1XBy: Donald S. Clark May 5, 1995 Huntington Beach, Ca The Failed Policy of Free Trade Free trade has had a profoundly negative effect on the economy of America and in turn, the living standard for all Americans. America's history of prosperity under protectionism, the cogent economic arguments that support protectionism and the economic practices of other more prosperous nations reveal the economic policies America should follow. A treaty with other nations that delineates free trade will have an additional effect of reducing America's ability to influence other nations on issues such as the environment and human rights. With so much for America to lose, it is hardly surprising that foreign governments and multinational corporations lobby so vigorously for America to adopt a free trade policy. It is in the economic best interest of America, however, to pursue a policy of international protectionism while promoting domestic competition, if America is to achieve a higher standard of living for its people. America- A History of Protectionism and Prosperity The first settlers of America largely supported themselves by producing agricultural products which were in turn, traded for manufactured goods (mostly textiles) from European nations. Free traders such as Adam Smith perceived that this example of specialization was the most efficient way for economies to produce and America might well have been an agrarian society today if it were not for the war of 1812 with England. The war caused America to be isolated from world trade which served as an impetus to develop its manufacturing interests. At the end of the war, tariffs were introduced in America. Although farmers wanted the less expensive foreign goods, the new manufacturing industries in the North had more political power, and from 1815 through 1930, America pursued a policy of protectionism. This was a period of fierce domestic competition among relatively small businesses run by people who had a large vested interest in their long term success. Dr. Batra, Author and Professor of economics at SMU, describes this period saying: "Industrial output rose almost ten fold between 1810 and 1860, quadrupled between 1869 and 1900. . . . real wages jumped 50% and retail prices tumbled 37% . . . .and the period witnessed a rate of technical innovation matching or exceeding that of Europe (133 & 136). Towards the end of the 19th century, larger businesses began to absorb smaller ones to form inefficient, but profitable monopolies, and the public responded by passing anti-trust legislation and reducing trade tariffs to promote competition. Dr. Batra explains, "During the depression of 1929, the tariffs were raised from 40% to 59% by the Hawley- Smoot tariff Act in an effort to stimulate the local economy as had been the successful policy in the past. During this time however the U.S. had enjoyed a trade surplus with other nations who were so enraged by our tariffs that they retaliated with tariffs of their own resulting in a loss of that surplus which deepened the depression" (133-6). This occurrence has caused many people to ignore over 100 years of successful economic policy and conclude that protectionism is bad for our economy. Unfortunately, anti-trust laws in America failed to promote levels of domestic competition which would require its industries to remain efficient and keep pace technically with foreign interests, particularly in the auto industry. And, although monopolistic domestic manufacturers resisted, the political solution America continued to pursue is to move towards international free trade. "By the late 1960s, the average tariff fell in America to a low of about 9.9%. . . . which was followed in 1971 by a trade deficit which had been in surplus since 1893" (Batra 143-5). Through various methods employed by economists it can be proven that the average American family is poorer today than they were previous to 1971. There are many people who would conclude, based on this practical experience, that the result of international free trade is to make Americans poorer. Economic Arguments The free trade advocates offer several arguments in favor of their position. First is the principal of comparative advantage. "For example, there are two writers, one is good at writing and the other a good typist. Working together they ultimately produce more than they would individually, and they share the benefits. The principal can also be applied to countries as a whole although it assumes that the net increase is shared equally and that writers and typists are paid the same, which is not true" (Batra 154). The concept is rooted in the idea that in a free trade environment all activities will be performed by their most efficient alternative. The benefits that free traders describe are not shared equally, however, but proportioned by whomever possesses either the most power, or offers the best opportunity for gain. A second argument is that free trade provides competition which will in turn provide the consumer with the best possible goods at the lowest possible price in the exact quantities demanded by a society. Few economists would argue against the benefits of competition but the conclusion that foreign competition, as opposed to domestic competition is good, is not true. The competition that has resulted from free trade policies among nations has created an unequal playing field, especially in the areas of the wages, labor standards and the environment. On the wage and labor law issues there can hardly be any competition. Many countries who lack industrial capacity are at an extreme disadvantage economically, often hardly able to produce enough food to feed their population. They are highly motivated to work for the companies that relocate there regardless of the low wages or labor policies. Merrill Goozner of the Chicago Tribune acknowledges the dilemma of foreign manufacturing workers saying: "But as the global economy pushes ever deeper into the poorest precincts of the developing world, its benefits arent trickling down. When they try to improve their lot, they are denied basic rights. The managers who hire and fire them know there are millions more waiting to take their place" (A18). The trickle down theory suggests that as companies prosper their altruistic character will allow wealth to trickle down to the lower echelons. Wrong. The companies that relocate there have a virtual monopoly on the supply of jobs in an area where demand for them is high. Demand for labor is the single economic force that will improve their situation unless the country is willing to adopt labor laws and enforce them which is not likely. In reference to a recent move by the Clinton administration to include workers rights in the latest free trade agreements, Goozner writes: "A united front of rapidly developing East Asian nations defeated that move. They called it a thinly veiled protectionist attack on their chief competitive advantage- cheap labor" (A18). The foreign governments are so anxious to attract manufacturing businesses to their countries that they will allow manufacturing concerns to exploit their workers on the issues of wages and working conditions. As our world industrializes, pollution will become a much larger issue since toxins dumped into the oceans or allowed to escape into the air will affect all of us. Free trade, if left unchecked, will provide the incentives for massive environmental destruction. Governments who provide the least resistance to the destruction of the environment will be favored among the world class manufacturers. No nation will be immune to either the effects of the pollution or the economic pressures to reduce their enviornmental standards. An unidentified author and supporter of free trade wrote an article published in the Economist magazine suggesting that: "Imported products must be treated as favorably as identical domestic ones; and the way in which it was produced is not good reason to discriminate against it. . . .What right has one country to dictate the environmental standards of another?" ("Trade" 25). Laissez faire policies with respect to the environment will cause environmental damages of the severest magnitude. Very likely, countries that would allow the deterioration of their environment would also be likely to ask for financial relief later to clean it up. If fair competition is the goal, then why should anyone resist a common standard for the protection of the environment? The result of free trade, and the inequalities that allow foreign manufacturers an unfair competitive advantage, caused many American industries to move overseas. John Culbertson, Professor of Economics UW describes this occurrence: "Among nations, competition over wages [,social and environmental standards] causes desirable industries and jobs to move from countries with higher standards . . . .to countries with lower standards" (57). In other words, companies move because they can produce in the most cost effective manner. Consequently, they can offer these products at a substantial discount undercutting their competition and absorb larger market share, and show a huge profit in the process. In futile attempts to become competitive with the multinational corporations, remaining American companies "abandon research and development, chop investment [and] decimate staff [which] is a formula for destruction" (Culbertson 61). The free trade advocates suggest that this is an orderly realignment of resources and that displaced manufacturing employees in America will find other opportunities in the service sector. Other Americans believe the reduction in manufacturing jobs will not affect them since they do not work in a manufacturing environment. Many people having observed the cost advantages of purchasing foreign goods perceive the American manufacturing industry as inefficient by comparison. They are insensitive to the dilemma of American manufacturers, and the people they support, and see no reason why they should pay higher prices. Similarly, some American manufacturers have rationalized that the inclusion of potentially superior foreign made components in their assemblies has a value added effect to their end product. Their arguments are short sighted and are not supported by sound economic reasoning when you consider the American economy as a whole. The effect that deindustrialization has had is to reduce the supply and increase the demand for jobs in America. No area of economic pursuit is buffered from this effect since the transitioning manufacturing workers, blue and white collar alike, affect the job supply and job demand relationships in other sectors of the American economy. Professor Culbertson offers the following analogy with respect to the job supply/ demand relationship: "If there were free immigration and truly open boarders, workers from lower wage countries would stream into higher wage countries. These new arrivals would compete for jobs, accept work for lower pay, and force the existing jobholders to accept either lower wages or unemployment . . . .the notion of free trade . . . has the same effect. Instead of exporting workers to the United States, lower wage countries simply import our jobs" (57-8). If a policy of free immigration is unacceptable, then why would we allow free trade? It should be clear at this point that American companies contribute to the American job supply and pay American taxes to the social well being of America. In contrast foreign companies provide all of these benefits to foreign peoples. Also, in order to reduce the ballooning trade deficit U.S. currency is devaluated as compared to foreign currencies, which makes imported goods cost more so they are less attractive to consumers. Culbertson describes the result saying, "By reducing the value of the dollar we cut real wages, diminish U.S. buying power, and bring the U.S. economy more in line with the lower standard of living countries against which free trade has pitted us" (Culbertson 61). The direct result of devaluating the money is that all Americans are poorer in proportion to the number of U.S. dollars they have in their possession. Popular Myths Offered by Free Trade Proponents The first is that Americans should save more in order that these monies could be made available for investment by American business which would in turn create jobs. Free traders point out that many citizens of other industrialized countries (like Japan) have higher rates of saving than in America. Free traders fail to recognize that in a free market economy, all resources are directed towards their most valuable pursuit, specifically, these monies would very likely capitalize the overseas manufacturing concerns. In contrast, certain other countries do not practice free trade on an international basis and therefore have a higher standard of living, which allows them to have higher levels of savings and investment. The low rate of savings in America is an effect of trying to maintain an affluent lifestyle the population has become accustomed to, not a cause. Another myth perpetuated by free traders is that our products are inferior by design. They quote statistics that reveal we graduate fewer engineers as a percentage of our population as compared to some other industrialize nations like Japan and Korea. But in truth, America pioneered the development of almost all of the technologies required to produce todays consumer products. But because of free trade we lack the economic environment to capitalize on these advancements. Dr. Batra writes, "Among the new industries that have come up since the 1970s- robotics, video equipment, fax machines [the personal and mainframe computers] - the United States is a minor player. They are all U.S. inventions, yet the Japanese have been dominant in their [production]" (170). If American companies are not able to exploit the fruits of their research and development efforts, it is unlikely they will be motivated to pursue them. Similarly, as manufacturing concerns move overseas, America requires fewer engineers, and the free market wages reflect that. Political Considerations In the past, the United states has had some influence over the policies of other countries through the use of tariffs and other economic sanctions. Specific examples include human rights issues as those in South Africa and China and animal rights issues such as elephant tusks (Africa) and dolphin safe tuna (Mexico). Under the conditions of free trade, it would be increasingly difficult for us to persuade other nations to accept our point of view. Another consequence is the loss of revenue the government needs to provide its services. Since the labor force is transitioning from higher paying manufacturing jobs to lower paying service oriented jobs, the loss in real earnings (inflation adjusted) for the individual also represents a loss in revenue for the government, assuming income tax as a percentage remains constant. Two additional losses in revenue are represented by the removal of the tariffs from the foreign goods, and the amount that American manufacturers who have relocated overseas would have contributed. If government services are to remain constant, domestic taxes will have to be raised to offset this loss. Other Countries by Comparison All countries practice protectionism selectively to protect their infant industries from foreign competition. Sometimes the tariff is removed later when these companies can compete internationally but in other cases the tariff is maintained and a policy of domestic competition is pursued. Japan, for example, practices protectionism but possesses two ingredients America presently lacks. The first is domestic competition and the second is that their corporate elite have a vested interest in the long term success of their companies. This combination affords them the opportunity to protect their markets and, in doing so, maintain a higher living standard for their population. In contrast to Japan, since the 1950s large companies in America like the automakers have gobbled up their competition until they posses a virtual monopoly. Anti trust laws have not kept corporations from monopolizing the market to the detriment of the consumer. The process stifled technical innovation since there was no motivation to improve and instead, the corporations favored profit taking. Secondly, most American corporate executives have a very small financial interest in the company they run. They tend to be seasoned individuals who may no longer be in their corporate leadership position in 5 or 6 years. Under these circumstances, short term profits are preferred to long term investment and resulting growth of the company. Short term profits amount to huge bonuses paid to these executives whereas long term growth profits will likely be distributed elsewhere. Elliot Smith, reporter for the Orange County Register, illustrates this point saying: The voluntary restraint agreement on Japanese automobiles in the 1980s increased Japanese automobile prices more than $2000. Moreover, U.S. producers, rather than increase market share, raised their own prices an average of $750 to $1000 (K01). The lack of domestic competition was the culprit that raised prices but as noted previously, foreign competition is no worthy substitute. On the issue of unfair practices by businesses who dominate a market, the Japanese need few lessons. Japanese manufacturers were encouraged to collude on export goods, and in some cases subsidized by their governments to dump products onto American markets below costs in order to decimate our industries. "During the 1950s several electronic companies in Japan, with the blessings of its Ministry of International Trade and Industry (MITI), formed an export cartel. Televisions were sold at lower prices in the United States than at home. The cartel. . . . drove many American firms out of business" (Batra 182). This predatory behavior on the part of the Japanese is familiar to many American companies in other industries as well. These practices have allowed Japanese companies to absorb entire industries once dominated by America. If American industrial capacity is of so little value, why have the Japanese sacrificed short term profitability by dumping in order to acquire their market position? One could hardly suggest that the fastest growing economic power on earth has a flaw in its economic philosophy. Japanese efforts to improve economically, at our expense, has been very successful and their population likely wishes to maintain that advantage. Their standard of living, education, and environmental standards are very high as compared to most countries because they practice protectionism in the form of tariffs for imported goods to protect their jobs. Culbertson describes their position saying: "Japan- a model of realism and success in so many recent competitive undertakings- is hardly rushing to submerge itself in a one-world economic commune" (64). At the same time Japanese industries are strong supporters of free trade as a policy for America. "No wonder, as Ross Perot lamented during the 1992 presidential election, many U.S. trading partners have hired well connected Americans to lobby for their interests and perpetuate laissez- faire" (Batra 127). America is one of the few countries where a foreign economic interest can lobby politicians to pass laws on its own behalf. Conclusion In conclusion, it is not hard to understand why some people support free trade even though most Americans do not. The multinational corporations support free trade because they profit hugely by its implementation. They pay the least, sell for the most, and declare their profits and thus pay taxes in, the country with the smallest tax burden. Many American politicians, being surrounded by foreign lobbyists and multinational corporate elitists, may not recognize the expense their legislation has on America. Maybe their equalitarian nature makes them more sensitive to foreign nationals than to the Americans they represent. W.Allen Wallis, Under secretary for Economic Affairs (Reagan) writes: "The debt ridden less developed countries, for example, can hardly even service that debt unless. . .we, and the other developed countries keep our markets open to them" (77). History reveals that the federal government first rationalized its existence as providing for the common defense of the nation. Many Americans may well believe that this protection extends to economic circumstances as well. In fact, some might rationalize that if the employees of the U.S. federal government are unwilling to represent Americas interests, for whatever reason, then they should not be charged with the responsibility. In an article published receintly in the New York Times a U.S. Senator sympathetic to American industry suggests: "Free trade is the new Vietnam policy argued Senator Earnest L. Hollings, (Democrat -South Carolina) who is trying to torpedo [free trade agreements]. You destroy your economy to save the world " (Qtd. in Sanger A03). What ever reasons various people have for supporting free trade, it is certainly not a policy of mutually advantageous exchange as many Americans have been led to believe. It is entirely one sided, to the benefit of foreign interests. America's history, sound economic analysis and the experience of other wealthy nations suggests that free trade has been, and will continue to be, disaster for America. Works Cited Batra, Ravi. The Myth of Free Trade. New York: Macmillan Publishing Company, 1993. Culbertson, John. " The Folly of Free Trade." Free Trade vs. Protectionism. Ed. Donald Altschiller. New York: H.W. Wilson Company, 1988. 55-69. Goozner, Merrill."Focus on APEC Human Capitol." Chicago Tribune 15 Nov.1994, Morning ed.: A18. Sanger, David." Analysis: World Economy." New York Times 20 Nov. 1994, Morning ed.: A03. Smith, Elliot. "Navigating Trade Barriers." Orange County Register 29 Aug.1993, Morning ed.: K01. " Trade and the Environment: The Greening of Protectionism." The Economist 27 Feb. 93 : 25. Wallis, W.Allen. " Protectionism: A Threat to our Prosperity." Free Trade vs. Protectionism. Ed. Donald Altschiller. New York: H.W.Wilson Company, 1988. 70-8.wsokgc0_0[R8Wn8S<O =K~h =IMwWMs`UomUkXgc0_0[R8Wn8S<O =K~h>"000+4L8N8N8n84:<< =?EBMDMWMXUZUymUUUYV[VVVW<WWWWWWXEBMDMWMXUZUymUUUYV[VVVW< Ariallamented during the 1992 presidential election, many U.S. trading partners have hired well connected Americans to l