I think that I must be less favorably disposed towards mercantilism masquerading as free trade than George Friedman is. In his post at Mauldin Economics he laments letting the mask drop:
In the last G-20 meeting, its members agreed to drop the forum’s commitment to free trade at the insistence of the United States. That agreement was reached at one meeting and was contained in a single document—such agreements and documents are far from written in stone.
In spite of that, it must be regarded as a historical moment. Excluding the free trade commitment from the agreement marks a fundamental shift in a concept that has been central to global economics for more than a generation.
As the late Mayor Daley used to say, let’s look at the record. To the best of my knowledge no country has completely free trade. There are fewer impediments to any other country selling its products or services in the United States with the possible exception of goods that we euphemistically deem to be violations of our intellectual property laws than there are in most countries.
All of our major trading partners on the other hand have substantial barriers to the import and sales of U. S. goods and services within their borders, not limited to duties, quotas, and subsidies. Suggesting that we might do the same is just acknowledging reality.
The reality for the U. S. is that while trade may have boosted GDP a little, median income has remained frustratingly stable while the average income has risen sharply. That’s just another way of saying that a few people have benefited greatly by trade while most of us haven’t benefited at all and some of us have been gravely injured.
The trade regime I support is reciprocity. China or Japan can impose tariffs as high as they care to or impose quotas or provide subsidies to their hearts’ content, secure in the knowledge that we’ll take the same actions against their goods and services. That will hurt the Walton family but you’ll start to notice more neighbors who are employed making things than you used to.
Okay. We “reciprocate” with tariffs, quotas, and subsidies to match our trading partners’. They then “reciprocate” by raising their tariffs, quotas, and subsidies, and/or applying them to new products. So we “reciprocate” again, and so on. There is another term for this: “trade war,” and no one wins it.
We’re already in a trade war. We’re just not firing back.
What’s your alternative? No barriers here while our trading partners maintain their barriers? That’s the status quo. It’s functioning like a siphon for jobs. We import inexpensive goods and deflation. The Chinese import employment.
You want to abandon even the goal of free trade? In favor of a series of on-going trade wars? And you think this will bring us jobs? Do you have evidence of this?
China slaps a tariff on American wheat and we fire back with a tariff on electronics and who benefits? Canada and Korea and Japan. The Canadians sell more wheat and get cheap Chinese electronics, while the Koreans and the Japanese sell more phones and laptops. We get higher prices, lower quality and a hostile China.
And of course it’s practically a government mandate to US producers to open overseas affiliates. You think Apple and Microsoft and Amazon and Hollywood are going to sit passively by while trade wars ruin their business? They’ll open subsidiaries overseas and hire locals. We are not the world’s only consumers.
If the problem is not that we don’t bring in enough cash, but that the benefits flow disproportionately to the rich, why is the solution not taking from the rich to support the poor? That seems rather more on-point than abandoning a long-held American belief and entering an era of increasingly distorted trade.
If free trade is still an inherently good idea, why are we giving up? And if the Trumpian trade war approach is good for us, why did the rest of the G-20 shrug and say, “OK?”
We’re already extracting as much from the private sector as we ever have other than in war time. The burden of proof is on you to prove that we can increase the effective tax rate on the rich. It’s about as high as it’s ever been right now.
Free trade isn’t inherently good or bad. It’s good if it helps; bad if it doesn’t; otherwise neutral.
But China is so vast it’s a special case. If China discontinued its policy of one-way autarky, most of our economic problems would disappear.
Well, speaking as a member in good standing of the lower 1%, you could do it by raising my taxes. Rates go up, I pay more. I know this because I write the checks to the IRS and the Franchise tax board. Rates go up: the check gets bigger. Rates go down, the check gets smaller.
I recognize that the very rich have ways to avoid taxes that are not available to those of us in the merely well-off class, so maybe we could, you know, stop giving them tax breaks and loopholes to exploit. I earn a whole lot less than Donald Trump, and I pay a much higher rate. A clean, no-special-deals tax bill is certainly more reasonable than abandoning the idea of free trade and starting a series of unpredictable trade wars that we might very well lose. And if you tell me we’re already losing, I’ll counter that as far as you or I or anyone knows, it could get a whole lot worse.
Those are hopes not proof. I believe that it’s presently politically impossible to raise the effective personal income tax rate.
Keep in mind that I’m in favor of free trade. I think we should enter into a free trade agreement with China tomorrow. Both countries would benefit.
But we don’t have free trade right now and what we have benefits China much more than it does us. What we have is managed trade and it’s managed to benefit a small number of Americans.
“You want to abandon even the goal of free trade? In favor of a series of on-going trade wars? And you think this will bring us jobs? Do you have evidence of this?”
What is alternative? The status quo results in the continued erosion of the middle class, an increasing de facto oligarchy and, eventually, most of the population on state support.
Your alternative, taxing the rich to give to the poor, doesn’t solve that problem, it’s just a band aid. Redistribution can’t come close to making up for economic activity from a vibrant, employed, middle class.
Free trade is a “long held American belief?”
Protectionism held sway far longer than free trade has, and as many Pat Buchanan columns and a book show, America grew to economic power status under the era when protectionism dominated.
Andy:
Let me clear: I’m not excited at the prospect of paying higher taxes. April 15 is upon us. There will be bitter tears.
Look, even when the overall economy is growing the lower quintiles don’t see it. The rich get richer, the not-so-rich don’t. But the rust belt started rusting long before NAFTA, before China. It’s been the rust belt since the late 70’s. Detroit stopped being Detroit a long time ago. I just don’t think that’s going to be reversed by suddenly changing course, rejecting free trade and opening a series of trade wars with China, Japan, Korea, the EU, the UK. . . What confidence do we have that we come out on top in that situation? I don’t like wars where I don’t know who’s got how many bombs and no one knows how to define victory.
You have missed all the points, Michael. Andy points out that the taxing arithmetic doesn’t work. Dave points out that the politics preclude your taxing solution.
And as for the rust belt beginning to rust before NAFTA et al, that is true, but not persuasive. Steel dumping began long before NAFTA. And the China problem, currency or wage structures, persists to this day.
As for problematic war outcomes or ill defined standards of victory, for many we have become the knight in the Monty Python skit who has lost two arms and is hopping around on one leg. At this stage I doubt we could do materially worse. At the risk of proposing something outrageous, we might actually try something closer to free trade than we have now. Don’t label it a trade war, but maybe something catchy like The Workers Trade Reform, Recovery and Fairness Act. You guys like shit like that.
Michael,
“Let me clear: I’m not excited at the prospect of paying higher taxes. April 15 is upon us. There will be bitter tears.”
My point is that this problem isn’t solved by taxing you more or redistribution through the tax system. There aren’t enough of you and there is a lot more at stake besides moving money around. I’ve been to a lot of countries where there is a super-rich elite, a small middle class (or nonexistent) and a sea of poor people. It doesn’t work no matter how much one tries to redistribute the pie through the state.