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Profiteers Find That "Free Trade" Is Still An Easy Sell

Published 11/07/09 Thomas Heffner - Print Article
E-mail - editor@economyincisis.org


Editor's Note: This article originally ran in 2004, but is more relevant today than ever.

Free trade sounds great. Consumers get the benefit of increased competition for their buying dollars, manufacturers get to locate or source from the lowest cost labor pool, exporters have the opportunity to sell into new markets with no tariffs. So what could be bad about that?

Fundamental Flaws In Free Trade

There are at least two fundamental flaws with free trade that have led to the most massive wealth transfer in the history of the world ($4 Trillion has been lost by the United States since the 1970's through trade deficits caused by elimination of tariffs).

1. Impossible to enforce

The premise that all countries will play by the same rules is impossible to enforce and hugely expensive, time consuming, and inefficient to contest. The reality is, trade is impacted not only by tariffs, but by other much more intangible state-sponsored "trade weapons" such as currency manipulation, technology transfer requirements, joint-venture policies, selective customs policies, underhanded government subsidies and incentives, labor rates and policies, and countless other tools.

We are relying on "faith-based economic policy" when we think that somehow, other countries won't take advantage of the much sought after American wealth when we place them in a situation with no way to oversee or penalize their misdeeds.

2. Impossible to compete

Tariffs are one major way to balance fundamental competitive differences just as a handicap is used to normalize skill among golfers. If two countries with a huge labor cost differential engage in "free trade," eventually, all the production that benefits from cheaper labor will flow to the lower cost country in the absence of a countervailing influence like tariffs.

The Greatest Crime Unreported?

A logical question is why the lack of attention to this issue. There has actually been a great deal of attention paid to this issue despite persistent free-trade mantras. In the 1980's there was tremendous concern among Reagan administration officials that the US was losing its competitive position in the world. Reagan enacted numerous protectionist policies in an effort to stem the hemorrhaging trade deficit. Media attention was centered on a doomsday scenario whereby Japanese and Arab interests would come to own and control everything in this country.

Japanese Learn Public Relations, And Now Japan Is Thriving

"Fortunately" for America, Japan's economy suffered a supposed devastating meltdown following a series of failed loans, a stock market crash, and a burst real estate bubble. Twenty years later, however, Japan's economy is stronger than ever. Its assets have quadrupled in the same period and its dominance of global industries is now unparalleled and unquestioned.

Japan's stock market crashes and real estate bubbles had much less effect on the country because they are structured much different than the United States. They do not use the stock market as a primary financing mechanism. Try looking up information on Nikkei issues. Hardly any information is available compared to massive volumes on American stocks. Japanese companies raise capital through state-controlled banks and lenders. They also have massive personal savings with very low credit exposure such that something like a real estate bubble would have a small fraction of the impact it would on the incredibly leveraged economy of the United States.

Japan has learned how to project a "basket-case" image to deflect curiosity as to why it has quietly become the worlds largest saver and the worlds largest net exporter and why it now controls the purse strings on the financial wherewithal of the US Government.

Many Notable Individuals Have Shown Great Concern About Current Free-Trade Policies

Furthermore, a litany of notable politicians, economists, journalists, and industrialists have stepped up and spoken against this 30 year period of blood-letting. Names such as Warren Buffet, George Soros, Pat Buchanan, Sen. Hollings, Sen. Lieberman, Ross Perot, Pat Choate, Eamonn Fingleton, Paul Craig Roberts, and Lou Dobbs have all voiced concern.

John Kerry had announced that if elected he promised an immediate review of all trade agreements affecting America. George W. Bush even conceded for a time that US steel tariffs were necessary to protect that critical industry (before eventually bowing to free-trade lobbyist pressure).

The department of defense has recently commissioned a US-China review board to identify our dangerous dependence on the communist trading partner. The findings of this board are truly shocking and fly in the face of every proponent of free trade.

Corporations, Individuals, And Politicians Do What Is Best For Themselves

So given all this insurmountable evidence to the contrary, why is it that free-traders continue to sell out the country at expense of national security and all future generations? The answer is that every person, corporation, and politician tends to do what is in its own short-term best interest be they motivated by pure profit or reelection. At an individual level, our economy is driven by consumption (70% of GDP is consumer spending).

Since most of this consumption is of foreign goods, to restrict that flow would have a devastating effect on many industries such as retailing (most textiles are produced over seas as well as electronics equipment and components), freight and shipping (trillions of dollars flow over transportation routes each year), marketing, advertising, law, and banking, which are all tied directly to American consumption of foreign goods.

Encouraging foreign manufacturers to produce in the U.S. creates a big negative for us.

Cars for example. Ohio and Indiana competed to get a new Honda auto factory. Indiana succeeded. They gave Honda an $81 million enticement gift and other intangibles. Honda said they would put up a $500 million facility to produce 200,000 cars per year. They did put up a facility, cost unknown. And 23,000 Americans applied for 2,000 jobs. Two thousand Americans are now turning out 200,000 Honda cars per year in Indiana which translates to one American supplies the labor to turn out 100 cars per year. One American can earn on average about $50,000 per year to turn out $2,000,000 worth of cars (Average car sale $20,000 x 100 cars = $2,000,000). This may be a simplification, but the American labor cost is approximately 3%. Almost nothing is made in that factory.

Selling Off Companies To Foreign Interest Reaps Short-Term Gains And Long-Term Deficits

Furthermore, given record low capital gains taxes and other incentives, CEO's and shareholders of major companies stand to gain more from the one-time bonus of selling their company at a massive premium to a foreign purchaser than from continuing to run them on salary basis.

Countries like Japan, Germany, and China take great pride in protecting their industries from foreign robber-barons. We seemingly do everything to encourage them. Finally, politicians do not want to be the bearer of bad news. No one wants to paint a picture that is less than rosy unless absolutely necessary and certainly no one wants to be the messenger that says we must take drastic action to the short-term detriment of many Americans.

Free-Trade Is An Ideology That Is Destroying America

Free-trade is a convenient, well-packaged ideology that resonates with consumers, CEO's, and politicians. The result is that nearly 50% of all new cars now sold in this country are foreign. Only two domestic auto manufacturers exist today (consistently losing market share and teetering perpetually on default).

There is now a stigma that buying American is cheap, undesirable, of poor quality, and in poor taste. Clearly the only group unquestionably damaged by free-trade is American industry and as a result, the American middle-class that relies on American industry for employment and opportunity.

No rational argument exists to continue this policy because it is damaging America as a country even though it continues to provide cheap goods to American consumers. If we continue along this path of selling our assets and borrowing from foreign sources to finance our lifestyle of imports, we will eventually receive a margin call and will find our cheap goods cost much more than we had ever bargained for.

Click here to contact your Representative in Congress.

Unless the above article is already copyrighted, this article is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License, EIC grants permission to use this article in whole or in part provided attribution is given, preferably in the form of a link back to EconomyInCrisis.org.

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Article Comments From Readers

biguru says "Root Cause" on 11/10/09
The financial, credit and currency crisis is due primarily to years of trade deficit (40%)and ponzi schemes on wall street (40%)and too many lawyers managing industry (20%).

They all need to be solved simultaneously like an equation. Balanced the trade, control the ponzi schemers, and create an awareness to make sure lawyers and idiots do not do brain surgery. Other socio-economic issues can be addressed once the stability is reached.

guest says "Reply to "Be aware of the lurking US financial, credit and currency crisis" " on 11/09/09
Actually there is no distraction from the critical issues this country is facing. They are all interrelated to the decline in the value of money due to increased money creation with increased indebtness and less production. When you just have an economy that consumes by printing money out of thin air and doesn't produce much of anything we get a situation where less people work and more people borrow on credit created out of thin air to live. By going into all this debt and buying mostly all foreign goods from protectionist countries with the newly created credit the US finds itself at the mercy of foreign creditors. So if anytime they want to sell large portion of their dollar holdings it would really cause a depreciation of the dollar. Some will say if foreigners do that it will correct the imbalances. Actually it won't because the biggest problem the US has is market access to other countries, so even with the dollar devalued immensely it won't correct the trade deficits. Also since we import alot of oil; a much weaker dollar would increase it's price and might even increase the deficit further.

Furthermore we have the government running budget deficits to grow the economy but its just mostly more consumption spending. Production needs to be encouraged. Its real easy to increase the money supply by 50% but not easy to increase the production of real goods by 5%.

To keep the consumption economy going asset bubbles had to be generated where the assets could be used as collateral for loans or be sold at a capital gain for increased consumption. With interest rates kept low by the creation of more liquidity, it eventually had to find an outlet which was the housing market. With low interest rates by government intervention in the market, banks made all types of risky loans with the thinking that the government would bail them out.

guest says "Be aware of the lurking US financial, credit and currency crisis " on 11/09/09
I think most of the articles in the website is trying to distract the readers from the critical issues that the US is facing, the financial, credit and currency crisis is still persisting in the current situation. These three crisis particularly the credit crisis is killing businesses and causing unemployment. The financial crisis due to toxic loans and derivatives has severely dented the US banking system (it is with the banks but currently ignored and hidden) and the USD that has been fluctuating plunging downwards. Businesses and trades cannot flourish under such environment and I am afraid that if these are allowed to continue, the US will reach a stage where another wave of recession will strike.

guest says "Great quote from an interviewer of Ron Paul" on 11/09/09
"We can’t even get rules in Washington that require members of Congress to read the laws or point to the part of the Constitution that authorizes the laws."

No wonder we're in a huge mess, how many times did our mothers tell us never sign anything you don't read.

guest says "Of course its easy to sell Protectionist agreements against domesic US industries called Free Trade when Congress signs bills they never read" on 11/08/09
Its no surpise that more protectionist agreements called Free Trade to confuse will be an easy sell when we have a Congress that signs bills they never read. Im sure these so called free trade bills mention eliminating quotas and tariffs but probably nothing is mentioned about VAT taxes on US exports, undervalued exchange rates by money printings, requirements to share technology to export, and other barriers not called tariffs or quotas.

guest says "That small group has access to the printing press which is where their power resides" on 11/08/09
Capitalism and the market decided a long time ago that gold and silver was the money to use. Special interests can't print it out of thin air. The past gold standards weren't perfect because there was still fractional reserve banking involved but it did limit some of the excesses to a degree but the excesses became to great that they had to abandon when for international trade reasons they didn't want to revalue gold higher and enough gold got drained from the US. Without sound money, the value of everyone's savings gets debased and whoever gets the new money first benefits before the prices rise further from the moment they received. This is an important issue because so many complaints about wages, trade and other social issues is related to the value of money which keeps declining. Can anyone name an asset that if someone works hard and wants to save they can purchase and will keep its purchasing power in tact without all the wiggles? Some say gold or silver but theres so much paper trading based on gold that prices fluctuate constantly.

guest says "Protectionism is not an absolute quantity" on 11/07/09
as the author assumes. In his simplistic thinking, he posits that the government is a neutral body, only interested in the welfare of the nation as a whole, and not subject to being influenced by special interests.

Therefore, in his model, free trade can only be an impediment to the recovery of American economic health, and protectionism a strategy to overcoming that impediment; and once followed, the American economy will right itself.

However, he ignores the reality that the government is not a neutral body at all. In the last three or four decades, the government has shown itself to be acting in the interests of minority special interest groups, particularly in the interests of the group that funds their campaigns and controls the political system.

The control of the political system by this group is so great that they act almost as gatekeepers for entry into the political world. Without the permission of these gatekeepers, it is very difficult for a person to enter the field of politics.

The evidence for the existence of such a group can be found in the voting patterns of the lawmakers in power. Members of both the Democrats and the Republicans voted overwhelmingly for America's invasion of Iraq when it was first proposed. The lack of dissent suggests that the political system is not really a bicameral system at all. It can be more accurately described as a monopoly - a monopoly of power wielded by the small group of central bankers.

Given that the government as a whole - which comprises all the lawmakers on Capitol Hill - is beholden to this group, we can see the reasoning clearly behind certain economic policies that have been effected in the past four decades.

These economic policies are:

1) Opening up trade with China - the Great Detente of the 70s: this allowed the central bankers' corporations to have access to cheap abundant labor.

2) The free trade agreements - these agreements enabled the central bankers to manufacture products overseas and sell them to more affluent customers in the US and elsewhere in the west. Also, agricultural products could be grown in places like Central and South America and sold all over the world by multinational food corporations like Monsanto.

3) The push for globalization - the acceptance of globalization by the citizens of the world, especially by the people of the west, legitimized the actions of the central bankers - using the slave nations of China and Vietnam etc to manufacture their products dirt-cheap, and then selling the products to western consumers at first world prices. The Americans came to accept the Walmartization of their economy, not bothering to think deeply about the implications of that happening, not realizing that it could lead to the loss of their jobs and the eventual collapse of the US economy - in other words, Americans fell victim to the slowly-boiled frog phenomenon.

4) The various strategies of the central banking system in America, the Federal Reserve, coordinated with their sister branches around the world, in opening or tightening up the money supply, depending on the need of the bankers, all with the goal of enabling the actions of the bankers outlined above. This explained why the money supply spigot was opened up full-bore during the 90s and early 2000s. Americans were led to believe they were wealthy and could go on buying sprees and buy all the stuff that was manufactured by the bankers' corporations overseas. So Americans splurged and did not save. They even bought on credit. The American dollar during this spending craze still held its value, and the money that Americans spent went straight into the coffers of the bankers, to be immediately converted into solid assets, into safer currency or back to their industrial investments overseas.

5) It wasn't only in the area of consumer goods that the bankers wanted to make their profits from. The stock market was also seen as a lucrative vehicle for generating wealth for them. So it was no coincidence that the government during the 90s and early 2000s changed its policies governing the stock market and loosened up the regulation of the stock market, enabling the bankers to make spectacular profits selling all kinds of bonds and package deals that included mortgages, to the extent that the financial transactions that involved housing mortgage instruments made up a large share of the banks' portfolios, putting them at great risk of bankruptcy if the housing market collapsed. The government didn't say the banks were too big to be allowed to collapse back then as the banks entered more and more into the world of financial arbitrage, diverting pensions and other government-backed investments into ever-more risky areas of speculation. "Throw everything onto the casino table including people's pensions and their life-savings! And spin the roulette wheel!" Everything could be gambled away, and it was - with the government's full approval.

6) The government's home-lending policies changed to enable the bankers to profit from the housing market. It became illegal not to lend to risky prospects from certain minority groups. It was seen as " racial discrimination". The boom in lending for mortgages enabled the bankers to use the mortgages as another instrument for speculation and arbitrage, one that turned out to be very profitable for them right up until the housing market collapse. And even the housing market collapse may be a boon for these bankers, as they are the only ones with cash these days, thanks in part to the taxpayer-funded "bailout", and can take advantage of the low prices of the homes, buying these undervalued homes for pennies on the dollar.

Given that the above points provide ample evidence that the elected lawmakers do not care about Americans, as they work only for the central bankers, I would like to know what makes the author think that the same lawmakers won't continue to put the interests of the bankers first when it comes to introducing protectionist policies?

The bankers will make sure that the government diverts taxpayer money to "protecting" or subsidizing THEIR industries, so protectionism will just end up being another taxpayer-gift to the bankers. Sure, there will be an increase in employment, but this will be just a secondary effect, and probably a temporary one at that. The primary effect will be that the taxpayers will be giving more of their money to the already rich bankers and hurting their own futures in the long run, as protectionism will not increase the net income of the nation (exports will fall drastically even more than before). It will just be a further redistribution of the money in circulation in the direction of the productive to the non-productive members of society (the non-productive are the long term career welfare recipients such as the single parents, and of course, the bankers) without staving off the looming collapse of the economy. In Japan and Korea, people pay 3% of their income in taxes, in America, people pay 50% of their income. In sum, protectionism will just amount to a magnification of the slave-socialism system that prevails in America.

The fundamental mistake in thinking is regarding free trade as the problem. It is a symptom and not a cause of America's economic malaise. The actual cause of America's financial woes is the POLITICAL SYSTEM. It has enabled a small group of extremely wealthy individuals to seize control of the the government, and this group has found that it is to its advantage that America's wealth be plundered. The plundering has almost been completed, and this explains the current state of America's economy. Measures such as protectionism that are taken with the stated goal of improving the economy will be carried out by the agents (the lawmakers) of the same people who brought America to ruin in the first place, and these people will make sure that the measures introduced profit THEM which will mean that the economy will be plundered even further and the productive people will be exploited even more than before.

biguru says "Steel Pipes" on 11/07/09
This will be a Tit-for-Tat and each one will try to punish the other and just create animosity between the Chinese and Americans, when the media blows it out of proportion.

Better solution would be to sit down with the Chinese and beg them to reduce the trade surplus with us. It would be good for the Chinese in the long run, because as our economy picks up, we will buy more stuff from them since we do not make stuff to fill the Wal-Mart.

(We may have to eat our pride thanks to our Lawyer Politicians.)

guest says "Fair trade is near" on 11/07/09
Well, we'll have to see how fair trade goes as it is happening now. The US slapped a 99% tariff on imported steel pipes from China and I believed this
tariff bring some fairness into our trade with China.
I would expect the Chinese to counter hit the US with tariffs on some US exports and maybe slow down the purchase of the US bonds. Let see how these fair trades progress in the next few months.

guest says "Even with another country paying cheap wages like a penny an hour based on exchange rates the labor arbitrage could never last long" on 11/07/09
Unfortuantely we don't have a free market for money, so every US citizen could have a Phd in physics and Math and still wouldn't be competitive with a foreign country that can print money out of thin air faster than the US does.

If the US was running lets say a trillion dollar trade deficit with another country, the country with the trade surplus should have an exponentially higher exchange rate. Even if the surplus country was able to manipulate inflation so that the price of their labor stays at $0.01 per hour by their central bank soaking up money by issuing their own bonds, based on exchange rates it would be hugely more expensive to import from the surplus country. Because of the trade deficits it should take like 20 US dollars to equal 1 unit of the foreign currency from the country with the trade surplus. So if the country we run trade deficits with pays their workers lets say a dollar an hour, then based on exchange rates it would cost 20 US dollars an hour to pay those workers the equivalent of 1 unit of their currency which would be the cost of paying more than the average US worker an hour.

So as you can see, it's not the only problem but a large portion of our trade problem is a monetary one. The other problems stem from terrible tax policies where we get taxed to produce but foreign goods from protectionist countries come in for free and terrible protectionist agreements from NAFTA and WTO called free trade to confuse.

We hear the complaint that Americans cost too much so we hear lobbyists say we need more foreign labor and more outsourcing with most people not realizing that our money is being devalued by all the spending in Congress of not reading spending bills they sign written by the lobbyists and the Federal Reserve creating money for special interests. Then you hear the complaint from business that its always cheaper overseas. Some foreign competitors print money faster then the US does so its always cheaper there.

The UN came out with a recent report reporting how real wages around the world declined. Well mostly every country in the world is on the same type of fiat monetary system so its no surprise. Money gets debased domestically and trade competitors debase money so workers in both situations lose because money buys less in both the importing and exporting countries.

guest says "Outsourcing and Money printing" on 11/07/09
How many more critical US industries are we going to lose to outsourcing just because a foreign trade competitor can keep printing money out of thin air faster with a computer keystroke causing their prices to be cheaper no matter how many degrees Americans have?

guest says "4 Trillion is small compared to the quadrillion lost" on 11/07/09
I think the amount of money the world lost to the US with the "free trade" of the securitized bonds and the derivatives are a lot more than the any trade in history. This is not to mention the bonds and derivatives trade are worthless (toxic) when compared to the traded normal products. Now perhaps the WTO
and World bank should summon the US into court for these scams.

guest says "Lets call what these agreements are which are Protectionist agreements disguised as free trade." on 11/07/09
Lets call these agreements for what they are which is protectionism. That should be the theme from now on, "Protectionist agreements disguised as Free Trade" which is decimating US domestic producers. As long as we drop from the definitions of protectionism udervalued exchange rates by money printing, VAT taxes and requirements to share technology in order to export in a country then its free trade according to the lobbyists for these agreements. What a better way to confuse Congress who signs bills they never read than to call Protectionist agreements against American industries free trade.

guest says "The article" on 05/20/09
This article originally ran in 2004, but is more relevant today than ever.

That is 5 freaking years! When people are going to learn? And we expect everything to be in ship-shape by 2012?

guest says "Balanced Trade" on 05/20/09
If we can set laws to balance the budget of a State, why can not we make laws to have balanced trade and if there has to be a variance, it must be approved by the congress for only that quarter. Otherwise make a law that the trade must be balanced each month with a negative variance of only 8%. If it exceeds that month, it must be compensated the following month.

I still think, we need a powerful agency like EPA or DEA as a trade watch dog that has similar power as Japan's MITI. Our Commerce department is useless and sides with Wall Street than Main Street.

Our 20+ odd intelligence agencies need to focus on our economy. Otherwise, in front of their very eyes, USA will become like Russia, a has been empire.