Democrats: We Don’t Understand Free Trade
After American Madness’ veer to the left yesterday, I felt a little rebalancing was in order. As the only registered Republican on the masthead (I believe), it’s nice to see how the other side is thinking. Believe it or not, when I’m not thinking about money (GREED!), and corporations, and my investments, and war, and guns and not believing in luck, and the best way to pull on my bootstraps, I like to read. I even read the New York Times sometimes, even though my vast right wing masters at Fox News say I shouldn’t. And we all know I only do what I’m told by Fox News.
Today, I read in the Financial Times that Canada is pissed off at us because a couple of Democratic gas bags believe populism and protectionism is the surest path to economic glory. Based on the loud rhetoric, trade has taken jobs from hard working Americans (read: Ohioans) and given them to not-so-hardworking foreigners. The biggest target of their wrath is the evil North American Free Trade Agreement (NAFTA). You know, the free trade agreement signed between Mexico, the US and Canada by one head of the Billary duo.
Both Clinton and Obama have vowed to revisit and renegotiate NAFTA once the drape measuring is done and they assume their seat on the Oval Office throne. Obama has said he “would immediately call the president of Mexico and the president of Canada (hey Barack: Canada doesn’t have a president, it has a prime minister) to try and amend NAFTA, because I think that we can get labor agreements in that agreement right now.”
And to think, he is the level-headed one. “We will opt out of NAFTA unless we renegotiate it and we renegotiate on terms favorable to all Americans,” sayeth Clinton.
All of this based on misconceptions and false statistics about the impact of NAFTA on the American economy. The truth is that since its signing in 1993 (and implementation in 1994), the United States has a net creation of jobs, directly related to the elimination of artificial trade barriers between the three trading partners. American manufactures realized they could send widget assembly to Mexico, which would do more low-level, non-skill related tasks and then send component parts back to the US manufacture for more skilled labor to develop into the final product. Thus, as widget assembly type jobs come open they are no longer staffed, because they are unnecessary. At the same time, a new market for our now more efficiently produced widget machines opens up in Canada, which gets a better quality product at a lower price. US manufactures now have more revenue streams, and spend resources to develop more technical (and higher paying) jobs toward the end production. Mexico gets jobs (a win) and the US gets jobs (a win) and Canada gets better goods (a win). So what’s the problem?
The problem is organized labor, whose sole purposed in the 21st century is to create obstructions to growth and innovation. Organized labor sees any free trade agreement as an erosion of their influence on the workforce, and ostensibly an erosion on their influence on the United States political scene. Thus, jobs that are obsolete, or inefficient must be kept for the sake of keeping the job. And those jobs must pay a “living wage,” and they must come with retirement benefits, and health care is mandatory, and the job can never be eliminated.
So what happens? Companies like GM, and Ford keep lots of inefficient, laborious workers on their payrolls, and provide all of those benefits which the union dictates. But those benefits are not provided in a vacuum. Rather, the cost is passed on to the consumer, through the price of the product. So gradually, American made products become too expensive for the American consumer, who turn en masse to the cheaper, more reliable imports from countries such as Japan. And in the case of vehicle production, Japanese cars are largely made in the US, with largely non-unionized workforces, thanks to trade agreements.
Yet to say all of that out loud is political suicide for anyone wishing to represent the Democrats as a presidential nominee, so every four years about this time, we get a lot of gassing about things such as “working families,” and “middle class jobs,” and all those folks that Republicans don’t care about. Apparently, the candidate of change can only mean changing the way we protect union workers.
This year, Canada is not taking this populist, union-pandering rhetoric very well, nor should they. For the uninitiated, Canada is the United States #1 (numero uno for the other NAFTA signatory) foreign oil supplier. 1.8 million barrels a day comes coursing through our veins to power the American economic machine. In total, that 1.8 million barrels amounts to more than 10% of US consumption.
Well, if NAFTA is renegotiated, and Canadian oil is taxed, what is the incentive to continue to supply it to us, when other countries, with which Canada has, or will have free trade agreements in place, start placing their bids? See Canada, that leftist utopia to the north with the (free!) health care, and the no war mongering, and clean air, and trees, believes more in selling their resources to the bidders paying the best market rate. Thus, there is suddenly a very competitive bid made by the Chinese. China is a country you may have heard of, which is growing rapidly and has a suddenly unquenchable thirst of the black stuff. (Growing in large part because they supply American consumers with cheap shit, because it is cheaper to make it in China and really, who wants to continue to make not-so-cheap shit in the US?)
And that is just one example. The impact on American businesses would be even greater. Trying to calm the diplomatic roe the two Democrats have caused with our very peaceful neighbor to the north, President Bush said, “One statistic I think people need to know is there’s roughly $380 billion worth of goods we ship to our NAFTA partners on an annual basis…There’s a lot of farmers and businesses, large and small, who are benefiting from having a market in our neighborhood.”
Canada’s trade minister, David Emerson, puts another number on it. “It’s our assessment that more than seven million job in the US depend on Canada-US free trade.”
Seven million is a very large number. It is larger than any one trade union membership. Democrats should be careful with their rhetoric, or we may just throw the baby out with the (Canadian) bathwater.
February 29th, 2008 at
“As the only registered Republican on the masthead (I believe)”
Heheh. Don’t be so sure
February 29th, 2008 at
First there’s the question of whether we want to encourage American production of goods and services that can be obtained more cheaply abroad. That is, are those jobs worth saving? I think from a business/consumer perspective, saving them as a fetish item is cute (kind of like a rich father supporting his daughter’s acting habit), but not very sustainable.
However, when we consider the negative externalities of cheaper foreign goods, their cheapness comes into question. Are Chinese goods (toys, drugs, food) cheaper when they routinely cause injury or fail to reach minimum standards?
No…there’s a cost we pay and that cost needs to be factored into their cheapness. If they are still cheaper given the Fight Club formula (cost savings minus lawsuits and harm to brand reputation of U.S. companies like Mattel) then we sell our souls for cheaper goods, plain and simple.
Now, at some point it makes sense to sell out, but if the cost savings is really slim (as I expect it is), we might consider subsidizing quality production for 5 cents a unit versus praying at the alter of cheap labor. But the negative externalities don’t stop with consumer impact on the purchaser. What about the impact on the producer?
Certainly, the U.S. doesn’t pay the price of polluted air & streams, starving rural communities, human rights abuses and criminally negligent workplace safety standards in China and India DIRECTLY, but we do pay. The whole human race pays.
And maybe it’s worth 5 cents a unit to support the production of goods in places where workers aren’t treated like crap. And maybe one of those places is the United States.
February 29th, 2008 at
Two points. Consumers will price in the risk of buying goods from substandard manufacturing methods. If consumers have no faith in potentially tainted good, the consumers will seek goods from a different source, or seek alternative goods. Painted toys, dog food, mouthwash are not exclusively made in China, consumers will seek substitutes (amazingly, the world didn’t tilt on its axis when Thomas the Tank Engine was recalled). Today, consumers are privy to more information than before, ergo, the consumer is able to make greater choices about goods, because our government has opened up more trade markets from which to source more goods. Saying it is worth it to pay a nominal subsidiary to “guarantee” safety (which is a joke, look at spinach and meat in this country) means less opportunity for competing products because of protectionist practices of the government.
Which leads to my second point. The problem with subsidiaries is the inhibition of the betterment of people’s lives that move from an agrarian (third world) to a services (first world) based society. Human rights abuses will occur as part of this transition, because the infrastructure is not in place for the protection of the weakest citizens. It happened in England during the industrial revolution (Thank you, sir, can I have some more). It happened in the United States during the first quarter of the 20th century. (Upton Sinclair made a name for himself pointing it out). And now it is happening in places like China and India.
But what else is happening? A middle class is forming. The consumer is become empowered in these places and previous socialistic systems (which are ultimately more repressive to their population than a capitalistic one) begin to crumble as the sudden infusion of domestic wealth seeks out investment opportunities. One generation becomes better off than the previous one because more opportunities are created for employment and education. Through the opening of previously closed trade routes, our government does more to help people previously mired in a bleak existence.
However, if our government continues to subsidize domestic goods to support a domestic bureaucracy, goods from developing nations are not allowed to infiltrate our system and make a market here. Thus, the development of the lower class to middle class in other nations is stunted, and people continue to live a hand-to-mouth existence.
If we want to help the nations of Africa, Central America and Southeast Asia, the way forward is not with more government hand outs and IMF loans. The way forward is the elimination of trade barriers in the US and globally to create a free market for goods produced in these nations. Only then will the previously impoverished citizens be able to move away from their subsistence way of life.
I advocate the immediate and complete eliminate of all artificial trade barriers. I advocate our leaders use trade to encourage development and trade to encourage advances in human rights. Allow previously impoverished people globally the audacity of hope through an opportunity that has previously been denied to them: the opportunity to make a market.
And yet, Hillary and Barack want to increase protectionism in this country, hurting the prospects for growth in the US and abroad. And this is supposed to inspire hope?
February 29th, 2008 at
I don’t disagree that industrial revolutions are messy, but it’s harder to tolerate the messiness now that we know there are alternatives. There is no need for people to be butchered in the cause of achieving exceptional annualized GDP growth.
It’s common sense that we can feed everyone in the world right now at current or sub-current production levels. Everything else isn’t about meeting necessities, but about opening markets and creating consumers for products, most of which they don’t want or need.
That’s where the exported notion of quality of life/middle class/1st world comes in. Any acknowledgment that the (never mentioned) 2nd World produces enough to meet the needs of people is crossed off.
So, we have reached the other end of the bell curve and see diminishing returns on this amazing growth. Cheap goods are great, but not when they poison us.
The argument that we have full transparency is charitable. With a lot of research, you and I can decide not to buy from Mattel or others, but most of this purchasing isn’t done on the personal level, but at the corporate level.
And of the consumer purchases, I’m not certain it’s reasonable to expect people to do that much work before they buy food, toys, furniture, etc. American citizens, perhaps naively, expect the food and drug administration and other government organs to protect them.
These organs have failed in recent years because they have been starved by people in the current administration who believe that the market makes good decisions. And the market does, over time. Over an extended series, coin flips fall distribute heads/tails evenly. But in the short term, I do not trust my health and safety to a coin flip, nor do I trust the transparency of businesses that thrive in opacity.
I expect my government to use the powers we give it to help us. Very few product ingredients are transparent. There is no way to know where all components have been mixed and under what conditions and at what cost unless I do a tremendous amount of research.
I expect my government to do that research and to create minimal standards, and they do. They don’t always enforce them, but I want them to. At least in a global economy, the more sensible European Union is willing to step in and ban certain toxic chemical compounds (for instance) and thereby force producers to alter their processes to meet minimal standards, not just minimal costs. Luckily, we get the benefit of this foreign regulation, because producers will adjust their minimal standards to the more stringent EU rules due to its purchasing power.
Even if all information were transparent, government exists to protect the weakest among us, including the dumbest of us. And I don’t expect dumb people to spend 20 minutes on Google trying to figure out which toys won’t poison their three year olds. The markets can decide which toys it LIKES best, but shouldn’t have to DECODE which toys are safest. Big difference. When it comes to basic health and safety, the markets are cold, efficient and not humane.
I’m all for other nations freely trading with us. It’s a dream, though. We find all kinds of reasons to keep Africa from exporting products to us. We tariff, we say they’re using genetically modified seeds (good luck finding heirloom seeds for less than twice the base cost!), or other doggerel.
Luckily, consumers have already shown a willingness to buy some of these products when they are marketed as being helpful to the third world (or organic, etc.), which is basically a form of charity, but a more effective form of charity, as you note, than World Bank loans that (for all I know) may finance child armies and basic graft.
A President can have a dramatic impact on this process by ensuring basic standards are met by foreign producers, and their moral leadership can help place a value on goods and services obtained reasonably, at fair price, and with the safety, health and well-being of both the worker and the consumer in mind.
March 1st, 2008 at
Don’t feel like you are alone Eric. I’m a fiscally conservative independent. I like free trade and limited government, but many of the Republicans’ religious and moral convictions skeeve me out.
March 1st, 2008 at
Goodness. He’s certainly not alone. I also believe in free trade, but we’ve got to hone in on what is meant by “free.”I don’t like the idea that free means accepting products regardless of how they were made and at whatever impact to workers. The basic disagreement, if there is one, is whether it’s necessary or advisable to allow human rights abuses as part of the industrialization process of the counties supplying the cheap goods that we want to buy.
I argue that we don’t need to make this trade off. That requiring basic workplace standards AND buying foreign products can actually help both sides: we get cheaper goods and the workers supplying them improve their quality of life. What I’m against is a race to the bottom on price without any consideration of the human toll.
In short, free trade needs to promote actually freedom, not just freedom of choice for the consumer. How would you feel know that saving 20% on thousands of items meant that many people had to work fifteen-hour days in sweatshops? Well, it’s not a hypothetical.
What’s more, protecting the basic rights of the worker levels the field, allowing us to compete on price. The U.S. isn’t actually terribly anti-competitive. Why else would the Japanese manufacture cars here? The notion that our choice is between decent wages and workplaces versus foreign sweatshops is false. But make sure that the foreign shop is run up to snuff, and then the U.S. can compete on price and quality.
In short, I’m against protectionism but for ensuring our way of life is promoted through trade. We don’t need cheap goods so badly that we should trade our souls for them.
March 3rd, 2008 at
My thinking is if we utterly opened our trade policies it would be a matter of months before every single U.S. factory shut down and we were importing absolutely everything. We pretty much are already, aren’t we?
Even in something as quintessentially American as the L.L. Bean catalogue, almost every single item says “Imported” next to it. The ones that don’t say Imported say something like “Made with U.S. Wool assembled abroad” or something like that. Flip over every calculator, pair of scissors, item of clothing, whatever you own; I’m sure 90% of everything you own was manufactured abroad.
And why not? In a free market, it makes sense to buy something for cheaper and still sell it for more. If I can import rubber bouncy balls from China at $.20 per dozen and sell them for $1 a peice, that sure beats making them myself for $.50 a peice and selling them at $1 a peice, right? Well the reason it costs so much to make anything in this country is simple: Healthcare. If Healthcare was gauranteed by the U.S. govt, as it is in virtually EVERY other developed country, maybe the U.S. wouldn’t be such an expensive place to manufacture goods.
But that’s not giong to happen any time soon, so the U.S. is moving toward a “Service Economy” whatever in the HELL that means….which as far as I know means not manufacturing based. So we are going to require a better skilled workforce capable of adapting to the new “Services Based” economy. That would be great, if anybody could afford an education in this country without leveraging themselves into indentured servitude for their natural born life.
Personally, I would love to see either the government take care of a.) Education, b.) Healthcare, or (GOD FORBID) c.) both Education and Healthcare. Also, give out subsidies, give out tax breaks, do whatever it takes to get manufacturing back to the U.S. so even if you don’t have a college degree you can earn a living wage (Yes, a “living wage”) and support a family. Our expectations are going to have to come down a bit…every American might not be able to own a two storey house and have a Ford and a Chevy in the garage…but there has to be a middle ground between absolutely restricting trade and living in a service economy where you are either Rich or Poor, with nothing in between…
This is the greatest country in the world…we’ve got diverse and plentiful natural resources, a diverse and vigorous people, a well-structured government friendly to business. There is no reason why we can’t figure this problem out so that the American people don’t keep getting shafted, and so we can be, once again, an example to other nations.
March 4th, 2008 at
Grant brings up some great points and I’ll address two of them: health care and education. Regarding the cost of health care, before I went on my crazy libertarian tirade about a world free of tariffs, I wrote in my first post about the negative influence of the union on trade. One reason the union is so expensive is because of the guaranteeing of health care to its members. Now, what makes anyone think that if the government were to suddenly take over all health care in the US, health care would somehow be cheaper?
I’ll post seperately (and soon) about why the US government has zero business providing guarantees to health care, but the question I pose is why does the government taking over that obligation from the union suddenly make health care cost neutral?
The reality is the government would need to pass along the cost of health care to the consumer (much like the union mandates do today). This comes in the form of higher corporate tax rates. Currently, the US has a counterproductive high corporate tax rate of 35%. That will likely increase to afford health care coverage to all.
However, we live in a globalized world. Higher corporate tax rates will have a material impact on where companies decided to set up shop. Why set up a business in the US, and get taxed at 35% when you can set one up in say, Ireland, and have a taxation sub 20%? Or Slovakia, or Romania, or Poland? Those nations all have corporate tax rates lower than the US, and with the expansion of the EU, now have the logistics and labor to competively sell goods to a global marketplace.
Which is one reason NAFTA is so good for the US, it gives us built in trade partners for all the stuff we make here in the US. Do the Democrats actually believe they can renegotiate the terms of NAFTA to protect jobs in the US and still provide healthy export markets? To the contrary, Canada will suddenly look to establish free trade agreements with EU members, and the US will be priced out of the marketplace. All in the name of job protection.
Regarding education, free trade and the migration of manufacturing jobs does not mean the end of good career opportunities for people that do not want to pursue a college education. There are some jobs which can never be sent to another country. As we import more goods, people are needed to work as longshoremen, crane operators, port inspection authorities, railway operators, truck drivers, expediters and other jobs of their ilk related to logistics. Further, as we build and expand our infrastructure to support more import related activities, opportunities in construction and construction management make themselves available.
To say nothing of the fact that free trade creates more opportunities than it eliminates. The biggest threat to manufacturing jobs in Ohio isn’t Mexico, it is Texas. Automakers don’t want to set up a new plant in Ohio because they will be hamstrung with prohibitely high costs associated with union labor (to say nothing of the fact that Ohio’s state income tax is burdensome). Meanwhile, Texas is a right to work state, so manufacturing jobs are created. Why wouldn’t a car manufacturer, looking to build a new plant, simply set up shop in Mexico? Because the cost benefit analysis does not immediately send all labor work to the lowest cost provider. Rather, components are sent to Mexico and in return we can concentrate on training a high skilled workforce to operate more sophisticated machinery. Manufacturing jobs may be fleeing Ohio, but they aren’t leaving the US.
Meanwhile, new opportunities become available which were previously non-existent. Science has advanced to the point where we can efficiently turn corn into ethanol to power vehicles. Warm bodies are needed to man plants going up in places such as Iowa and Nebraska.
It must be remembered that governments only create taxes and laws. They do not create jobs. That is why the Democrats anti-trade rhetoric is so damning.