Free Trade

I have three fears about a Trump Presidency, first that his indiscipline and lack of managerial skills will make it impossible for him to effectively run the nation’s bureaucracy; second, that given his inexperience he will be easily manipulated by foreign leaders and overwhelmed in the unstable and violent world he has inherited; third, that he will double-down on the sort of short-sighed economic nationalism that made his economic proposals on trade indistinguishable from Bernie Sanders’.

Let’s discuss the last one: Trump is against free trade agreements, especially multi-lateral ones.

An all too common American experience over the last twenty years has been factory closings, with the company moving their manufacturing operations overseas. The reasoning is simple: manufacturing in America is just too expensive. The reaction of unions and Trumpkins has been to reject free trade.

Yet if you look at the numbers, free trade is a net benefit to the United States. U.S. manufacturing output is higher than it was in the days before free trade. Companies like Siemens, Honda and Toyota open factories here in the U.S. thanks to free trade. Caterpillar, John Deer and Boeing do well precisely because they can export goods. American farmers love free trade since it lets them supply huge markets in Asia.

Free trade is bad because it puts American labor at a cost disadvantage to foreign labor. Free trade is good because it gives U.S. consumers access to cheaper goods it creates a larger market for American companies.

The response of “the elites” to this dilemma has been to shrug and quietly admit that there are winners and losers to free trade. They are the winners, and the “deplorables” of places like Michigan, Indiana and Wisconsin are the losers. Since American companies need to keep labor costs down, the elites import unskilled labor to drive down wages, making life even harder on the losers.

(In fact, the winner-loser dynamic of globalization looks a lot like a Marxist superstructure: to keep the losers from rebelling the globalists give them welfare and prescription drugs. If the losers complain, we call them racists as a way of asserting that the globalists are morally superior and have an innate right to rule and reap the benefits.)

But logically, growing the size of the market should mean growing the economic pie for everyone. Shouldn’t it be possible for everyone to win – and to feel like they are winning – in the global economy?

Rather than shrink the size of the markets by backing out of free trade the most sensible thing to do would be to optimize the position of the United States for taking advantage of the global market.

The tricky problem is keeping down the cost of doing business in America without driving down wages.

Here are some ideas:

  • Lower energy costs. Energy costs have been stable or trending downward in most of the nation thanks to fracking and can be driven lower still. The United States is currently one of the world’s largest oil producers and has huge reserves of coal and natural gas. Nuclear power remains cheap and safe. Renewable energy is unstable but plentiful and can also help control costs. Companies and states must build the infrastructure they need to take advantage of these reserves.
  • Rational business taxes:
    • The current tax code is very unattractive for businesses. The on-paper rate is prohibitive, the actual collection rate dismal because companies have to expend so much energy exploiting existing loopholes and lobbying for more.
    • The United States is the only nation that taxes companies both for their domestic and foreign profits, essentially a double tax, encouraging them to headquarter elsewhere.
  • Cheaper healthcare
    • End employer-based health insurance: employers should not have to manage health insurance, it is an utter waste of value. Employees are competent to make rational decisions about what sort of coverage they need.
    • Healthcare costs are high because there is little competition in the system and federal subsidies distort values. Some people will always need the subsidies, but encouraging more people to pay in cash should remove some distortions and encourage efficiency.
    • The real way to lower the cost of an expensive good is to make more of it. Why are there not more doctors, nurses and hospitals? What are the obstacles to them?
  • Simpler, more stable regulatory regimes. Regulation protects workers, investors, and the environment, but arbitrary and complex regulation makes it more expensive to do business, forces smaller players out of the market, and discourages new business start-ups. Regulation can also serve as means of legal graft, with governments using rules as just another way to exact rents and protect entrenched interests.

The United States became an economic superpower after WWII by bombing its main competition – Germany and Japan – into smithereens. For a generation American manufacturing simply had no competition. American government, industry, and labor unions foolishly thought this arrangement would last forever, and planned accordingly.

America can both keep jobs and reap the benefits of globalization, but the only way to do that is to realize we are in a competition for jobs and capital and to act like it.

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2 comments

  1. Has someone been having a bit too much coffee today?

    1. Slow work day.

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