If you’re a regular reader, this article will probably come as no surprise to you. I’ve previously written articles on the problems with international trade and globalization. So, it’s no surprise I’m not in favor of a 100% isolationist policy or a 100% free trade policy. But I have never fleshed it out fully, so let’s do so.
Free Trade and Comparative Advantage
Free trade largely made its debut through the construction of comparative advantage. This theory holds that as long as a nation has a comparative advantage in a field it should utilize that field and trade with other nations that have a comparative advantage in another field.
In simple terms, it means everyone trades with everyone based on some sort of specialization. China is a manufacturing hub, the US is a tech hub, etc.
The entire economic theory of comparative advantage is based on assumptions. These assumptions have been proven unrealistic and unreliable.
There is a very simple question to ask yourself:
Do you believe it is morally acceptable for the U.S. to trade with nations utilizing slave labor for a significant portion of their manufactured goods to save a few pennies on imports?
If yes, you are okay with exploitation of people as slaves for personal gain. If not, you want reasonable restrictions on trade.
The same can be asked about climate:
Are you okay with a nation producing hundreds of times more in carbon and other polluting emissions with no controls/regulations in exchange for saving a few pennies on your leather purse?
If yes, you are in favor of the destruction of the environment and living standards for marginal financial gain of foreigners and mega corporations. If not, you want reasonable restrictions on trade.
Most nations are restrictive in trade. Many economists still fail to see an issue with this, saying that the host nation can reap the benefits of free trade while the restrictive country will not.
However, in that case, the other countries are free to export to you while they restrict your imports. That’s not helping you, that’s losing your production, capital, and associated jobs to a competitor in return for temporary lower prices on their imports. You also lose out on the majority of your exports since they are restrictive to you. That nation safeguards itself against you. You allow your country to be subjugated to them.
You see, those prices won’t stay low as they continue to develop as a country and secure their specialization on the world stage. We have noticed this occurring with automobile manufacturers.
In short, this article argues that:
It is overtly immoral for a nation to focus on providing their constituents with access to marginally cheaper imported products than allowing them the jobs that would permit them to pay more for marginally more expensive domestic products.
Free Trade is Bad For All of Us
There are varying schools of thought on free trade, and I want to make mine obvious. I believe it is the providing the ‘most good’ when you provide people with the maximum amount of their own employment (and cultural security) rather than the minimum amount of cost. Employment gives individuals goals, ideals, and something to continue to work toward and strive with. Lowered prices merely incentivize and continue to create the plague of consumerism.
Employment and the skills it provides are intangible and everlasting. Lowered prices are just like our modern culture: temporary and unfulfilling long term.
Likewise, most would rather have a job than a handout. It’s basic human nature to desire to better ourselves and our surroundings. When we have the correct motivation and tools to do so, at least. Free trade restricts this by focusing on the end-immediate dollar amount instead.
Which is ironic, considering the lower prices will not forever remain low. Naturally, as a country becomes specialized, other nations naturally lose specialization. The host country can then increase the prices without option for the other countries to retaliate as they have lost their key industry workers already. Labor is more expensive in the US than it is in China. But this will not hold true for all the future. Especially as they surpass “developing” status.
Ironically again, protectionism could very well be the majority of the Western nations’ comparative advantages. Free trade is the best for majority-export nations, which tend to be developing nations. The receiving nations tend to lose out on this trade imbalance.
And with this article, I look forward to hearing the screams of the libertarians.
The Basic But Honest Math: Trade GDP
There is a basic calculation in macroeconomics for the calculation of the GDP. It goes like this:
GDP = C + I + G + (X – M)
In easier terms:
Gross Domestic Product = private consumption + gross investment + government investment + government spending + (exports – imports)
This is how we determine the gross domestic product of a country.
If you know basic math at all, you know where I am going with this.
(X – M) is the “trade surplus” or “trade deficit”. It is exports – imports. If there is $10 worth of imports but only $5 in exports, we are running a trade deficit of $5.
What happens when the overall calculation has a -$5 in the trade category as in the trade deficit example above? Simple, it lowers GDP by $5.
This means that regardless of the situation, if imports are ever equal to or greater than exports a country is going to lose out on potential GDP.
The trade deficit was $891.3 billion in 2018, according to the U.S. Census Bureau. That’s nearly a trillion less in GDP than what we could have had. (GDP was 20 trillion in Q1 2018, so nearly 5% of our GDP was lost because of free trade).
That is hardly a small number in terms of dollar amounts or percentage points. Additionally, we aren’t even considering the other items in the equation yet.
Consider C, consumption. If goods are purchased domestically for more expensive prices, and they are still required purchases, we would expect an increase in consumption at least in terms of total dollar amounts. At the very least, we could consider it to remain “equal” to the pre-trade change levels. This is due to the increased price offsetting the decreased purchases overall. Consumption does showcase a multiplier effect, after all.
Then what about I, investment? Massive investment would need to be undertaken in the US to continue the manufacturing and industrial capabilities and reinvigorate our industries if we stopped being so reliant on external entities and countries. I would also increase, further increasing GDP since more capital is being kept and spent in-house.
Finally, G, government investment. The government would be able to invest a lot more in local industries like manufacturing and farming with the additional billions they would receive in tariff profits, increasing GDP.
Sure, we could say that retaliatory tariffs are likely, decreasing our exports very so slightly. But the offset from that is nothing compared to the gains of the other components in the equation.
This equation is something that is tangibly avoided by free marketers in favor of dealing strictly with the “less cost for consumer overall” mantra. But employment is still a significantly higher reward than any additional temporary tariff tax cost.
Not to forget the climate as a negatively impacted externality. Like climate activism? Well, say hello to increased pollution from massive trade supply lines and increased developing nation pollution instead. We have no regulatory control over China and other massively polluting controls. The pollution trends in these nations are growing as the West’s are decreasing.
Don’t get me wrong, free trade is great for the countries that run trade surpluses like China and other developing nations. They are getting all the benefits mentioned above and additional GDP from a trade surplus. What’s not to like? But for the trade deficit nations, it’s a clear-cut situation that we are the losers.
Foreign Direct Investment
If foreign imports are so amazing for Americans and other Western nation workers, then why is China freaking out in massive quasi-psychotic episodes over the slight prospect that it won’t be able to export as much to the US in the future?
Even foreign investment is a joke. Rich foreign investors have purchased houses and other residential/commercial areas throughout the in-demand areas of Western nations. This process has only exponentially driven costs up and increased decay.
Very few of the purchasers of these houses live in them. There are entire sections of residential areas that are purchased by foreigners that only visit a few times a year, and the place remains millions in value. They sit on the properties as they appreciate in value, only to later hawk them back to the residents at the outpaced-inflation prices. Robbing the natives of the gain in equity and the capital that is now transmitted overseas.
Goodbye reasonably priced housing stock, hello forced rent control due to ballooning market prices.
Build up a desirable area and watch as foreign direct investment overtakes the cultural heritage that was once built up there by the locals.
National Integrity With The Pros and Cons of Free Trade
If we are to change this nearly trillion-dollar trade deficit into a break-even or surplus, we have to change our beliefs and practices. Really, our entire understanding of trade needs to be maneuvered in a better direction.
We are destroying our core industrial and manufacturing base in exchange of saving a few dollars.
We are destroying our independent capabilities and key knowledge players.
We are decimating our cities and towns that used to be prominent and leading players nationwide.
We are looting the middle class in the developed nations, the slaves in the developing world, and the poor worldwide.
Why? To help the ultra-rich national corporations make a few extra dollars.
It’s amazing how these corporations can brainwash so many, even academics.
These special interest groups are the ones pushing free trade and paying out the economists to side with them. These corporations can then shift their production to places like China or Vietnam, lay off their entire (more expensive) domestic workforce, and pay the native workers pennies on the dollar. They can then ship these items back to the US at cheaper rates but higher profit margins and reap the additional revenue not once but twice. No wonder income inequality continues to rise in developing nations.
That previous paragraph is no secret. It is known to all, and still free trade is pushed as an irreconcilable truth.
I don’t deny that free trade has benefits to these certain parties. The point is that it harms other parties even greater than the perceived benefit to the first parties. It is not a zero-sum game, and it is not in the benefit of most Western nations. This is without even including the cultural and demographic argument, which are both huge.
The issue is that these other pieces are never factored into the equation, as they are not an approved “assumption” in the modeling.
What this country needs is taxes taken off individuals and goods produced domestically so we can actually compete again. Then impose taxes on goods imported in here until we can build up our industrial base once again. The taxation on imported goods could offset taxes on domestic production as well.
We need a massive change or we will lose our independence over the next few decades as all of our key knowledge workers are dragged off to other countries and we continue to spiral into a never-ending trade deficit.
Being in debt to numerous other hostile nations was clearly never factored into the free trade model.
The world is returning to YOYO… Your On Your Own.. from a national point of view… so it’s far less likely that the wasteful multilateralism with its duplicitous labor trade arbitrage , free trade wealth transfer and capital mobility will continue… each geographical nation will be YOYO and borders will harden… get used to it… so the idea that they can trade or migrate their way out of this is very unlikely.. get used to the outcome that the global population will shrink as the virus moves through.