Free Trade

Today a story appeared that said President Obama was pushing aggressively free trade globally.  I had two separate reactions.

The first was from growing up as the grandson of a union organizer, and the son of a union member.  That reaction was why would a Democrat president work against the working man?  We know that these countries don't play fair, so why not even the playing field on those wishing to take American jobs.  But I guess he cleared it with his union buddy.

The second, coming from a student of economics, was that free trade is a great thing, as long as it is fair trade.  Did you ever wonder how a trinket from say China could travel thousands of miles on a boat, then hundreds to thousands of miles farther on truck or train, and still be cheaper than the trinket made in the next county?  While most of the time people blame labor costs, that is not entirely true.  All governments, ours included, find ways to subsidize certain industries.  When that subsidization occurs, the trade is no longer fair, and throughout history the target country has put a tariff on the product, to protect their workers.

Think of the inequalities between the Chinese and American economies.  China has much more lax pollution regulations.  While keeping our house clean is a good thing, the messy neighbor is able to save capital which is a part of the price of our trinket.  To bring this in to the real world, I worked for a company that manufactured air chambered beds.  They did not make the chambers here, simply because of expense.  Regulations prohibited the manufacture, since too much pollution came off the process of fusing rubber together.  They were forced to out source the production to a former east block nation.  So while their beds are assembled here, the parts are made elsewhere, because of inequalities in law.  But does not pollution carry in the wind?  Does not what the Chinese do or don't do affect the entire globe, including us?  How about the Indians, or Vietnamese?  Or even Mexicans and other South American countries?



Advertisement

Before we should pursue free trade, we should pursue fair trade.  Fair trade is when both economies play by the same rules.  So as an example since Canada and the United States are similar in regulation, free trade can ensue.  Or even many countries in Western Europe.  We need to decide as a nation whether we want to clean up the planet, or not worry about it.  Many political discussions in our country focus on regulation.  Some regulation is required, and in our system that regulation is decided by our elected officials.  By buying items from nations that do not protect their environment, we are tacitly saying the environment is not important.  We are being hypocritical.  We point to our environmental laws and regulations and pat ourselves on the back, then allow those who do not give a wit about pollution to cut us off at the knees.  That is not fair trade.

Tariffs are the mechanism that equals the playing field.  They do increase the price of imported products, but that only makes them equal to domestic products, this encourages good environmental stewardship.  As other countries come up to our standards, those tariffs should be reduced.  Assuming that eventually all countries would come to our standards, then free trade makes sense.  Until they come to our standards, tariffs are logical and appropriate.  There are some inequalities with the price of labor, those also tend to go to equilibrium as the less developed country becomes more developed, and when matched with transportation costs are actually minor in the pricing of products.

So we would urge the President to pursue fair trade agreements aggressively.  Free trade is unfair trade.  We saw that with NAFTA under President Clinton.  All the US companies that opened plants just across the Mexican border, did so because of unequal regulation.  The same did not happen just across the Canadian border, because Canadian regulation would not offer the same savings.  We lost too many manufacturing jobs because of this.  If the President must promote free trade, then he should advise the EPA and Congress to change our laws, reducing regulation and environmental controls to make it truly free trade.

Spend Wisely!

Political Economics

Can we all agree that there is a political side to economics?  And it runs much deeper than to just say "I am a free market capitalist" or "I'm a Keynesian believer".  The type of economic system a politician believes in, can shape policy, and affect the over all economy pretty deeply.

Another thing we can probably all agree on, is our economic well being in the US is precarious at best.  The morass seems to trudge on, with no apparent end in sight.  We read news (or at least I do) that says the Chinese currency may over take the Dollar as the world's reserve currency.  Reserve currency is the money people prefer to be paid with.  Before World War II that currency was the British Pound Sterling.  Since World War II the US Dollar has enjoyed that distinction.  When the Japanese or Chinese or British buy oil as an example, it is priced in Dollars.  That means they have to buy Dollars from us and use those Dollars to pay the oil producers.  Reserve currencies are generally perceived to be stable in value, and readily accepted.  So why now is the Chinese Yuan challenging the Dollar?

The Chinese have built their economy, almost on a free market system.  They are attempting to beat us at our own game.  While their government remains a totalitarian communist regime, their ability to unleash the entrepreneurial spirit in the people seems to be propelling their economy.  But for the same reason that the Middle East will never be the reserve, there is strict  controls by their government on the supply of money.  However, the more economic freedom they allow their people, the more likely it is that their currency will keep bubbling to the top.  There are pitfalls in the Chinese model, and unless their luck holds out, this blogger doesn't think the Yuan will be the reserve currency as soon as other experts.

Most market traders look at the present, and consider a little history.  Yahoo recently paid over a billion dollars for Tumblr.  Tumblr's assets are not worth near that, Yahoo believes they can improve Tumblr, and save money on the start up costs, and it does take a competitor out of the mix.  Traders also trade on emotion, more so now than ever before.  Sometimes, they ignore economics just because they believe they know where the future lies.  And sometimes they are right, think plastics in the 40s and 50s.

Many now assume that the Chinese economy will never have a hiccup.  That isn't true either.  While they have a vast internal market and seem to be growing their export market there are inequities in the Chinese market.  We have heard of the Apple plants, seen government plow over villages, and hear about the low wages.  Twenty or so years ago, it seemed Japan could do no wrong, the Japanese have had a rough couple of decades since, and the Yen is not as important as it was back then.  Consider what would happen to the Chinese economy if a general strike occurred, or a hard line Communist leader came to office.  And neither of these is too far fetched, considering what we know of their economy and political system.

There is still one nation that has political flexibility, a stable work force, and infrastructure to build itself into a power house.  That country is the United States.  For all our flaws, we really do know how to do business, and to do it in a sustainable way.  We have learned how to protect ourselves from pollution.  We have the ability to regulate business to ensure fairness.  The Chinese have none of that.  Their political system will be their undoing.  Will the Dollar always be the reserve currency?  In a word NO.  But our good years are far from behind us.  But as a people, we need to keep our political leaders on their toes.  We need to vote, not along party lines, but by who will promote the economy the best.

The Great Depression of the 1930s could have sunk us.  But our leader, Franklin D. Roosevelt, said "We have nothing to fear, but fear itself."  And we promptly went out and saved the world.  Japan could have unseated us in the 1980s, but we had a president, Ronald Reagan, who said "I see America as a shinning city on the hill."  Igniting a favorable economy for almost 15 years.  When we elect a leader with as much vision as these two, the Yuan is in trouble.  Remember, economics is as much psychology, as it is real measurable numbers.  When the American people wake up, and they will, our economy will reignite once again.  All we need to do is to balance regulation and tax policy to help fan the economic fire. 

Spend Well!