you are a classical or neo-classical economist?

A better question to ponder is this: Alan Greenspan has caused an explosive growth in the money supply (i.e. monetary inflation) during his tenure and yet jobs are leaving America is the millions. Why?

It is pretty simple stuff really. Where are you going to get a return on your capital? The money supply is large in America and hence the cost of money (i.e. interest rates) are low. Thus capital is not getting a return in America and as such it is seeking a return overseas. Capital includes both financial capital and physical capital (i.e. factories etc). As such if the return in America was better capital (both financial and physical) should flow back to America. N.B. This is real return taking into account inflation.

IMHO both classical and Keynesian economics are bullshit. Both are built on the assumption that either the central bank (classical) or the government (Keynesian) can solve economic problems. Neither can.

IMHO central banks are truly dangerous and the root cause of many problems.

Pretty much the response I expected (i.e. no interest at all).

The East Asians countries peg their currencies to the US buying US Dollars and US treasuries. US treasuries are US government debt.

Here is something to think about:

http://www.gold-eagle.com/editorials_04/dsmith030304.html

I have not checked his numbers but if they are correct it is a frighting position. By 2011 the debt servicing of the US government will equal total US government revenue. In other words all of America’s taxes will be paid to US Treasury holders.

Can you begin to work out the consequences of this?

Without the currency pegs the US government would have trouble financing its deficit (as its largest buyer of government debt i.e. Asian central banks would be gone). Thus it would force fiscal discipline (i.e. taxes and expenditures would need to be similar). Unless the debt is monetraized by the federal reserve, hyper-inflation in this case.

Without the currency pegs the US Dollar would fall against the East Asian currencies thus forcing current account discipline (i.e imports would become more expensive, exports would become cheaper).

The time is now!

Damn. You people must do this for a living. In response to Steely, I must quote one of the most influential economists in recent history, Milton Friedman:

A fallacy seldom contradicted is that exports are good and imports are bad. The truth is very different. We cannot eat, wear or enjoy the goods that we send abroad. We eat bananas from Central America, wear Italian shoes, drive German automobiles, and enjoy programs we see on our Japanese TV set. Our gain from foreign trade is what we import. Exports are the price we pay for imports.

That’s all for now. I can’t think for myself right now.

One of the problems with the free trade whiners (those that don’t like free trade) is that they are of the assumption that if trade were less free, fewer jobs would have been exported. And this just isn’t true. The reason jobs are exported is for cheaper labor. If a person is willing to do the job at half price, he is more likely to get the job.

For trade tax to change this, it would require a very large tax.

What people don’t seem to understand is that trade is not for us to sell our shit, but for us to get the stuff (i.e. shit) we want.

Trade is a good thing. People try to make it look like it is destroying America, but it isn’t. Interestingly the same people who complain about jobs lost to other countries are the same people who say we should open the boarders and make everyone an American citizen, which actually could mean fewer jobs for Americans. This is just hypocrisy.

We have a slow exportation of jobs, and this is not as bad as most think. These other countries that gain jobs also gain something else. Money for them to spend on our shit. And more power for the people. As people become wealthier in other countries, they gain more power. It becomes harder and harder to abuse workers. Many American companies have policies in place to prevent abuse of workers overseas. (Yes it still goes on, but it is becoming increasingly harder.)

Also people don’t realize that an exportation of jobs might be keeping some companies profitable. The exportation of a hundred or even a thousand jobs overseas might prevent the company from going under and resulting in ten times as many employees loosing their jobs.

Another thing to remember about trade is that the competition is good for companies. Years ago the American cars were going downhill. Suddenly they had competition from Japan, and the quality of cars has increased dramatically.

An example of lack of competition is the oil industry. I believe the oil companies have shrunk down to 4, and unfortunately they work together. They don’t have absolute control over the market of coarse, otherwise the prices would be even higher. But they are able to do things like not build more refineries, preventing the available oil from being converted to gas as easily as it could. This artificially keeps prices up. And with the old refineries breaking down, like the did recently, the price of gas is going to go higher.

Now as far as the value of the American dollar, that is also manipulated, by the US government. A lower value dollar is generally good for the US economy, but it can backfire. You don’t want a tremendously dropping dollar, and you don’t want a dollar that explodes in price compared to other currencies.

Back to jobs, the world’s unemployment rate could drop as the world economy takes over. It is not really a choice to join or not. For our economy to work, we have to be part of the world economy. It is too late to change that, and possible that we never could have.

Right now everyone is going through growing pains. People fear change. But if you look at it intelligently then you can benefit. I believe that everyone can benefit. These arguments are not new. With the industrial revolution everyone was worried that the machines would eliminate all jobs.

I remember the 1980’s where people said that the computers would result in massive unemployment because the computers were going to do all the work, and people would not be needed. Yet computers have created a phenomenal number of jobs worldwide. Testosterone exists because of them.

Each time has resulted in old jobs disappearing, but in the creation of even more jobs. This is no different. While jobs will be exported, many jobs will be created in its place. Many people have left the idea of a job behind them and have created their own jobs through self employment. And these additional jobs are not added to the government statistics, making things actually look worse then they are.

Now as far as government debt, this is no better then living on credit cards. It just is not good. It seems to make things better in the short run, but huts us in the long run. Some very simple control over the budget could change this situation. If we were able to change this, and eliminate the government debt, imagine the effect. (Not overnight of course.)

bluey, it’s not that I don’t have interest, and it’s not that I don’t agree on some of your assesments, but on some things we are so far apart I’ve been debating if it’s even worth responding.

I disagree. The low cost of capital is one of the driving forces behind the economic growth this country has achieved over the last decade. Are you trying to tell me that if it costs more to borrow, firms would invest more in America?

The cost of capital is the hurdle rate a company must achieve to invest in a project. The low cost of capital means firms are more inclined to invest. Raising this rate would destroy growth, not create it.

Are you are confusing cost of capital with cost of equity, ke=rf+B(rm-rf)?

Now if we’re talking money supply, and you’re worried that Asian investors will no longer buy t-bills at their low rates, that may be a legitamite concern and is even more of a reason to elimanate the budget deficit. But the key here is balancing the deficit. I completely disagree in contracting the money supply by going back to a gold standard to thus raise interest rates to fund the deficit. Why? That makes no sense. Keep interest rates low to spur economic growth, and get some fiscal responsibility in congress.

If anything messes up the economy, it’s not money supply, it’s the demand side by a government demanding too much money.

As for free trade and China’s pegged currency. I agree, in general, we would want to see them depegged, but not at the expense of us going to a gold standard.

Read today’s Wall Street Journel about Greenspan’s thoughts on Chinan depegging.

The reason jobs are going oversees has everything to do with prohibitive costs here, not a low cost of capital.

The answer to the question is: No.

On the whole free trade is better for the world economy and consumers. In the short term some jobs are lost yes. But the jobs lost are usually lower-end low paying job. This allows countries like the US to increase innovation and keep the better, higher paying jobs at home. As long as someone in India will do the same job as an american for 1/3 of the pay we dont have much of a choice. Keeping low-end jobs by adding tarifs, govt. subsidies, etc. only leads to inefficient industry and price inflation at home. Outsource the low-end jobs and we can focus on innovation and technology creating more jobs in the long run.

Gabe,

The current trend is for high paying technology-based jobs to be outsourced to India. India is producing academic M.Sc’s and Ph.D’s like crazy. There was just an article on MSN suggesting that in the future surgery might be exported to China, where you’d be flown overseas for your bypass.

Higher pay follows higher productivity. As was pointed out, jobs will flow toward the people who can provide them at the lowest cost per unit output, so America can retain jobs in two ways: decrease cost of production per unit output, or increase the units of output per producer (increase productivity). Imposing tariffs or trade barriers simply punishes consumers while rewarding companies and/or labor (mostly unionized labor) for maintaining uncompetitive conditions.

Forgot to expand on the fact that there are many factors other than wages that go in to the cost side of the cost per unit of output. Regulations, taxes, any transportation costs, legal costs, etc. all add to the cost side of the ledger. The U.S.A. could easily increase competitiveness by decreasing its cost per unit output by lowering those costs.

For an example, look at what we do to attract foreign capital: foreign investors generally do not have to pay U.S. capital gains taxes on their investments. This is a huge benefit that attracts foreign dollars to our markets and feeds economic expansion.

Decrease the cost of something, and more will be demanded.

many of the tech jobs going to India are also the lower end such as updating antiquated code, programming, etc. Companies that can effectively manage (not easy) a virtual workforce can keep the leadership positions at home while taking adavantage of the best minds all over the world. What is really needed is for industry and academia to shift gears in order to develop US workers more adept at managing teams and international workers.

Boston-
not to nitpick- but cost will not change demand for a product. It will change the “quantity demanded” i.e. people will buy more of a product at lower prices. But the demand curve will not change the demand curve reflects all possible demands at all possible prices.