Do you want to join a club? Maybe a reading club? I don’t know. Maybe those other people want to read things you don’t want to read. Maybe some of the people in the club want you to pay dues but will never listen to what you want? But then being in a reading club might make you a better reader and more knowledgeable – and maybe it will be fun. Hmm. Which way to go?
As we get closer
to the election this year we are going to have to wade through a lot of bologna.
Recently I was reading about the international trade plans of the two candidates. Trump is clear about “Me, Myself and I”. He has never seen a club he likes. He’s
a loner. Anything “international” seems to him to be a way to take advantage of
Americans.
Biden is not
like previous Democrats. He does not fully embrace the idea than anything “global”
is beautiful. Especially given the recent circumstances of Covid 19, he is more
mindful of jobs for Americans and he doesn’t want to support any policies that
might take jobs away from Americans. He is talking about industrial polices and
tax policies that will keep jobs in America. “Me, Myself, and I” figures prominently into both candidates plans.
It is
interesting to me how far we have come in less than a year. I used to like free trade
agreements. I used to like the idea of promoting freer trade. I liked the idea
of lots of “clubs” to join. Maybe you could call that philosophy “Us, We, and Ya’ll.
Why did I like UWY? You can pronounce it like OOWE – as in OOWE G00WE was a worm.
I liked UWY because
it seemed so logical. It seemed so intuitive. None of us make our own stuff. Okay
maybe you grow some tomatoes. But mostly what we do is learn how to do
something – call that your occupation. We earn money and we use that money to
buy squash, beer, and Impossible Burgers. You don’t, in contrast, grow all
your own food, produce your own steel, make your VW Bus, or any of that stuff.
Why do you
do that? Because we believe in the benefits of specialization. If I tried to
make my own Hawaiian shirts, they would be very ugly and probably cost me a
ton. It is better for me to spend my time trying to be a good teacher and earn
enough money to buy shirts from someone who really knows how to make shirts.
The idea of
free trade extends these intuitive notions to nations. Why try to be a jack of
all trades when you can specialize in some things, earn income, and then buy
things from others? The result is that we would have much more product that way
and at a better price.
I can hear
you singing your favorite hymn right now. What’s wrong with this simple plot?
Several things
are wrong.
First, like
any club, this international scheme means we count on our trade partners to
play by the rules. For example, they shouldn’t use trade policy as a big stick to
gain other advantages. If Country A wants to invade Country B, they might
threaten to cut off trade with B so that they ignore their bad behavior outside
of trade.
Second,
countries can gain by giving unfair advantages to their own workers and firms.
Should we produce our own Panama Hats? We might have some great hat makers in
the USA. But what if country C decides to give big subsidies to their hat
makers? The world decides to buy hats from Country C instead of the US. US
firms and workers are hurt.
Third,
similar to the second point, countries can advantage their own companies and
workers through a variety of protectionist policies including tariffs, health and
safety regulations, labor regulations, and a number of other non-tariff barriers.
Fourth,
transitions can be slow and treacherous. Perhaps natural economic advantages
change over time? Suppose one of these changes negatively impacts US firms and
workers. No cheating going on. Just change unfolding. The reality is that
US firms and workers will be hurt. It will take time and much effort for those
people to move away from earnings associated with declining industries – and move into more promising ventures. A 60 year-old worker might not transition easily
from making hats to writing code.
Those are
four things that come to mind that jeopardize a faith in free trade. We don’t
want any of those things to happen.
But the truth
is that we also may not want to go to the other side. We may see very negative
outcomes or at least risks arising from an industrial policy that uses the deep
pockets of government to routinely assist and regulate the trade of companies. We may see negative side-effects coming from a
broad and continuous system of trade protectionism.
What do we
do? As usual, try to waddle through the middle.
The benefits of free trade might be a lot like the figurative free lunch. They sound good but maybe they are not what they are cracked up to be. Of course, an economy that is run and controlled by the government might have some drawbacks too. So we walk right down the middle knowing that it will be a fight to try to get the most out of free trade knowing that government will play a role.
Like walking
on a tightrope – swaying too far in one direction or the other, means a ride to
a hard surface. Staying on the rope might mean a little movement either
direction but not enough to topple you.
That balance
is quite a challenge! I’m not sure Biden or Trump has the balance.
NAFTA 2.0 (known in the US as USMCA, known in Canada as CUSMA, known in Mexico as ? probably MUSCA - both the Canadian and Mexican versions sounds better on the tongue, but none as good as NAFTA) is not a free trade agreement. It is a managed trade agreement designed to protect industries governments feel like protecting.
ReplyDeleteWe don't need clubs for everything, but in some areas they are crucial. They are especially crucial to the US and Western countries as they try to get China to play by rules. What Americans need to wake up to is the fact that the US will be crushed by China if it does not create and nurture alliances. If you don't think this is true witness Huawei which reported 13% growth in the first quarter of 2020. China does not need access to the US market to grow and prosper. It's economy will soon dwarf the US, and its military will not be far behind 1.3 billion Chinese, 375 million Americans. The only way to rebalance is to bring some allies on board, something that has definitely not happened in the last 4 years, unless you count Russia and North Korea.
So, Me Myself and I is not your preference. I wonder why our two political candidates want to go it alone?
DeleteAgree with Bizzard. Then there is.the rare mineral iss used to make many market products like call phones. The countries that have them typically have struggling economies. I am not concerned about China but they need soy beans from somewhere in large quantities to feed their cheap labor... which in their terms and dollar value is no different than US labor. The difference is the value of the exchange rate which is manipulated and the US they own.
ReplyDeleteGlobal trade has been around for thousands of years. Silk Road? US farm products? In fact the US was founded for several reasons and 1 was we could provide food and raw materials to Europe.
This comment is from TUNA,
ReplyDeleteDear LSD. Lately, in the Deep C Class on Int’l Trade we reviewed the rationale for moving manufacturing to lower labor cost countries: Lower costs, production closer to customers/markets, fewer regs, optimization of supply chains, etc. would offset logistics costs for shipping back to good ol’ U S of A. Seemed like a slam dunk profitable strategy for multi-nationals and others based on the discounted cash flow analyses and Excel sheets of the MBAs. We down here and ya’ll up there now know how that turn’d out. In tail-fin-sight pretty good for the multi’s but not so good for U.S. workers ‘n some U.S. strategic/national interests. Knowing how sea currentz work it’s gunna be hard to turn the U.S. ship ‘round.
Trump renegotiated NAFA and has stated frequently he’s OK with international trade as long as it’s ‘fair and reciprocal.’ He favors bi-lateral and quid-pro-quo agreements over multi-national agreements and negotiating what he deems fairer and more balanced trade agreements to promote the creation of U.S. yobs and prosperity. That doesn’t seem “Me, Myself, and I” but a rational and fair policy. I do not see in ‘America First’ any language or implication of ‘merika only.’
Biden not like other Ds??????? What kind of CO2 are you breath’n up there? Are terra ferma folkz burn’n lots-0-meeryjowanna wacky dust?
Apologies to Tuna for the Anonymous source above.I mistakenly deleted his original comment and the above is just a cut and paste of his words.
DeleteTuna,
DeleteThis must not be my day. I just wrote a comment to your comment and the damn thing disappeared after I hit an errant key. Grr. My first point is that modernization and productivity gains have led to a replacement of labor with capital. Yes, trade impacts labor but domestic substitutions are probably much more important. We need policies to help labor be worth US average per capita income. I read what you say about Trump but I doubt he can do much to keep jobs at home and to me it is just pissing in the wind. As for Biden there is a change away from world solutions and more of a focus on those workers you would to help. But alas, his idea of using a Federal approach and industrial policy is ridiculous. We will disadvantage workers even more with that idea.
Dear LSD. Sowwry for miss’n yer first point ‘that modernization and productivity gains have led to a replacement of labor with capital’—didn’t see that. Yepp’r, a twue statement. Seemz like cheat’n, steal’n, ‘n currency manipulation . . . along with cheaper ferin labor . . . also have replaced labor. In the normal scheme of mice ‘n men modernization + technology = productive gains = capital replacing labor. Cheat’n, steal’n, ‘n currency manipulation don’t seem to comport with ‘the normal scheme of mice ‘n men’—(a natural phenomenon?). Policies to ‘normalize’ labor with US average per capita income seem artificial—(govomit intervention?)—compared to the normal scheme of mice ‘n men modernization ‘n technology = productive gains = capital replacing labor. Average labor gains before CV-19 were about 3% annually . . . a reasonable good rate . . . while upper earners’ gains were lower. Wouldn’t ‘normalizing’ labor with US average per capita via govmit policy light up inflation? Wouldn’t the path of ‘mice ‘n men’ be more normal . . . less inflationary?
DeleteDear Tuna, Normalizing labor would mean bringing up productivity to offset higher and downward inflexible labor costs. So, no, that would not be inflationary. It usually implies replacing labor with more capital. And then that puts downward pressure on wages -- but that process is slow because of rigidities.
ReplyDeleteSo, dearest, LSD. It seemz normalization of labor to avg. per capita inkome cannot ever be achieved via productivity gains ‘cauz that eventually leadz to capital replacing labor then lead’n to pressure on labor wages—a mighty vicious vortex down to de sandy sea bottom. Apparently, your solution, then, to normalize labor wages with avg. p/capita inkome is govomit force (e.g. euphemistically ‘legislation’). R U in favor of guaranteed wages . . . if not, what are yer thoughts on shrink’n de gap/normalizing labor with avg. p/capita inkome?
DeleteI agree with Dr. D. We are well into international trade. To combat means more AI replacement. What business would not want enough of a better deal that saves both operating and production cost.
ReplyDeleteIt’s about money. I sold goods to China, India and Brazil . For Korea I required US based distribution. Every deal was different. The Korean company wanted to set up manufacturing in the US to gain a better market in North America. Just like Toyota or Honda. China’s cell phone is the reverse of Apple making phones in China.. Global trade makes business sense but in the short term not job market sense until we can make a better system. Many jobs have already been automated. It will not stop.
So what needs to be done? It is complicated. Leverage is important in any deal. Both parties have th be willing to give to get.... I mean business parties.