Free Trade

In this letter to Walt, John has interesting insights on trade as a small, liberal businessman:

Hi Walt,

A few thoughts on free trade. Before the election last year we wrote about which issues we see as critical to our nation and we differed on many of them. Five of my main issues were controlling deficit spending, rebuilding the manufacturing base of the US economy, enacting meaningful tort reform, making health care more affordable and reforming bankruptcy laws. I regard all four of these as being critical to our nation remaining strong economically as well as morally (I am hesitant to use the latter term because it has been used so frequently in recent years as a political tool, but I refuse to relinquish claim of its use to any political party!)

The US has a strong vested interest in having a skilled workforce which can produce consumer products. Some would argue with that assertion but, given a choice between a worker who knows how to build furniture or cars and a worker who knows how to stock shelves it really isn't hard to see which one is generally more productive. And that's certainly not to denigrate the work of those people who stock shelves--it's merely saying that society could make better use of their abilities in many cases.

There has been a wide scale loss of manufacturing jobs to foreign countries, particularly since the early 1970's. I can recall that when my bother, four years older than I am, was in high school and had no problem finding work in any number of factories in the area where we lived. By the time I reached his age in the early 1970's there was nothing. The plants had all either closed or scaled back operations to the point where there were no work opportunities. I took a job for $1.00 per hour at the local dime store which was by that time about on its last leg. The manufacturers moved outside the US primarily because of the lower cost of production and also because of an increasingly difficult environment with workers comp liability, product liability and environmental regulations. The factory in Earlville, which produced electric motors, moved to Mexico where workers were willing to live and work in poor conditions for wages that amounted to a fraction of what the American workers required.

The result of the movement of manufacturing overseas did benefit the US economy in the short term to the extent that it created a plethora of low priced consumer products which were much more affordable than similar products that were made domestically. But I see that as a short term benefit. In the long term we, as a nation, have paid a heavy price and are continuing to do so.

You wrote that a trade deficit is just an indication that we choose to buy some products from overseas. Fair enough. But the critical word is "some". We now have a trade deficit with China of $300 billion per year and growing. Since 1990 the amount has exceeded $3.2 trillion (figures are from a Christian Science Monitor article last year). Now this represents $3.1 trillion in national wealth that is no longer in the US. And that's just China. The total trade deficit is now on the order of $600 billion annually or more than 5% of the GDP. China has this huge inflow of cash which it using to both build itself into a 21st century superpower and also to make a profit on US Treasury Bonds which are financing federal deficit spending. I cannot see this as a sustainable situation. We, as a nation, are approaching bankruptcy and the creditors are nations which may pose a serious threat to our national security.

I feel that an important step in reversing this problem would be to strengthen the US economy with jobs that produce consumer and industrial products. We cannot, in my opinion, remain a nation with a high standard of living when the population is not producing anything of value to export or consume domestically. It is very much in the national interest to have a skilled work force that is manufacturing such products. The problem is how to accomplish that in the face of low cost labor overseas. For starters, we need tort reform so that every manufacturer would not be anticipating frivolous lawsuits with every product it manufactures. I am intrigued by the "loser pays" system in use across western Europe. That would take a tremendous burden off US manufacturers. It would have the added benefit of cutting the ruinous health care costs that are now such a big factor in the salaries of American workers.

Now there will still be the issue of trying to compete with salaries of pennies per hour in countries such as China and Bangladesh. And that's where I believe the federal government needs to intervene. It seems to me that there should be something of a tiered system for tariffs on products imported into the US. It would be based on the standard of living of foreign countries as well as environmental laws there and whether or not they have tariffs on US made products. It would work something like this: There would be three tiers which a nation could be placed in based on the above mentioned factors. Countries which have a standard of living comparable to or better than the US would be in the first tier, and there would be no tariffs provided that they have no significant barriers to the import of US products. This first tier would include Japan, western Europe and Canada. The second tier would be nations that have a lower standard of living but are improving. It's hard to say which ones specifically would be in that group but I'm thinking in terms of South America and Eastern Europe. Products from these countries should have a small tariff--perhaps 20-30%. The final tier would include countries such as China, Bangladesh, Vietnam and others in that economic category. Products coming from these countries should have a 100% tariff placed on them as they enter the US. They are not operating on the same playing field as we are and their countries are wracked with poverty and pollution which no more advanced nation would tolerate. They can still sell their products to us but they will have an incentive to improve conditions for their populations as a whole in order to reach the next level. It would also benefit the US to the extent that it would help pay off the deficit and create a more favorable economic environment for domestic job creation--which would also help the US economy by producing tax revenue. And it really would not be a tremendous burden on third world manufacturers either. As an example, I'll cite the cost of imported bicycles since that's an area with which I have some familiarity. China can build a good quality mountain bike for approximately $90. Shipping charges add another $20-30 and import duties add a bit more. The domestic shipping charges will add another $20 or so to get it to the wholesaler which makes a substantial markup--on the order of 100% or a bit less--when selling it to the retailer. Most retail bike shops try to get a 35+% margin on bikes (for the record I operate on closer to 25%--which is why I am not too popular among some of my competitors). The net result is that the $90 bike in China retails for around $500 in the US. A tariff of 100% on that bike would add $90 to the cost, but with tort reform the wholesaler would be able to operate on a much lower markup.

This obviously is a very basic outline of what I think should be done. But I do believe that the US needs to move in this direction and do so very soon. It has to be a complete package though. Tariffs will not be effective without tort reform. And though I am strongly opposed to many, if not most, of the policies of the Bush administration, I would glad support any solid efforts to move the country in this direction.

Marc's Response:

There is also a cultural dimension to the problem of job loss: we owe much to our accumulated knowledge of manufacturing. The Industrial Revolution in America was based principally on small manufacturing in New England. Interdependent communities of manufacturers gave New England strength that came in very useful in ultimately defeating the Confederacy: the hasty efforts of the Southerners to come up to speed came to naught. Historians have remarked that had the rebellion occurred in 1850, it would have likely been successful, but by 1860, the accumulated population growth and agricultural and industrial strength of the North could not be overcome.

Even today, when you visit Salt Lake City, a direct descendant of the culture of northern New York, you find block after block of thriving small industry producing all manner of manufactures: quite a contrast to Albuquerque, where everybody stocks shelves.

If manufacturing departs from the U.S., scientific progress will depart with it: there are indissoluble bonds between the health of industry and the health of science. Security will depart too: the bonds between manufacturing and arms production are
indissoluble too. Basically the U.S. will become a second-rate power. We will lose what control we have over our destiny.