Economies of the past and present
Throughout the timeline of human existence, economies that were more open have fared far better than the more closed economies. This is by no means an accident or mere coincidence. The open or free trade economy can trace its roots back to individuals, like Adam Smith, who is widely seen as the father of free market economics. However, the idea of a free market economy is a relatively new idea.
The countries typically associated with an open economy have been centered around all sorts of governing structures, such as democracies, republics, and democratic republics. These particular governments were often constituted on a bedrock of classically liberal principles.
On the other hand, the closed economy can trace its roots back many, many years. It has also been closely associated with elements of the mercantile system, which is a system born of the age of monarchy’s, aristocracies, dictators, and Czars. These times are associated with phrases like “Might makes right.” This was the age of brutes and strong men. When Adam Smith put pen to paper writing The Wealth of Nations, mercantilism’s days were numbered soon after.
In The Wealth of Nations, Mr. Smith debunked the follies of protectionism showing that open and free trade was mutually beneficial to the individual and the state. The mercantilist’s look at trade as a zero sum game, when the case has been made time and time again, is simply not true. Furthermore, the top down tyrannical government needed to bridal such a free people and their economy would be unrecognizable to many civilized modern nations.
The allure of these discredited systems still manifest itself today. Its appeal, in particular, is primarily due to its promises of fairness and equal outcomes provided by the state. The matter of free trade is becoming a major issue in the 2016 election. Both candidates have seemingly come out against some aspects of it. Donald Trump routinely calls for tariffs, price controls, and other forms of government control. Hillary has followed this same banter to a lesser, but still troubling, extent.
We probably won’t ever have the type of free market, in my life time, that I would ever approve of. You could make a strong case that what we follow in this country isn’t or hasn’t been free market capitalism in many years. But, this economy glistens when held up to the light in comparison to mercantilist protectionism. Smart Trade or Fair traders have been around forever. They may change their name, but they’re still a mercantilist at the end of the day.
In a piece written in Forbes by Steve Hanke, professor of applied economics, it states:
“Mercantilism was an insidious economic theory that held Europe in its thrall in the 16th, 17th and 18th centuries. The mercantilists decreed that a nation’s economic success could be measured by its stockpile of gold and that the way to make the pile higher was to encourage exports and restrict imports. Adam Smith routed the mercantilists in Book IV of the Wealth of Nations (1776). His lesson was clear: Open markets and trade are “goods,” not “bads.” The war, alas, is not over. Mercantilism is back. Its adherents use new lingo and make slightly different arguments—they hoard jobs, not gold—but their poisonous creed is in essence the same. It is that a nation can enrich itself by boosting exports and chasing imports away. Mercantilism is behind the campaign to make the Chinese revalue their currency upward. The preposterous notion here is that America would be enriched if Chinese apparel cost a little more.”
In this piece, I hope to explore and expose the follies of the new anti-free market Republicans. I hope to inform and educate some of our well-meaning friends on the right. This isn’t about empowering big business or the “elites,” this is of course about liberty.
What is Protectionism and what are the benefits?
A recent Pew study found that 68% of Trump supporters don’t think free trade is the right path anymore. This is an alarming but not very surprising trend. Americans on average have a fundamental lack of understanding of what free markets mean to them. It also doesn’t help that so much of what the government does is secretive or openly misleading to the detriment of the voters.
I do get it. If I had to live with the fruits of the Obama economy, I’d probably be desperate enough to accept the fallacy of protectionism, too. Supporters of protection will tell you the founders believed in protectionist trade policies. This is indeed factual. The founders supported tariffs. And after the Republican party was established a long string of Republicans advocated for ever increasing tariffs. This policy was the centerpiece of Republican policy culminating with the Smoot-Howley tariff of the 1930’s. Combined, this contributed to the collapse of trade worldwide plunging the country into the Great Depression.
Through all of this, the thing to remember is America succeeded despite these policies primarily because of lax regulation, expanding land mass, an abundant supply of cheap labor, and precious resources. Opponents of free trade will tell you that tariffs are a win for American workers. They will also say that China is cheating by manipulating its currency. Some will say America is a net loser when it comes to trade.
I wanted to see for myself what the free market had to say about all of this. I’ve outlined my findings throughout this piece. What I found is that tariffs do have their initial benefits, but their long-term distortions in the market should make them unpalatable to any lover of smaller, less intrusive government.
Tariffs are win for American Workers & Consumers
Tariffs are a win for American workers only if you look at the seen, but the unseen should give you pause. Let’s start with tariffs on specific countries: Tariffs on specific countries would be impractical due to the fact that companies aren’t stupid. They’ll just move their tariffed imports to non-tariff countries.
A study completed by the National Foundation for American Policy found that a 45% tariff on imports from just China and Japan, and a 35% import tariff on Mexican imports would cost American consumers $11,000 over 5 years. What the study also found is that imports of the tariffed goods rose by 25% from the year before. What this shows is that the market responded or adjusted to the new barrier by working around it. Either companies of non-tariff countries took advantage of the opportunity and expanded their market share in the US, or those companies affected by the tariff moved some aspect of their operation to a non-tariffed country to evade the tariff. The Smart trader will tell you that the way to stop this would be to place a tariff on every country around the globe. This policy would cost US consumers $6,112 annually and over $30,560 over a five-year period. The policy would also cost high income earners over $62,570 over five years. This would have a dramatic effect on the economy and have long term negative impacts on everyone.
As a whole, the tariff proposed by Trump would cost the US economy $170 billion annually and $850 billion over five years. The benefit to US producers would be $43 billion, and that’s only 15% of what the consumer would lose. This, of course, is only a look at the financial cost to the American consumer. Other countries are likely to place tariffs on their imports as well. The reader could only guess the cost this would have as it rippled through the world economy.
It’s amazing that these protectionists can sit in their homes surrounded by products made in every corner of the earth but still think it’s reasonable and possible to make all these goods in America. Regardless of how you feel about the global economy, it is the free market. This doesn’t mean we have to accept the customs and cultures of every part of the world. Empowering the central government to interact in the marketplace to protect American jobs is a fool’s errand and destined to lead to an ever bigger government. The idea that the only way another country can win in free trade is to plunder another is a preposterous fallacy propagated by the economic illiterate. The free market is based on voluntary interaction among individuals for the benefit of both parties. Only stupid people believe less free trade will bring more economic prosperity to any country. This study proves that it simply doesn’t.
China Subsidizes Their Corporations and We Should Be Fighting It
China subsidizes its corporations which enables them to “dump” cheap products onto the world economy. This is a significant and ongoing problem. China’s government gives corporate welfare to its multinational corporations, so should we punish them by giving corporate welfare to our multinational corporations? This, of course, would require us to pick winners and losers in our marketplace and all the other things we despised about the Bush and Obama administration.
No one bothers to look at the results of this fiscal policy in China. The Chinese government has an iron grip on every aspect of Chinese life, including their economy. The only reason they’re not currently in a recession is through an intricate web of market controls subsidies – and obviously currency manipulation, among many other things. It’s amazing that some of our leaders see this and in retaliation want to emulate some of these policies. The real payback is to let them continue to give us cheap goods that they’re subsidizing to our benefit and they will beat themselves in the long run. There is something to be said about them stealing our intellectual property. This isn’t the free market and should be addressed.
Economist, Donald J. Boudreaux, a Prof. at George Mason University, offered a perfect analysis of this in a 2011 AEI report:
“Economists are far more hesitant than are politicians and members of the general public to use the reality of such subsidies as a justification for the home government to impose retaliatory trade restraints. The most obvious reason, from an economist’s perspective, for why foreign governments’ subsidies (and other market-distorting policies) do not justify retaliation by the home government is that people in the home market typically benefit, on net, from subsidies given to foreign exporters. If, for example, the Chinese government taxes the Chinese people in order to artificially reduce the prices that Europeans and Americans pay for Chinese exports, why should Europeans and Americans complain?”
There will come a time when these type of policies will come home to roost for China. In the meantime, we already have protections in place that help mitigate the most egregious forms of the Chinese economic policy.
There is a serious glut of steel on the world market. This is one of the front lines of our cold trade war with China. The American consumer has paid the price due to this trade war while the world has benefited. In the past two decades, Chinese steel output has increased at an incredible pace from 95 million metric tons (MMT) in 1995 to 803 MMT in 2015. This accounted for more than 80% of the world increase.
Speaking about this, Commerce Secretary, Penny Pritzker, authored an opinion piece where she stated:
“We take seriously our ongoing responsibility to combat unfair trade that threatens the viability of this industry and the good people in our steel-making communities.” She went on to also say, “Currently, we are enforcing 161 anti-dumping (AD) and countervailing duty (CVD) cases on steel products to combat the countries, like China, that are trying to dump steel on our market.”
AD & CVD are petitions American corporations have filed with the federal government to stop Chinese steel from entering the United States. As the Secretary suggested “161 anti-dumping (AD) and countervailing duty (CVD)” petitions had been enforced. The commerce department’s policy stopped US companies that use steel from receiving this cheaper steel from China. That means a business probably from your state or mine wanted to make you a cheaper product but was stopped by another business (the steel industry) by using the levers of government. That doesn’t sound exactly fair, but that’s the law. The result is steel prices were higher in America compared to the rest of the globe. You may be rationalizing with yourself that this may be worth the low relative cost difference if it saves American jobs. The problem is that the economic numbers don’t support this assumption. Steel producers represent a small sector of the economy in relation to the steel consumer sector.
Daniel R. Person of the Cato Institute and former U.S International Trade Commission agent said:
“The Bureau of Economic Analysis (BEA) is part of Sec. Pritzker’s Department of Commerce. BEA data indicate that value added by “primary metal manufacturing” amounted to $59.7 billion in 2014. (Note: Primary metal manufacturing [NAICS 331] includes nonferrous metals, such as copper, aluminum, magnesium, lead, tin, silver, and gold, so is much broader than the steel industry.) Downstream manufacturers that utilize steel as an input generate value added of $990 billion, more than 16 times larger than primary metal industries. The disparity in employment also is more than 16 times greater. Primary metal manufacturing employed 400,000 people in 2014. Downstream manufacturers employed 6.5 million. Employment by U.S. steel producers is somewhere in the range of 100,000–150,000.”
As Mr. Person states in his article, we need to put this problem into perspective. You can’t possibly think it’s reasonable to sacrifice a sector of your economy that employs 6.5 million people for the benefit of 400 thousand jobs. Trump’s fiscal prescriptions would put this on steroids making an almost out of balance policy even worse.
In the piece written in Forbes by Steve Hanke, he also wrote about anti-dumping laws, saying:
“Just take the antidumping amendment of Senator Robert Byrd (D-W Va.). Senator Byrd slipped it into an agricultural appropriations bill in 2000, and supposed free-trader Bill Clinton signed it into law. The Byrd statute allows U.S. companies to file antidumping petitions, have tariffs imposed and then divide up the loot. The WTO recently ruled the Byrd amendment illegal and authorized other countries to hit the U.S. with retaliatory tariffs unless Congress repeals it.”
To be fair, US manufacturers of steel have been ravaged by Chinese steel. The anti-dumping laws, however misguided, have failed to protect these companies because they do continue to sustain losses. Unfortunately, this may be a sector of our economy that may not weather this storm. Ever increasing regulation at the federal level has had its effects on this sector as well.
Sugar protections & The Export Import Bank
According to an article written by Justin Sykes at Americans for Tax Reform, Tariffs on sugar introduced in 1934 have cost taxpayers billions. Our taxes have been used to prop up the sugar industry and forcing us to pay double per pound of US sugar compared to the rest of the world. The program is estimated to cost 10,000 American jobs annually in the US food industry. Industries in the United States have been forced to pay an artificially high price for sugar. This has led to companies having to relocate to places outside the US to be competitive in the world market. From 2000-2001 it cost consumers nearly half a billion dollars, and in 2013 it cost $300 million. The industry is supported by price controls, tariffs, and import quotas. Producers of sugar have benefited tremendously from this. If you want to see the transfer of wealth, just look at the sugar industry. This is the face of protectionism in all its glory.
The Export Import Bank or Ex-Im Bank was created by executive order during the Great Depression to help US companies secure low-interest capital. It quickly became a tool used by politically connected elites at the expense of the US taxpayer. The subsidized export financing helped companies shift their productions to foreign countries, with one of the biggest beneficiaries being China.
Sen. Mike Lee (R) writing about the program had this to say:
“China is by far the biggest beneficiary of Ex-Im guaranteed loans. And since most of that financing benefits state-owned firms, the Ex-Im Bank is one of the largest subsidizers of Chinese communist officials in the world. For instance, in 2013, the Export-Import Bank financed a $63 million deal to help build a semiconductor manufacturing plant in China. How exactly does subsidizing Chinese semiconductor manufactures help save American jobs?”
Sen. Lee, along with other conservatives, ultimately put the brakes on Ex-Im for now. The Ex-Im Bank is a prime example of how a country can try and give a corporation advantages in the world market, but those advantages often lead to cronyism.
I’m sure most supporters of smart trade will tell you these results aren’t what their policies aim to do, but a simple look at past protections will show you this is the only result.
The US Economy is a net winner in the world economy
When I’m debating “smart traders” they tend to have a pessimistic view of American standing in the world economy. I see the negative things taking place in the global economy. I also see the piles of regulation being placed on these companies. Overall, the US economy is a net winner in a lot of these economic situations. There are more than a few real world success stories taking place right now, courtesy of more free trade. For example: During the 1980’s, Nixon placed a trade embargo on exports of all US oil. There were some exceptions to this policy obviously, but it was a general embargo. In Dec 2015, the Republican congress and – to my surprise – the Obama White House repealed the ban on oil exports. The next few months following this repeal 87 million barrels of crude oil and condensate were shipped to 17 countries in the first half of 2016 alone. Billions of capital and profits have flooded into this sector even though American oil companies are in the doldrums. The protectionist policy of keeping American oil in America should have been a boon to domestic production, but with the market open, all you have is growth.
Another example of trade working is the great state of Texas. Texas is viewed as the most business friendly conservative-run state in the union. Texas breaks all the rules when it comes to most “smart trade” thinking. Texas also has the second largest economy in the United States. They happen to be the biggest trader in the United States by a long shot with $248 billion in exports, and is the leading state in trade 14 years running.
Every year, trade revenue continued to rise in Texas and every year more jobs were created. Sixty-two percent of those exports came from free trade member nations. When it comes to Foreign Direct Investment (FDI), Texas is also a leader. Texas is number one in FDI when it comes to creation of jobs. FDI is responsible for $212 billion in combined capital investment between 2011 and 2016 in the state. The largest FDIs in Texas are the UK, Germany, and Canada. Foreign owned companies employed 512,800 Texas workers.
It’s strange because according to protectionists, Texas should be getting clobbered by trade. Open markets in this state have been a miracle for the Texas worker. They are and have been the leader in new jobs and innovation across the spectrum of economic policy. The policy has been so successful, it’s been dubbed the Texas model. This further shows why open, and not closed, trade policies is a net positive for Texas and America.
According to a Pew research poll, 68% of Trump supporters don’t think free trade is the right economic policy. And to that, I say 68% of Trump supporters are 100% wrong.
We should be working to expand the bubble of individual liberty. The narrow thinking when it comes to trade will be the undoing of this republic. More choices, not fewer, should be the mantra of the party of Lincoln, even though he didn’t completely advocate for it economically. It is perfectly reasonable to support Trump in the construct of this being a binary choice between him and Hillary, but it is foolish to accept his premise of putting America first when it pertains to protection. In the book Economics In One Lesson, Henry Hazlitt broached the subject of protection, succinctly saying:
“It is useless to deny that a tariff does benefit-or at least can benefit-special interest. True, it benefits them at the expense of everyone else. But it does benefit them. If one industry alone could get protection, while its owners and workers enjoyed the benefits of free trade in everything else they bought, that industry would benefit, even on net balance. As an attempt is made to extend the tariff blessings, however, even people in the protected industries, both as producers and consumers, begin to suffer from other people’s protection, and may finally be worst off even on net balance than if neither they nor anybody else had protection.” (Henry Hazlitt Economics in One Lesson chapter 11 page 83-84)
In the same book on the matter, Hazlitt also said:
“We should not protect, for example, that reduction of tariffs would help everybody and hurt nobody. It is true that its reduction would help the country on net balance. But somebody would be hurt. Groups previously enjoying high protection would be hurt. That in fact is one reason why it is not good to bring such protected interest into existence in the first place. But clarity and candor of thinking compel us to see and acknowledged that some industries are right when they say that a removal of the tariff on their product would throw them out of business and throw their workers (at least temporarily) out of jobs. And if their workers have developed specialized skills, they may even suffer permanently, or until they have at long last learnt equal skills, in tracing the effects of tariffs, as in tracing the effects of machinery, we should endeavor to see all the chief effects, in both the short run and the long run, on all groups.” (Henry Hazlitt Economics in One Lesson chapter 11 page 83-84)
These policies leave real world disaster in their wake. Republicans need to turn back to the free market. Trade policy and China has had very little effect on our overall economy. Manufacturing in the United States has increased by nearly 40% in the past 20 years, despite NAFTA or the rise of China.
The culprit behind the loss of manufacturing jobs is due to increased innovation in the sector. Automation and a plethora of other technological breakthroughs have led to companies needing fewer people to produce the same goods. We have smarter factory workers who make larger salaries and don’t have to slave in textile factories to earn a buck. We have got to understand that change is and will occur whether we like it or not. This innovation has made all things more affordable and increased our standard of living.
America’s poor live in relative luxury compared to most of the world’s impoverished. Protectionism, smart trade, mercantilism… whatever you want to call it, is illogical and should be rejected.