Coming To Terms With Free Trade

Walt, John, and myself, good college friends with different outlooks, continue our discussion regarding free trade:

Walt

My understanding of John's position is:

• problem: declining U.S. manufacturing ability since 1970;
• cause or aggravating factor: the trade deficit;
• remediation plan: protection of U.S. industry with a 3-tier tariff schedule.

I see things very differently. I don’t believe that the U.S. has lost manufacturing ability, or jobs, since 1970. I’m not an economist, but I do have a 2005 World Almanac. I looked up the following statistics for the U.S. GNP since 1960:

[GNP (E12 current dollars); GNP (1967 dollars); per capita GNP (1967 dollars)]:

1960: (0.53, 0.60, $3400);
1970: (1.04, 0.90, $4400);
1980: (2.8, 1.1, $4900);
1990: (5.8, 1.5, $6000);
2000: (9.9, 1.9, $6800).

It looks like the wealth created in the U.S. since 1960 has more than tripled, from $0.6 trillion in 1960, to $1.9 trillion in 2000, adjusted for inflation (1967 dollars). Furthermore, although U.S. population increased during that time, the per capita GNP still doubled, in inflation-adjusted dollars. I interpret this to mean that we have added a great deal of manufacturing ability since 1960, and that there is twice as much wealth per person in 2000, compared to 1960, as well.

Is this increase in wealth merely a fictional “paper” increase, or perhaps held by only a few fatcats? No, it is not. Some comparisons between the 1987 and 2005 World Almanacs:

Automobiles: (1987 - 130 million; 2005 - 220 million);
Televisions per capita: (1987 - 0.14; 2005 - 0.84);
Phones: (1987 - 134 million; 2005 - 182 million);
Internet lines: (1987 - less than 1 million; 2005 - 159 million).

What about unemployment? Has the U.S. been losing jobs, as a percent of the labor force? No:

1960: 5.5%;
1970: 4.9%;
1980: 7.1%;
1990: 5.6%;
2000: 4.0%.

I do not see any worsening trend. However, the data are somewhat misleading; they might suggest a nearly constant number of jobs available when comparing 1960 (5.5%) to 1990 (5.6%). However, that is not the case. These numbers represent unemployment not as a percentage of the total population, but rather as a percentage of the workforce. In 1960, most women were out of the workforce; but in 1990, most women were in it. So there is significant job growth between 1960 and 1990, which cannot be seen from the unemployment table alone. Finally, a look at life expectancy: (1960 - 70 years; 2000 - 77 years).

To sum up, when looking at statistics from the World Almanac, I can’t find any evidence for declining manufacturing ability, standard of living, or job loss. On the contrary, all categories seem to be getting consistently better. Furthermore, my personal anecdotal observations are consistent with the statistical data.

Of course some individual towns, and employment in some individual industries, have declined over this period. Some of those declines, for example mining, are partly or mostly due to competition from overseas. Others are due to increased productivity. An example there is agriculture. At one time, more than half of Americans were on the farm; now it is less than 3%. Are we in a starvation crisis? Not at all – production efficiency has gotten so good that 3% of the people can supply all our food needs. The important thing from a national perspective is not the employment level or financial health of any one industry, but the economy as a whole. I see nothing to be alarmed about, as far as ability to produce wealth is concerned. So your basic premise, that we are losing manufacturing ability, is not correct, as far as I can tell from statistics and my own experience.

But are trade deficits a bad thing anyway? I don’t believe so. One thing to remember, which you know, is that “deficit spending” and “trade deficit” are two different things, with nothing important in common. Deficit spending is borrowing, a trade deficit is buying. Borrowing money is not necessarily bad, but it obligates one to a financial responsibility which can last a long time. Buying is not bad at all, if one has the money to pay.

The national trade deficit is the sum of all the individual trade deficits of American citizens. My wife and I have been running a trade deficit with Bi-Lo supermarket ever since we got married. Currently it is close to $4000 per year, with a twelve year total of $50,000! There is no prospect of reducing this trade deficit in the foreseeable future. I’m beginning to suspect that no matter how long I live, I will die with a net trade deficit with Bi-Lo. Is this bad? No, because my economic well being does not depend on a balance of trade with Bi-Lo. Furthermore, I do not borrow from them. I earn, from an outside source, much more money than I ever spend at Bi-Lo. Finally, if my outside income declines in the future, I will be able to reduce spending at Bi-Lo, if I choose: much of what I buy is elective, and not strictly necessary. Yes, I know that Bi-Lo is an American company, but the principle is the same. If it was a foreign company, nothing about my personal situation would be different. By the way, I have a significant trade deficit with Honda, too, and likewise I don’t expect it to send me to the poorhouse.

I’m sure you see the analogy here. America’s economic well being does not depend on a balanced trade sheet, as long as we earn an independent income from an independent source, which is larger than the trade deficit (T.D.) Our GNP is a whole lot bigger than our trade deficit. According to my almanac, the 2003 T.D. was 4.8% of the GNP. That’s analogous to me spending $4.80 at Bi-Lo for every $100 I earn. Another way to look at it is: in 2003, we earned 20 times more than we sent overseas. Next year, we’ll earn again 20 times more wealth than we’ll send to other countries. We make money a whole lot faster than we send it abroad. And remember, the trade deficit is NOT an accumulating debt – it is not a debt at all. Adding it up to get a big cumulative number, and a corresponding sense of impending doom, does not make sense, as far as I can tell.

Also, I do not worry much about China or some other country buying all our power plants (or whatever) with their U.S. dollars, and then turning them all off at once. If we don’t want to sell, we won’t. If we’re tricked into selling, we’ll freeze their U.S. assets, take over the power plants, and turn them back on.

Maybe I’m missing something important here. If I am, I’ll feel like a fool, but I’ll thank you for setting me straight. If you do, please explain it with my Bi-Lo trade deficit analogy, so I’ll understand it better. Also, note that the U.S. ran a nearly continuous trade deficit from 1790-1875. Why don’t the history books talk about that being a big disaster?

Your proposed 3-tier tariff structure interested me, because here you shifted part of your objective from preserving U.S. industrial capacity and jobs to putting pressure on other countries to change their social priorities.

If the objective of a tariff is to reduce imports, and thereby preserve(noncompetitive) American jobs, and also reduce cash flow out of the US, then the most effective tariffs will be those imposed on the nations with whom we have the worst trade balances. Those nations are China, Japan, and Canada, in that order. However, you propose the highest tariffs on goods from China, Vietnam, and Bangladesh. Although China is certainly a major source of imports, Vietnam and Bangladesh are absolutely trivial contributors to the trade deficit, or to U.S. job loss. Neither one even made the Almanac’s trade balance table. On the other hand, you nominate Canada and Japan for no tariffs at all! This suggests that here, you see tariffs more as an instrument of foreign policy, and less as a shield for U.S. industries. Your motive may be only partly to reduce imports, but more centrally to exert pressure on nations whose labor & social practices are different from ours.

So how do I feel about this? I’ve got mixed feelings. In principle, it is OK to use coercion to change other nations’ behaviors. Diplomacy is an accepted practice throughout the world, and diplomats have only two tools in their bag: the carrot, and the stick. Imposing tariffs to pressure nations into improving their environmental, labor, or intellectual property behaviors is perfectly OK with me. However, I am very much against using tariffs in order to restrain trade, or to keep uncompetitive or inefficient industries alive. That is planned obsolescence. If we rely on a tariff, which are a species of boycott, in order to keep our businesses going, one day we’ll wake up to find that nobody in the world wants to buy our products, because better and cheaper products will be made in every nation but ours. I also believe that imposing tariffs for these reasons is unethical. It is all right to shun people who won’t work, or who think society owes them a living, but it is wrong to do that to people who work hard and create something useful. Also: do we want the poor nations of the world to pull themselves out of poverty, or not? How will they ever succeed if the “upper class” conspires to refuse to buy their stuff?

Of course I’m perfectly aware that some of the reasons for the competitive edge overseas are fewer environmental regulations, fewer worker safety regulations, and lower wages. So it’s a grey area, kind of like everything else. Thus my mixed feelings.

I face layoffs myself. My company had 23,000 employees in 1992. Today there are 13,000, and the company plans to lay off 2,000 more over the next 18 months. I know all about layoffs.

Marc

Even though America is wealthier than it was 35 years ago, it doesn't mean manufacturing is healthier. Presumably, we could ship all of our manufacturing overseas, and all the specialized jobs that go with it, totally devastating manufacturing, if, in turn, investors overseas were happy investing their avalanche of dollars gained from exports in U.S. government securities and U.S. consumer debt. As long as the value of the dollar remained stable, the system would work.

In the Winter 2005 Wilson Quarterly, Robert Aliber has written a thought-provoking tract called: "The Dollar's Day of Reckoning." Aliber looks at the macroeconomics of America's rapidly-growing trade deficit, and he sees imminent troubles. The U.S. trade deficit is growing too large to be sustainable: our indebtedness to overseas investors is growing by 16% per year, whereas the GDP is growing only by 6% per year. Basically, we are borrowing more and more from overseas investors in order to make our interest payments to them - an unsustainable situation, in a household as well as in a nation. Some of the debt is government debt - the U.S. budget deficit, and some of the debt is consumer debt (e.g., home loans). A lot of the government debt we are racking up isn't a terribly efficient use of the money (security, army, etc.). I bet a lot of the consumer debt isn't that useful either. In any event, the value of the dollar is at risk.

Aliber sees a lot of similarities between the U.S. situation, and other unfortunate countries' situation (e.g., Argentina, Russia, Japan, Thailand, etc.) since 1970. According to Aliber:

Today, the U.S. saving rate remains low because of the continued displacement of American saving by foreign saving. But America's reliance on foreign saving is excessive: The nation's international indebtedness is increasing at much too rapid a rate. The inevitable adjustment will require that American's household saving rate increase as reliance on foreign saving declines. ... [The United States] is engaging in Ponzi finance, and the game will soon be up.

Manufacturing has much to recommend it. As Aliber notes, tradable goods (e.g., cars) are generally worth more than nontradable goods (e.g., expert shelving) in an economy. I tend to think in more moral terms: manufacturing requires more skills, and hence has a better impact on the citizenry, than most other forms of economic activities.

John

Walt's point that the U.S. economy has grown dramatically since 1960 is, of course, completely accurate, but I feel that the basic picture has begun to change over the last 25 years. Starting in the 1980's the U.S. moved from being the biggest creditor nation to being the biggest debtor nation. This is a very fundamental change which is at the core of my concerns. While in many ways the standard of living is better now it is hard to cite specific material indications to prove that that is absolutely the case. Cars, for example. In nearly every part of the country today an individual who does not own a car cannot take advantages of job opportunities and is often forced into isolation and poverty. A car now is pretty much essential. As to television, if ever there was an "opiate of the masses" television is it. The shallow infotainment which passes for television news has kept the American people in a fantasy world controlled by political forces which control those "news" broadcasts. Newspapers are in dire straits across the country because people do not choose to read hard news. It's easier to turn on the television and be offered platitudes of pets rescued from frozen ponds and celebrity scandals. And a few lines of actual news are thrown in just to make people think they are being informed.

The American work force greatly expanded, particularly after about 1970 when women began working outside the home in large numbers. That contributed to improving the standard of living for American families. Yet how common are one wage earner families with several children as was the standard in 1960? In most cases that is financially impossible. I'm not saying that our standard of living has declined--only that things are not as clear cut as at first glance.

Manufacturing employment in the U.S., according to the best information I've been able to find, has fallen from 25% of the work force in 1960 to around 10% now. Now obviously a good deal of that is a result of factors such as new technology and increased efficiency, but the majority of it is a result of manufacturing moving outside the country. Whole sectors of the U.S. manufacturing economy are now absent. Small commercial aircraft (with the exception of corporate jets) are gone, having been replaced by planes form Brazil, the E.E.C. and Japan. Commercial ship building is gone. North Carolina's economy is reeling from the demise of wood furniture manufacturing. Hand tools and, more importantly, machine tools are nearly gone. I note the latter one because it illustrates that we are no longer producing products but are not even building the machinery to build them.

In your Bi-Lo analogy I see some basic differences with international trade. The Bi-Lo is a local business providing jobs and taxes for the local economy. To the extent that a local Hyundai dealership does the same the analogy works. But Bi-Lo gets most of its products--with the exception of coffee, some ethnic foods and some produce--from domestic suppliers which are providing jobs for American workers, thus keeping money circulating in the U.S. economy. In the case of international trade that money leaves the U.S. and goes to build foreign economies which, to a point, is not bad. But again, it is the amount of the trade deficit which I find ominous. As Marc noted, a trade deficit which grows at a rate far exceeding the growth rate of the GDP is not sustainable.

As to concerns about U.S. security, my main concern is Chinese power in the Far East. An unprecedented influx of cash into a totalitarian regime is not reassuring, particularly one which, with other foreign nations, holds 40+% of the US national debt. China could easily refuse to buy U.S. Treasury bonds (there are already indications this may happen soon) and cause inflation in the U.S. on the magnitude of that we experienced during the Mideast oil cutoff during the 1970's. That is a risk we should never take, especially when the result would be an ever greater increase in the already ghastly national debt caused by increased interest rates.

A bit more about my thoughts on tariffs. Canada has no significant trade barriers to the importation of U.S. products. Japan, on the other hand, has enforced strong barriers to U.S. imports, which is why I qualified my proposed tiered tariff system to address that situation. Nations which impose such barriers should have equal barriers to their products imposed by the U.S. As to Vietnam and Bangladesh, I cited them only as examples. There are many other third world nations like them. They can produce goods by paying workers pennies per hour but a tariff on such goods would serve as a strong incentive for their governments and private industry to improve the standard of living for their people. It would be the proverbial win-win situation whereby the U.S. would gain much needed revenue from tariffs and the exporting countries would improve social conditions. The tariffs would not seriously affect the workers in those third world countries since their labor rates would still make their products attractive on the world market. The poverty and pollution in those countries impacts the U.S. and the rest of the world. Poverty and hopelessness are fertile substrates for social and political unrest and extremism. Further, air pollution from countries such as China is now degrading air quality in the U.S. By giving third world nations trade incentives to improve their standards of living the US would be acting in its own interests as well as those of those third world nations.

I too oppose using tariffs to protect inefficient or noncompetitive industries as long as we take into account the whole picture--which includes social conditions of third world manufacturing countries. It is morally and socially wrong to tell experienced American workers that they must compete with foreign work forces that can produce the same product in dangerous and poverty-stricken cities for a small fraction of the U.S. production cost. A tariff would serve to level the playing field somewhat. We need foreign trade but we also need to protect American workers and other national interests.

Marc

Free markets are only approximations, of course, and free trade is an ideal. There are always limitations. One significant limitation in the world economy, as trade barriers ease, is the relative immobility of labor. In comparison, capital moves around the world with great ease. The Chinese government (among many others) is taking advantage of its large, impoverished population to offer the business world low-cost labor: an advantage that has more to do with desperation than to inherent efficiency. Economies get skewed that way. Once China owns the majority of the world's factories and becomes wealthier, presumably their education level will rise higher, and the disparities will ease, but for now, in a world where labor is immobile, concentrated in Asia, and desperate, and capital can move quickly, we are far from a global free trade universe.

As beneficial as free trade can be, national economies can sometimes improve through tarriffs and other barriers to trade (particularly if they are debtors). One example is Argentina: when that nation defaulted on its international debt in 2000, and refused to adhere to World Bank demands to reduce its budget deficit, its future looked bleak: the imminent decline of trade promised to be calamitous to national wealth. Significant restrictions on capital flight, however, plus its goverment's refusal to sacrifice its local economy in order to pay its debts, have helped the Argentina's outlook: still bad, but no longer as dire. A better example is the U.S. in the 19th Century, which used high tarriffs to shield its developing economy from British manufactures. Creditors benefit most from free trade: now that the U.S. is a debtor again (since 1980), we should revisit the question of tarriffs. Multi-national corporations (that usually benefit most from free trade) have a lot of influence in the U.S. government, but they could very well be opposed to America's real economic interests.

In other words, the best approach depends on circumstances, and a single-minded reliance on free trade will not be sufficient to protect people's interests. 'Free Trade' might prosper, but the U.S. might suffer. The pie might get bigger, but your slice might get smaller. We have less to benefit from free trade than we did even ten years ago.