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Dispelling Two Objections To Free Trade

By David R. HendersonHoover Institution

FTC

In my recent Defining Ideas article titled “A Refresher Course on Free Trade,” I made the case for free trade. A large part of the economic case is that free trade makes people in the country that adopts it better off than if their government hadn’t adopted it. It makes imports cheaper, allows consumers to get a more varied range of goods, and causes labor and capital to be allocated to areas of the economy where they are most productive.

In the United States in recent years, there have been two main objections to free trade. The first is that when free or freer trade is introduced into a particular sector, producers in that sector, both owners of capital and laborers, will be worse off. Therefore, argue some of the people who make this point, either trade shouldn’t be liberalized or, at least, introduction of trade should be accompanied by government spending to compensate the losers. The second objection is that free trade benefits mainly the wealthy and does little for the workers who are living on the economic edge. The first objection is often true in the short run but almost always false in the long run; it also applies to any economic change whether that change is caused by international trade or purely domestic economic interactions; in short, the objection proves too much. The second objection is simply false.

Winners, Losers, and Compensation

In my earlier article, I pointed out that if the market for sugar were opened to unrestricted imports from other countries, the price of sugar in the United States would fall and US sugar producers would be hurt. That’s all true in the short run. In the long run, say ten years from now, it’s not clear that those who produce sugar now would be worse off then. Owners of capital would have had ten years in which to find alternate industries in which to invest and workers would have had ten years in which to find other jobs.

Still, ten years is a long time. Those who lose jobs can find others at lower wages but they might be employed at these lower wages for at least a few years before they build their skills and earn wages comparable to the ones they lost because of free trade. So one can understand why people who see the benefits of free trade want a government policy to subsidize the losers for a few years. Those who want such subsidies tend to focus on workers who lose their jobs but the same thinking would presumably apply to business owners, including shareholders, who suffer a wealth loss due to free trade.

There are a number of problems with such proposals, though. First, government is notoriously bad at targeting help to groups sorted by their particular circumstances. When politicians sense a gravy train coming, they tend to lobby their colleagues to include other groups and causes. We saw this with the initial Biden proposal for infrastructure. It included a large amount of money for activities that have never been considered to be infrastructure, activities like day care.

Second, there is nothing special about free trade. Indeed, in a large economy like that of the United States, most trade is not across borders but is between people within the US borders. In 2019, imports were about 14.6 percent of gross domestic product. That sounds high, and is high, but that number confirms that most trade in the United States is between and among people in the United States. When a new technology or even a new way of running a business helps consumers, it also destroys many businesses and hurts workers who lose their jobs or who must work at a lower pay to keep their jobs.

We don’t need to go back far to see such examples. When I taught in the business school at the University of Rochester in the late 1970s, some of my evening MBA students who worked at Kodak called it the “big yellow money machine.” Kodak was riding high on the technology that innovator George Eastman and his successors had created and perfected. But digital cameras in the 1980s and 1990s and, later, cell phones that got better and better at taking still shots and movies, virtually destroyed the market for Kodak’s product. It’s true that part of the causes was international trade in cell phones. But even without cell phones from other countries, US cell phone producers were plenty capable of competing Kodak into bankruptcy. 

Few of those who advocate compensating those who lose due to expanded trade across borders advocate compensating those who lose due to increased trade within borders. I hasten to add that I’m glad that they don’t. But the principle is the same.

Are the Rich the Main Gainers from International Trade?

In early 2016, UCLA professor Mark Kleiman wrote:

But the bottom line is that all of the gains, not merely from trade but from economic growth, have been concentrated in the hands of a relative few.

I was surprised when I read that. Historically, the opposite has been the case. Before considering recent history, let us turn to the famous repeal of the British Corn Laws, which happened in June 1846. The Corn Laws disallowed the import of wheat (which the British called corn) unless the domestic price of wheat hit a very high level. In practice this meant that imports of wheat were effectively banned. Because lower-income people spent a much higher percent of their income on food than higher-income people did, repeal of the Corn Laws helped low-income people disproportionately. Those who lost were primarily rich owners of agricultural land who, after 1846, had to face competition from other countries.

In a recent discussion to celebrate the 175th anniversary of the repeal of the Corn Laws, British historian Steve Davies of the Institute of Economic Affairs in London put it well. The successful popular campaign to repeal the Corn Laws, he observed,

fixed in the minds of the British working class in particular, right up to the present day, the profound belief that free trade is good for the poor and the working man and woman and that protectionism is basically a conspiracy by the rich and special interests to screw over the working class.

Now let’s turn to recent history, which is quite consistent with the nineteenth-century British history.

Although trade may hurt various low-income people in their role as competing workers, it helps lower-income people, as consumers, proportionally more than high-income people. The reason is that the particular goods that are traded tend to be those that are a larger proportion of a lower-income household’s income. Think about who shops at Walmart and where Walmart buys many of the items it sells. Lower-income people are disproportionately represented among Walmart shoppers and many of the items, typically low-end, that Walmart sells are imported, especially from China. In an article in the Quarterly Journal of Economics, UCLA economist Pablo D. Fajgelbaum and Columbia University economist Amit K. Khandelwal lay out the facts about the gains from trade.

In correspondence with me about their findings, Professor Khandelwal considered the gains that would be captured by various income groups if prices for imports fell by 5 percent. For food, people at the 10th percentile—those whose income is below that of 90 percent of the population—would have an annual gain of 0.39 percent of income. People in the 90th percentile and 99th percentile, by contrast, would gain zero. Similarly, a 5 percent price cut for manufactured goods would raise real income for people at the 10th percentile by 0.81 percent and for people at the 90th and 99th percentile by only 0.22 percent and 0.10 percent, respectively.

In many cases, moreover, those who lost their jobs due to the opening of trade had had substantially higher incomes than the lower-income people who made out big from trade. Consider the case of clothing. The US economy lost 650,000 apparel jobs between 1997 and 2007, which was the period during which Chinese imports increased so rapidly. Not all of those people found jobs at a pay as high as they earned before. That’s the downside. The upside is that, with the increase in international trade, clothing became much cheaper. In his book The Rise and Fall of American Growth, Northwestern University economist Robert J. Gordon reports that between 1980 and 2013, clothing prices fell by an annual average of 2.6 percent. Compounded over the period from 1997 to 2007, that’s a 24 percent drop. The actual drop is probably even more because the opening to China brought down clothing prices annually even more quickly than the average annual drop from 1980 to 2013.

For 2019, the latest data available, households in the bottom two quintiles, which is about 53 million households, spent an average of $1,032 per year on clothing. That’s out of an average after-tax income of $22,591. So they spent 4.6 percent of their income on clothing. Because clothing prices fell over that time, they would have bought more clothing at the lower price. So we will understate their gain if we assume that they were insensitive to price and bought the same amount of clothing that they would have at the higher pre-expanded-trade price. Even assuming no further drop in clothing prices after 2103, the 24 percent drop in price was important for a household with such limited means. The clothing they would have bought in 1997 would have cost an inflation-adjusted amount of $1,358.  So the average family in the two bottom fifths of the income distribution saved $326 on clothing alone. Over 53 million households, that is a gain of about $17.3 billion. Assuming that the 650,000 people who lost their jobs lost as much as $10,000 each per year, which is probably an overestimate, their loss was $6.5 billion, which is less than 38 percent of the gain. Moreover, the average worker in a clothing factory in the United States, along with her or her family, almost certainly earned more than $22,591, the average income of the bottom two-fifths.

There may be other objections to free trade but two objections fail. First, even though some people lose in the short run when trade is made freer, almost everyone gains in the long run. Second, those who gain disproportionately from free trade are lower-income people, not higher-income people.


Why China Trade Talks May Hinge On North Korea’s Kim Jong-Un

By JED GRAHAMInvestors Business Dailly

Last week Wall Street focused on what the Trump-Xi summit would mean for the China trade war, the global economy and the Dow Jones. But the high-stakes meeting turned out to be a warm-up act. President Donald Trump’s real diplomatic flourish came as he crossed into the DMZ to shake hands with North Korea’s Kim Jong-un.

Investors are still trying to discern whether China trade talks will bear fruit after Trump’s big concession to Chinese President Xi Jinping. In addition to holding off on further tariffs, Trump said he would ease a ban on American technology sales to Chinese telecom equipment giant Huawei. Beijing appeared to give up little or nothing, and shows no sign of caving to Trump’s demands.

Watch North Korea To Gauge Trade Risk To U.S. Economy, Dow Jones

That raises the risk of another sudden collapse of China trade talks and a further escalation of tariffs. If that happens, both the U.S. economy and Dow Jones look vulnerable, even as the Dow hit record highs Wednesday.

But it may make sense to look at the China trade war through the prism of Trump’s push for a North Korea breakthrough. It’s a good bet that Trump-Kim DMZ meeting wouldn’t have happened if he hadn’t gotten China trade talks back on track.

Now Trump is pushing for a White House visit and reportedly wants North Korea to agree to substantially freeze nuclear weapons capabilities. As long as Trump sees Beijing as a “strategic partner” reining in North Korea’s nuclear ambitions, further escalation of the China trade war seems unlikely.

The relationship between North Korea and China is complex. But China has significant economic ties with North Korea, has often taken Pyongyang’s side against harsh international sanctions and has been seen as able to influence its behavior. International relations experts also say that Beijing has long used its role in mediating North Korea’s threat as a buffer against criticism by the West.

North Korea, China Trade Talks Follow Parallel Path

Trump has previously discussed China’s North Korea ties as a consideration in the U.S.-China trade dispute. While that hasn’t averted a major trade conflict, this past weekend isn’t the only time North Korea nuclear issue and China trade war have seemed to follow a parallel path.

Last December, Trump and Xi agreed to their first trade cease-fire. Then came Trump’s February summit with the North Korean leader in Hanoi. Trump walked away from that meeting, putting talks on ice. In May, China trade talks also broke down as Trump lost patience with Beijing for backtracking on commitments. On May 5, Trump threatened to escalate tariffs. Four days later, North Korea fired off short-range missiles in an implicit challenge to the U.S.

Why North Korea Deal Could Precede China Trade Deal

The odds of a China trade deal look pretty low, given the depth of the differences separating the two sides. The U.S. insists that China write new laws resolving complaints over theft of intellectual property, forced technology transfers, currency manipulation, access to Chinese markets and state subsidies. Even then, the U.S. wants Trump tariffs to remain in force, with some falling away as Beijing clears these benchmarks. China has refused all of these demands as humiliating and a violation of its sovereignty.

Trump may be losing hope for a huge China trade deal, but he seems to think a North Korean nuclear deal could be in reach. Trump may even see a certain logic in letting a North Korea deal come first. If Beijing really is a “strategic partner,” as Trump said in a Saturday press conference, Chinese leaders will encourage North Korea to complete a nuclear deal with him. If that happened, Trump might be more trusting of China to abide by any trade agreement, rather than keeping tariffs in place until Beijing proves it will keep its word.


Rare-Earths Mining Shows Exactly How China Cheats The United States Through ‘Free Trade’

A game where only one side plays by the rules is rigged. We have now locked ourselves in an embrace with a corrupt regime, and it has not been to our benefit economically or morally.

By Kyle Samminthe Federalist

The United States and China have traded since the early days of our republic, but only recently has the scale of that trade become a political issue. More than any other point, Donald Trump’s rhetoric against outsourcing to China gave him the blue-collar Midwestern votes that made up his margin of victory in 2016. His election was a break with the generation-long bipartisan consensus that more and freer trade is better, whether the trading partner is a liberal democracy that respects the rule of law or a communist dictatorship where unfree people labor in unsafe conditions for government-suppressed wages.

Even to call trade with China “free” is a misnomer. Besides the minor tariffs still in place, there is also an uneven use of non-tariff trade barriers. Chinese goods enter our markets cheaply and freely because we agree to follow our agreements, our laws, and the rules of the World Trade Organization (WTO). Our goods, on the other hand, are subject to arbitrary restrictions by the communist government, while Chinese companies and government routinely infringe our intellectual property rights. The high hopes of free trade have been replaced with humiliation and decline.

Free trade with unfree nations smells like a conspiracy: the rich get richer by paying peanuts for production, while blue-collar workers lose their jobs and are bought off with cheap goods and more welfare. The truth is not criminal, just criminally stupid.

In classic American broad-mindedness, when our system won the Cold War, we bent over backward to befriend our former enemies. Free trade would lead to a prosperous, freer China, the thinking went. We thought that lowering our guard would turn a foe into an ally. Instead, the American worker just got sucker-punched.

The Rare-Earth Dispute

One of the best examples of the perils of this uneven trade is the dispute over rare earth elements. Rare earths—a group of 17 different elements—are plentiful, but difficult to mine and environmentally hazardous to process. In recent years, rare earths have become more important, as many are used in modern electronics and military and high-tech applications.

At present, about 80 percent of the world’s production of rare earths comes from China. That undoubtedly suits China just fine, and the western companies that have outsourced industrial production there don’t have a problem with it, either. After all, if your iPhone comes from China, why shouldn’t its components?

But China’s dominance of the field has other effects. While the United States once led the world in rare earth production, we now import the vast majority of these minerals from China. The loss in mining jobs is bad enough, but the extreme concentration in the field means that China essentially controls the world’s access to a vital industrial and military resource.

Free-market conservatives confronted with a situation like this one usually laud the efficiency gained by trade and competition. They are not completely wrong: it is more efficient to have third-world workers in an unfree country mining hazardous materials. Mining is a dirty, dangerous job: why not let someone in a country with terrible environmental laws and lax workplace safety rules do it?

If rare earths were only used for toys and video games, that might be a financially acceptable albeit morally dubious answer. The military applications, though, make this a much bigger problem. Once China achieved a near-monopoly on rare earths, their position was ripe for abuse.

And, wouldn’t you know it, they abused it. Between 2009 and 2012, China drastically reduced its export of rare earths and two other important metals, tungsten and molybdenum. In a free economy, that would encourage production in sources outside of China, where the artificial scarcity Beijing imposed would make it worthwhile to produce at higher prices.

But when Red China is involved, the economy cannot be called free. Mike Fredenburg explained what happened next in a 2017 National Review article:

In 2012, U.S.-based Molycorp, attracted to the higher prices that resulted from the Chinese government’s efforts to boost profits by restricting REE [i.e., rare earth elements] exports, made plans to ramp up domestic REE production, investing nearly $800 million in state-of-the-art mining operations in California. At the moment when the project was poised to succeed, China flooded the market with REEs just long enough to knock Molycorp out of the market. After its Chapter 11 bankruptcy reorganization, Beijing is allowing Molycorp to continue operations in China. But once again, the U.S. has no domestic REE production.

This anti-competitive behavior in a domestic company would earn an investigation by the Federal Trade Commission (FTC). In the international economy, the American government’s options were more limited. The Obama administration, joined by Japan and the European Union, filed a complaint against China in the Dispute Settlement Body of the World Trade Organization (WTO).

America won its case, but the Molycorp mine in California was still bankrupt. In 2017, the rare-earth mining assets were sold to a consortium of buyers that includes Shenghe Resources Holding Company, a Chinese firm with ties to the PRC’s government, according to mining executives quoted in IndustryWeek. The Chinese government broke the rules of the WTO and still came out on top.

One of Many Violations

The rare earths industry is one of the more egregious instances of a non-market economy manipulating the markets, but it is far from the only one. The problem began when the free nations of the world agreed to admit China into the WTO in the first place. The WTO grew out of the General Agreement on Tariffs and Trade, a post-World War II attempt to rationalize trade and reduce barriers to it. As far as it concerned trade between developed nations recognizing the rule of law, it was a great success.

China joined the WTO in 2001. The organization’s press release from that day is full of hopes for expansion of “its rules-based system” that, in retrospect, look naive. “As a result of the negotiations,” the press release reads, “China has agreed to undertake a series of important commitments to open and liberalize its regime in order to better integrate in the world economy and offer a more predictable environment for trade and foreign investment in accordance with WTO rules.”

The specific promises are even less believable 18 years later:

China will provide non-discriminatory treatment to all WTO Members…many of the restrictions that foreign companies have at present in China will be eliminated or considerably eased after a 3-year phase-out period. In other areas, like the protection of intellectual property rights, China will implement the TRIPS (Trade-related Aspects of Intellectual Property Rights) Agreement in full from the date of accession.

Many of these changes have been made in Chinese law, but in a communist country, the law matters less than the will of those enforcing it. Intellectual property rights of foreign nations are routinely ignored, and counterfeits from China are sold around the world with the tacit acceptance of their government.

China also ignores environmental and occupational safety laws while banning independent trade unions from organizing. In a country that respects the rule of law, these things have been judged to make the marketplace more humane. They also make it more expensive to do business, but most people accept that tradeoff. China routinely ignores what laws it does have and squashes any independent source of power like trade unions or industry groups that might challenge the state to change.

Trade With China Is a Rigged Game

China’s accession to the WTO came with the expectation that China would be a “market economy” before very long. These actions show that it has not, and has no intention of ever doing so. Even so, we continue to trade with China on unfavorable terms, a reflection of the consensus among bipartisan elites that free trade benefits everyone, with little or no tradeoffs. The rare earths dispute shows how untrue that is.

Conservatives have recently been transfixed by a dispute between Sohrab Ahmari and David French over whether the liberal democratic system will allow social conservatism to co-exist with the values of the secular left when the secular left increasingly refuses to play by liberal democracy’s rules. A similar argument needs to be had about free market competition with non-market economies that are just as lawless in their pursuit of victory. Conservatives have long fought for greater market efficiencies, but we must now ask ourselves if that goal is worth the price.

Free traders have been very pleased to divide the debate between two sides: those who want to trade with the world, and those who want to keep out all foreign goods. It is a false dichotomy between absolutes. In between, there are many who would be happy with trade, provided it were among free nations. In a system where all involved can be trusted to obey the rules, and where violations can be punished with more than a slap on the wrist, trade can improve all nations’ prosperity.

But a game where only one side plays by the rules is—and there is no other way to say this—rigged. Competition among equal parties is fair and free. If a factory in one state loses out to another, so long as no government’s thumb is on the scale, the result is just. Everyone follows the rules. May the best company, and the best workers, win.

Compare that to competition with an unfree country’s manufacturers. Is a factory in China polluting in violation of their laws? We have no way of knowing. Even if we did, there is little we can do about it when their court system serves only the will of the Chinese Communist Party.

Are their factories working cheaper because they are unsafe? Likely, but again there is no justice system that will remedy it. There are no independent unions to fight for work rules that protect people’s health, nor for increased wages like those in the developed world. China pretends to be a worker’s paradise, but in reality, it is a billion-member factory town.

Killing Ourselves With Kindness

This month in The Atlantic, Reihan Salam argued normalizing trade with China was a mistake from the beginning. Salam dates the problem to a year before China’s WTO accession, when Congress extended “permanent normal trade relations” (PNTR) to China, rather than annually renewing most-favored-nation status. The results were stark:

The annual battles over whether or not China merited MFN status naturally brought human rights issues to the fore, and gave voice to champions of the Tibetans and other marginalized, and sometimes brutalized, minorities. The deepening of economic ties that followed PNTR had the opposite effect—rather than draw attention to all the reasons the U.S. might want to be wary of further entanglement with China, it greatly enriched those who profited from that entanglement.

We have now locked ourselves in an embrace with a corrupt regime, and it has not been to our benefit economically or morally. The rare earths trade has been one of the worst examples of how Red China has used our openness against us, but it is far from the only one. Now, bound to a hostile nation that grows in power every day, we have outsourced so much of our economic machinery to them that business leaders are heard to say that reshoring manufacturing is “impossible.”

It is not impossible, but it requires hard work. Congress—yes, Congress—must reassess the ease with which unfree nations are granted access to American markets. The entire international trade structure of the WTO has become an unequal treaty, with the United States and the rest of the developed world on the losing end.

China is familiar with the concept. Its trade with the Western world was once starkly unfair in the other direction. More powerful nations, including the United States, forced China to sign unequal treaties beginning in the 1840s. What came next was a “century of humiliation,” followed by the isolation caused by the communists’ victory in their revolution in 1949.

Our politicians may be ignorant of history, but China’s are not. American surrender on trade could cause our own century of humiliation. To avoid it, our leaders must, at last, ask the question workers across the country have asked for 20  years: has unrestricted, one-sided, free trade with China really benefited the average American community? Has ceding control of strategic resources to the enemy made us safer as a nation? After two decades of humiliation, the answer is clear.


Don’t Import Foreign Price Controls; Break Them

By Phil Kerpen • American Commitment

Americans are justifiably angry that we pay the highest prescription drugs prices in the world – anger President Trump tapped into on the campaign trail. The disparity exists because other rich countries use price control schemes, forcing American consumers to provide the returns on capital that justify the enormous research and development costs associated with bringing new cures to market; the rest of the world free-rides on our innovation.

The good news is that the Trump administration has been aggressive on the trade front in efforts to break foreign price control regimes; the bad news is that the Trump administration is also proposing to actually import foreign price control regimes into the Medicare program by adopting a payment formula that is pegged to foreign prices.

In its recent report “The Opportunity Costs of Socialism,” the White House Council of Economic Advisers (CEA) looked at “the impact on medical innovation of the U.S. adopting European-style price controls” and found: Continue reading


Trump’s Trade Wins Are a Victory for U.S. Workers

by Stephen Moore • Investor’s Business Daily

Is it possible that Donald Trump is winning on trade?

Last week, Trump apparently delivered two underappreciated victories as a result of his threat of stiff tariffs and renegotiated trade deals.

First, Seoul has agreed to reduce long-standing non-tariff trade barriers that have reduced American exports to Korea. Though the details are still sketchy, the Koreans have agreed to buy more Ford and General Motors Co. cars and trucks and other U.S.-made products. This can only be good news for American workers. The Koreans have also agreed to increase reimbursement rates to American drug and vaccine producers.

Even The New York Times grudgingly conceded that the deal “represents the type of one-on-one agreement that Mr. Trump says makes the best sense for American companies and workers.”

Also in recent days, China appeared to stand down in response to Trump’s jarring announcement of a record $50 billion of tariffs on Chinese products. Premier Li Keqiang pledged to improve American companies’ access to Chinese markets. He also said in a news conference that China would treat foreign and domestic firms equally. And what’s more, Beijing has promised that it would stop forcing foreign firms to transfer technology to China and would strengthen intellectual property rights enforcement. That was a smart and encouraging response. Continue reading


Unilateral Disarmament: A Bad Idea with Nukes and Industrial Policy

by George Landrith reagan brandenburg gate berlin

In 1963, John F. Kennedy delivered his famous “Ich Bin Ein Berliner” speech at the Brandenburg Gate in Berlin, Germany. Twenty-four years later, at the same spot, Ronald Reagan famously said, “Mr. Gorbachev, tear down this wall.” President Barak Obama, spoke this week at the same Gate where he hoped to regain some of his political mojo. He called for a worldwide reduction in nuclear stockpiles. In the theoretical world, a universal reduction in nuclear weapons is a good thing. But in the real world, there are nations that will not agree to such reductions and others that are currently seeking and acquiring them.

The idea that America should disarm in hopes of setting an example for other nations is dangerous and naive. We are not safer, if only the U.S. has fewer nuclear weapons. In fact, the rest of the world is not safer. If we can create verifiable and enforceable international agreements to reduce nuclear weapons, it would be worth considering. But if only the U.S. is disarming that is pure lunacy.

The same could be said for an international trade issue currently facing Congress that has garnered much political debate. Continue reading


A conservative’s take on the Ex-Im Bank

Ex-Im_Bankby George Landrith

As a rock-ribbed conservative, I support the entrepreneurial dynamism of free markets. I believe entrepreneurs are more likely than government bureaucrats to build successful businesses and provide stable, good-paying jobs. I oppose government interference in the marketplace. I want government to spend less, interfere less, do less, and tax less.

So when a few fellow conservatives criticize plans to reauthorize the Export-Import Bank on grounds that it is just another costly government corporate welfare program, why do I strongly disagree? The answer is simple – the Ex-Im Bank is none of the things some of my fellow conservatives claim. Continue reading


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