Friday, January 25, 2013

Free, Fair, and Suicidal Trade. Oh My!

If all I really need to know I learned in kindergarten, then all the federal government needs to know about trade and economic policy they should have learned in the state legislatures.

States and cities understand one fundamental principle of economic development that seems to evade the federal government, increasing the availability of high paying jobs is essential to economic growth.  To attract jobs, the states enact all sorts of laws and regulations designed to entice businesses to build new facilities or to lure those businesses away from their home states for the sole purpose of creating jobs within their state.  Tax breaks, TIFFs, and low to no state income taxes are just a few such measures state legislatures make to do just that.

What you never see states do is enact legislation that entices businesses to locate out-of-state.  You will never see a state pass a law that reduces the sales taxes levied only on goods manufactured out-of-state.  So why then does the federal government do just that?  Why does the federal government enact trade policies that make it overwhelmingly more beneficial for companies to manufacture or source services overseas?

Take as a prime example auto manufacturing.  Recently Republican presidential candidate Mitt Romney was criticized and even accused of telling the biggest lie of 2012 when he said Jeep was going to start manufacturing most of their vehicles in China.  Turns out he was right.

Jeep, like many other major auto manufactures, are moving their production facilities overseas for two primary reasons.  First, it allows them to avoid paying the 25% tariff China levees on all auto imports.  Second, it allows them to save an estimated 20% on the cost of manufacturing vehicles because of China's lower environmental and labor regulations, as well as their lower costs of labor.

Now consider what tariff the US levees on cars imported from China, a meager 2.5%, one-tenth of the tariff China levees on US made vehicles.  In the case of automobile, the US is incentivising auto manufacturers to move manufacturing overseas by leaving a tariff large enough to at least put the cost of American made and Chinese made vehicles on equal footing where they are free to compete on service, style, quality, and durability.

As a result of these trade policies, more and more auto companies are leaving the country and taking tens, if not hundreds of thousands of well paying jobs along with them that after more than two decades we are finding never come back.  The detriment to America's labor force and overall economic development aren't the only negative affects of these kinds of suicidal trade policies.  As part of China's policies to allow foreign companies to build goods in their formerly Communist country they make certain stipulations.  China requires foreign auto manufactures to disclose their trade secrets and make them available to Chinese based competition before they will allow them to begin producing their vehicles in China.

The federal government tells us that free trade is the solution.  But what they call free trade is anything but.

The world's best example of true free trade is that between the American states.  That free trade requires the absolutely tariff free flow of goods and capital between the states.  But it also contains another crucial factor, the third pillar of free trade if you will, the free flow of people.  Not only are companies free to move their business from state to state and export their goods tariff free from one state to another, but people are free to move from state to state to find the best job and quality of life for their family.

When it comes to the federal government's definition of free trade, the free flow of people is excluded.  But, even if it were there it would prove even more detrimental to the US economy because unlike the living standards between the state,s which are relatively the same, the living standards between third world countries like China and the US is so vast that Americans would be unwilling to move to China for work. By doing so they would be moving into far worse living conditions than they would be living in while taking advantage of America's generous welfare and unemployment systems.  Likewise, those welfare systems would attract even more of the third worlds poor than already immigrate to this country.  Why would they continue to work in the slave-like labor conditions of Chinese factories when they can come to the US, sign up for welfare and other assistance programs, and live a relative life of luxury?

Even more deceptive is the name our government gives these trade agreements.  The North American Free Trade Agreement, The Colombian Free Trade Agreement, and so on.  The implication is that these trade agreements are free trade, that neither country will tariff goods manufactured in the others' country and imported into their own.  Nothing could be further from the truth.

What America's free trade agreements with other nations does is set import tariffs at each nations' "most favored nation" status.  The MFN, as it is known, prevents the destination country from levying more tariffs on goods exported from the country of origin any more than the lowest tariff levied on any country.  In the case of the US, that typically means most goods imported into the country come with no tariffs levied on them.  Meanwhile, goods exported to other countries from the US are hit with large tariffs because those countries levy large tariffs on all goods imported to their country and do not give breaks to anyone.  Once again, American policies encourage companies to move overseas to take advantage of cheap labor and avoid tariffs.

So once again I must ask, why is it so difficult to look at what the states are doing and what is working there and convert those practices into federal policy?  The key seems clear, labor costs and regulatory burdens need to be balanced between trading countries through a combination of tariffs and deregulation.  No advantage should be giving to American-based manufacturers, but neither should their be an advantage given to offshore manufacturers.


New Reader Of This Blog said...

Excellent post!

theKansasCitian said...

Thank you.