I lived for eight years in the Solomon Islands, 1985 to 1991 and 2007 to 2009. The Solomons are a nation of about three hundred islands just south of the Equator. The only thing most Americans have heard of there is Guadalcanal, because it was an island that was the site of World War II battles.
The Solomon Islands are in the upper right corner, and Australia at the lower left. The Solomons is the least urbanized of the Pacific island nations. The population is around a half million. The capital city, Honiara, is about sixty thousand. The second largest city is about seven thousand … and it drops quickly from there. The Solomons is very poor, being classed by the UN as an “LDC”, a Least Developed Country.
It’s also a curious country for another reason. When I first moved there I was running a rural development agency working with village people in local business development. I was surprised at how difficult it was to teach business concepts. I’d worked in rural Africa and Central and South America, so I had a sense of how rapidly people picked up concepts.
What I finally realized was that not one person in any of the business classes that I taught in the Solomons had anyone among their families or friends who was in business. I was used to Africa, where the guy patching the cooking pots for money or trade had a great-great-grandfather who did the same thing, trading with the Arabs or someone else. But in the Solomons, there were no second-generation business people of any kind. Until World War II there was little contact with the outside world, because it was a hotbed of malaria, one of those places called the “white man’s grave”. No lie. I had malaria three times, plus one recurrence. But I digress.
As a result of only recently joining the modern world, the country is in the earliest stages of economic development. The work force is generally uneducated, inexperienced, and unused to the work environment. Don’t get me wrong, they are great people, hard-working, full of laughter. I have many long-time friends there. But it is hard to find experienced workers, because there is so little opportunity for them to learn how to do a job, any job.
One of the advantages of living in a small poor island nation is that the economics are very visible and simple. Let me recount for you the story of the nail mill in Honiara, the capital of the Solomon Islands. Of course, it was the only nail mill in the country. Simple economy.
Now, the nails used in carpentry and construction are called “wire nails”. This is because they are manufactured from a long coil of wire. A relatively simple machine is loaded with a coil of wire. The machine unrolls and straightens the wire, cuts it to length with a point, hits it with a hydraulic or mechanical hammer to forge the head, and spits it out.
When I got there, Honiara had a nail mill. It wasn’t much. Some melanin-deficient guy from England or somewhere had acquired some old clapped-out piece of nail-making machinery. Not the most efficient, but he could keep it working. He had a few employees. In an economy where jobs are nearly non-existent, this was huge.
Like I say, it wasn’t much. But it was one of the very few manufacturing plants in the entire country. It was a model of what might some day be possible. It was a place people could go and start to understand the mysteries of manufacturing and how it can transform an economy.
Now, as you might imagine, the factory was horribly inefficient compared to say some gleaming new plant in Malaysia turning out twelve tonnes of nails per shift with a work-force of seventeen including janitors. There was no way it could compete with that plant. Heck, it wasn’t even as efficient as this low-end modern plant:
But the nail mill stayed alive because back then, the Solomons did what every currently rich country did at that same stage in its economic development.
It protected its nascent developing industries by imposing tariffs to make local production economically competitive.
And things were going swimmingly … until the leaders of the Solomons got infected with the “free trade” sickness, and they signed on to an Australia-led free-trade scheme that required them to end their protective tariffs on a host of things … including nails.
And that was the end of the nail mill … and the end of most manufacturing in the Solomon Islands as well. They desperately need the things that a local manufacturing economy could bring them … but there are very few things that they could manufacture competitively at the current level of their unskilled workforce and inefficient economy.
So “free-trade” has condemned the Solomon Islands to be nothing more in the world economy than a perpetual supplier of raw materials and agricultural products—lumber, fish, palm oil, some minerals, and the like.
Rich countries got rich by protecting their nascent manufacturing sector from foreign competition. And poor countries stay poor because of free trade.
To bring this story back to the US, sadly free trade has been as destructive to American manufacturing as it has to Solomons manufacturing. Because semi-skilled labor is available for $3 per hour in Mexico and other countries, we’ve exported our manufacturing sector overseas. To reverse this, we need to end this free trade madness and protect our own manufacturing sector.
There is no reason why my neighbor should have to compete for a job with a guy who is willing to work for a few pennies and a dry place to sleep. My neighbor will never win that competition.
Proponents of free trade point out correctly that this will make some things more expensive. But which one is better—stuff is cheaper but the factory in your town shut down and you’re out of work, or stuff is more expensive and you still have a job at the factory?
The costs of our long free-trade experiment have been disastrous for everyone except for the corporations, which have benefitted greatly from operating where they never heard of safety regulations or workmen’s compensation insurance … it’s time to return to trade barriers to bring our own (and the Solomons) manufacturing sectors back to life.
Here, the constellation Orion has just hoisted himself out of the redwood trees, his bright dog Sirius will be following soon. It’s cold for this microclimate, about 44°F (7°C), and the air is crisp and clear after the recent storms.
My best wishes to all,
w.
Please be so kind as to QUOTE THE WORDS YOU DISAGREE WITH in your comment. That way we can all understand exactly what you object to.
Skating Under The Ice 
My parents were married in the Solomons in 1927 when my father established a hospital at Munda, before the airport was built. It was his knowledge of the malaria cycles of the region that saved many allied lives during WWII. My 3 elder sisters were raised there and all contracted malaria.
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I recall (early 1950s) our parish priest would allow 2 missionaries each year to speak to the congregation and ask for donations. I guess our families helped some families in Africa (mostly) but I suspect we did not help the society. Recently I bought a “Hand Knitted in Nepal” wool hat. That seems to be a better action. I get a nice hat. I don’t go through a religious group. I assume (since I can’t check) someone in Nepal benefits. Note, I could have had a neighbor knit a hat for me but maybe not as nice and costing more. So, I was happy.
Now, if someone in the Solomons can make and sell me something, that trade, with me, might help them. I don’t mean tourist items. It needs to be useful, so maybe they need to write-off dealing with deep-freeze sorts of places. 12°F tonight here in central Washington State; sort of a heat wave actually.
I have little ability to carry this reasoning to any conclusions.
I do agree that the current situation is not good for them nor for workers in developed countries. Friends and family members have lost jobs and had to retrain. Not us, but that’s more luck than smarts.
Best.
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Thanks Willis…..learned more about Free Trade from reading your post……Thanks
Lrarned some more reading this post entitled “The Real Cost of Free Teade Is Too Great For Americans To Bear”
http://economyincrisis.org/content/the-real-cost-of-free-trade-is-too-great-for-americans-to-bear
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Thanks, Jim.
w.
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As well as free trade destroying industries you have the governments “love” of renewable energy, a few years ago on holiday in Yorkshire we visited an old family run pottery where the last in the line dug the clay from a pit left it to weather and then made all sorts of decorative and useful pots etc. The kilns for firing the clay used to be coal fired (from a local but now closed mine) they are now gas and electric, the gas comes in cylinders as they can’t afford to have a gas pipe laid and the electric is getting ever more expensive due to our governments closing cheaper producers in favour of windmills and solar “farms”.
Talking to the guy running the pottery he was saying that he was told to apply for a “small business subsidy” for his power bills, only trouble being his kilns used more power than a “small business” and so he can’t get any help! There’s just him and another part time worker HOW MUCH SMALLER CAN YOU GET?
Obviously they don’t want manufacturing businesses.
James Bull
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This is a neat template Willis. I recently cranked up the browser font size when I added a 24 inch monitor. So is perfectly clear for me with aged eyes. Interesting story of the Solomons..didn’t know that.
I sometimes wonder what we have to trade in UK that hasn’t been made elsewhere. Recently lost a forge locally – car parts. Energy costs here I think!
The EU has laid high tariffs on Africa which is in most instances dependant on aid from us and others. Of course we know that aid is being creamed off by both melanin and non melanin types. That subject has flared up here of late….charities! In 3 hours last night TV channel charity begging could of had me/others coughing up £54+ ($70) monthly via cell phone remittance. Perhaps more. Simply don’t know where it actually goes.
Just discovered Trumps old Cadillac near me in Gloucestershire?
https://www.thesun.co.uk/news/2396231/inside-donald-trumps-80s-time-capsule-cadillac-with-its-own-fax-machine-tv-paper-shredder-and-drinks-cabinet/
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…The costs of our long free-trade experiment have been disastrous for everyone except for the corporations, which have benefitted (sic) greatly from operating where they never heard of safety regulations or workmen’s compensation insurance … it’s time to return to trade barriers to bring our own (and the Solomons) manufacturing sectors back to life….
Of course, the costs of a long-term protectionist strategy are also disastrous. That results in inefficient workplaces which fail to embrace new technology and plunge entire nations into a cycle of failure.
Too many religions, philosophers, management consultants and political activists have stoked human catastrophe by assuring others that they have the right approach to Life, the Universe and Everything for me to assert that I know all the answers, but it seems to me that flexibility and riding the crest of the wave is the key skill to acquire. At times you may need to protect – but more often you should expose an economy to as much of the outside weather as it can take without collapsing.
Though not a sailor, I’m guessing that a career in port does not enhance seamanship, nor does sending a shipload of cadets out in a Category 5 hurricane without lifejackets. To hit a peak, you need to be out there in as many weathers as possible – and, at the limit, some of you will not make it back. Those that do, you can trust your life to…
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On the matter of free trade it seems to me that Americans are like Germans or Frenchmen, irredeemably mercantilist. Be that as it may, there’s something missing from “Rich countries got rich by protecting their nascent manufacturing sector from foreign competition”. I suspect that you might better have said ‘the USA got rich by protecting its nascent manufacturing sector and stealing foreign technology by refusing to recognise patent rights.’ Do you urge poor countries of the present day similarly to steal technology, or must poor countries expect to be bombed by drones if they dare try it?
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dearieme, rather than “suspecting” what I “might better have said” and then attacking that straw man, let me ask you to follow my request and quote the words you disagree with.
As to your fantasies regarding “stealing” technology, say what? I said nothing even remotely resembling that.
Sorry, but I will not allow anyone to do what you’ve just tried—you attempted to put words in my mouth and then attack me for them. It’s a bad habit that I encourage you to eschew.
Finally, my claim is valid for England, France, Germany, and all other major manufacturing countries. They all protected their nascent industries.
Best regards,
w.
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One of the problems is trying to establish industries in places that can’t support them. Trying to build an industrialized economy in a region that can’t support it will lead to failure and economic ruin.
As to free trade. The actual problem is only one side adopts it, everyone else continues with high tariffs and taxes to protect their interests, we being the “nice guys” didn’t and subsequently got screwed.
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That’s just the sort of mercantilist rubbish I was referring to. “Only one side adopts it”: perhaps so, though I’d like to see some evidence. Judging by the treaties the US usually pushes, ‘free trade’ isn’t a particularly accurate description anyway, though maybe ‘somewhat freer trade’ would be OK. “Everyone else continues with high tariffs and taxes to protect their interests”: whose interests? How is the interest of a country served by increasing costs for its population and businesses? “We … didn’t and subsequently got screwed”: non sequitur – if the US unilaterally declared free trade then economic theory suggests that she’d still be a net gainer whatever any other country did. The theory isn’t particularly difficult: it’s just a sort of more reflective and intelligent version of common sense.
There would be problems with the distribution of those gains – which could presumably be dealt with internally. There might be unpleasant second-order effects e.g. with heavy costs of welfare doles. I’d rather like to see arguments on this point, but arguments from people who don’t understand the advantages of free trade are worthless. What’s needed are arguments from people who do understand its advantages but also believe that they have identified disadvantages that are omitted from the standard arguments. That could be enlightening.
What seems likely to me is that people are muddling together different problems. I can’t see how it is at all likely that traditional US manufacturing industry will ever again employ the large numbers on high pay that it employed in, say, the fifties. For example, because automation will have destroyed many traditional jobs. For example, because the US had little competition in the fifties, because so many potential competitors had been ruined, or flattened, in the war. For example, because rotten trade unions and rotten management have hopelessly handicapped a major contributor in the fifties, the motor car biz. For example, because of the huge expansion in competition for jobs from women and immigrants. Heavens, why stop at the nineteen-fifties? Why not aim for the eighteen-fifties and get everyone back on the farm?
Further, the idea that any American foreign policy ever was adopted in the hopes of being “nice guys” is just childish. American foreign policy is always intended to defend the political power of the decision-makers, usually by helping US corporations expand their markets. It may be ill-adapted to that purpose, but that is likely to reflect an absence of knowledge or judgement rather than a nobility of motive. I have no complaint about US foreign policy being based on self-interest – how could it be otherwise? But I am still capable of being disappointed when citizens just mimic the inane preachiness of their politicians. The only time you’ll get a “nice guy” foreign policy is when the electorate is infected by some ideology that the politicians feel they must placate if they are to continue in office. Even then it is more likely that they’ll disguise a much more cynical foreign policy as “nice guy”.
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Wow, what a pile of socialistic crap. Hope none splashed on your feet as you typed it.
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Hi Willis.
I think there’s an error in the phrase that begins “Opponents of free trade point out …”
Contextually, I think that should read “Proponents of free trade point out…”
It’s a minor point, and I mention it not for any sort of ‘gotcha’ but because I presume you’d prefer not to have that error attached to your name.
On the larger point, the virtue of tariffs to protect local industry, I remain unconvinced. But I appreciate the fact you’ve made me reexamine conclusions I’d come to a decade ago.
Here;s my thinking to date. We’re in agreement things cost more with protection, but with free trade, the natives get cheaper, better nails. The only person who benefits is the local maker of the inferior product. Where’s his incentive to develop his product? The Government are protecting him; he can keep making the inferior product. This is not developing an industry, it’s subsidising a crony.
But then again, I have yet to read the book you recommended that “Converted you from free trade immediately”, or words to that effect.. I’m dismayed; I’d thought I’d bookmarked it on Amazon, but haven’t found it in nearly an hour’s searching. Can I ask you to repeat your recommendation?
As a separate matter, congratulations on the blog. It’s a privilege to be able to read it because you’re so skilled a wordsmith. In a spirit of good will, I point out that the guy from “The Oatmeal” says he gets ten times as much income from sales of product on his site than from advertising? What might I buy? Maybe a T-shirt printed with ‘Ask me about my Climate scepticism’. A mug or tee-shit with the ‘models vs measurement’ chart, as up-to-date as possible? You, Anthony Watts, Steve McIntyre and Jo Nova have given me much more high-value reading than I have paid for. Despite my very limited income, I’d like to be able to return something back; but just ‘flinging funds’ seems wrong when my bankcard needs to be paid off. Regardless; consider the idea of a store.
Your article on ‘rules of thumb’ has been particularly useful to me. ‘The floor always needs sweeping’ is a mantra for positive action. I’ve not yet developed it into habit, but I feel that little nugget of insight has already improved my life tremendously. Thanks Willis.
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Leo Morgan December 19, 2016 at 8:03 am
Thanks kindly, Leo. My motto is “Perfect is good enough” …
Tariffs protecting local industry is how every rich country got rich.
Indeed. It is called How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor. People who bought it on average gave it 4.9 stars out of 5.
From the blurb:
If you want the TL;DR version, just look at the first comment. Best comment ever. It’s a concordance of a logical layout of the bare bones of Reinert’s arguments complete with page numbers for reference. Amazing.
My thanks for the kind words. I enjoy bringing a dry subject to life.
My thanks for the thought. At the moment I’m newly retired, a couple of years, and the idea of starting yet another business is not all that appealing … been there, done that repeatedly, won some, lost some …
Oh, good. I’m glad to hear that. I know that my great-grandfather’s rules were and are of great use to me, and I’ve gotten the rest from my friends and sweethearts, so I know that they are transferable.
All the best,
w.
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Mr.Trump obviously has close trading links with Russia. It will interesting to see how he treats a potential trade deal with Mr. Putin to whom he apparently owes a great debt of gratitude. Incidentally, if you have the time, can you read this article on his relationships with the Russian Dictator and tell me what you think?
http://www.the-american-interest.com/2016/12/19/the-curious-world-of-donald-trumps-private-russian-connections/
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So, you are saying Hillary Clinton’s friend and business associate Vladimir Putin wanted Trump as President? Got any proof of that, O’ linker of fakenews sh*t?
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I must confess that if the CIA, the FBI and most reliable news sources think that is the case, I suspect there is a fair chance it is true. Obviously Mr.Trump says it is not true, but he has certain conflicts of interest in the issue.
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And yet the facts remain, Putin and Clinton and Obama are all quite chummy and Trump was the last person Putin and his minions ever wanted to become President of US. Pesky things, facts, they just don’t quite do as you command them, do they?
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I think one problem is that we (like for many things) use words that don’t have a fixed meanings. “Free Trade” is used with an unstated assumption that it is “Equal Trade”. If I can make nails better and cheaper than you but you can make the wire that I use better than I can we’ve got an equal trade. Just looking at our balance of trade it becomes obvious that there is no equality in our foreign trade. We’re trading paper money for goods and we don’t have the goods to back up all of that fiat money.
The problem with protectionism is that it works if you’ve got trading partners that let you get away with it. Japan is a good example. I remember when I was a child and “Made in Japan” was a joke, but the Japanese made sure that anything that they were making domestically was protected with tariffs or with specifications that prevented foreign goods being sold in the country. You couldn’t even sell American made baseball gloves because they didn’t meet Japanese specs. Hell, we invented the game! So they were selling everything they could over here while we couldn’t break through their keiretsu conglomerates to sell over there. The US was arrogant at the time because there was nobody left standing after WWII to really compete with us (or so we thought), so we were like the Solomonder’s(sp?) making “just good enough” nails because of a lack of competition. Once the Japanese had perfected their manufacturing they proceeded to take us head on and clean our clocks in auto’s and electronics.
What we don’t want is to go back to the Smoot–Hawley style tariffs. If Trump actually manages to degotiate deals that winds up with a balanced foreign trade then everybody wins even if some workers need to change jobs to meet the demand. I’m not holding my breath though.
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Willis, I have to respectfully disagree with one of your premises. I do not think the consequences of our free-trade policies have been disastrous. Protectionism is attractive on its face. You protect some readily identifiable jobs, but at what cost?
The cost of manufacturing will be higher, which leads to higher prices, which makes those companies less competitive in the marketplace. In a global economy, that company will not be able to compete with companies in other countries UNLESS our country places tariffs on the competition to drive up the costs of that product in the U.S. That drives up prices for everyone, and is effectively a subsidy to the workers at the manufacturing plant whose readily identifiable jobs we are protecting.
Where does it end? Do you only protect the manufacturing jobs in essential industries? What about service jobs? What if they go overseas? Once tariffs are placed, other countries respond by placing tariffs on our products into those countries, which drives up costs everywhere for everyone.
Historically, we did not lose manufacturing jobs to foreign competition so long as our productivity could prevail. Suppose a worker here making $30/hr makes 300 widgets in an hour at a cost of $0.10/widget. A worker in another country making $3/hr, but only makes 15 per hour costs $0.50 per widget. What has happened over time is that our labor costs have gone up, and foreign companies have improved their productivity such that it costs less to manufacture the product elsewhere and ship it here.
Economics says that over time, the flow of $$$ to countries with which we have a trade deficit will drive up the standard of living in those countries, as well as labor costs. Manufacturing jobs then start to flow back here as those countries demand for our products increases. Look at Japan. How has our trade deficit changed with them over time? How many Japanese cars are built here now?
One correction – workers’ compensation costs are there to benefit the employers, not the employees. Those laws allow an employer to fix their cost and risk from injuring employees. The employee gets some minimal payment that the employer has to make, but gives up the ability to sue the employer for damages.
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JR December 19, 2016 at 10:37 am
I don’t understand. We’ve had 70,000 factories move jobs overseas since NAFTA. This meant shuttered towns, split up families, and had lots of bad consequences. The main one is that the constant outflow of manufacturing jobs ensures a constant oversupply of manufacturing labor. This, of course, follows the law of supply and demand and drives down wages.
And this in turn has meant that the middle class has not seen a pay rise since NAFTA. Nothing. Flatlined. The corporations and the elite have gotten rich from NAFTA, and the middle class has gotten … nothing.
As a result, suicide among the middle class has gone through the roof, opiate use is skyrocketing where NAFTA hit the hardest, and large swathes of the country simply lost hope, at least until the recent election.
How you can say that this experiment in free trade has not been “disastrous” is a total mystery to me. The rich have gotten richer and the poor have gotten shafted by free trade, the Solomons is sentenced to eternal second-class status by free trade, and that is not “disastrous”?
JR, I fear I couldn’t get further into your claims because we’re just starting from too far apart in what we consider “facts” to have a reasonable discussion.
Look, I understand the argument that trade barriers raise prices. I ask you again. Which is better? Cheaper goods when the factory shuts down and the town dies and you have no job, or more expensive goods when the factory is cranking and you have a job? Cheap goods are meaningless when your wages don’t rise. The cost of living has gone through the roof in the last decades, and middle class wages have been frozen.
That’s the tradeoff with free trade—you get cheap goods on the market … but you can’t afford them because you lost your factory job and the Government has generously “retrained” you to be a restaurant cook at half the wage.
My best to you,
w.
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Willis, I have to take you to task here. Before I do, let me say I am a HUGE fan of yours. I have loved all of the posts you have made over at WUWT because they are interesting, fun, and insightful. I know I will read this blog every day, regardless whether you agree with me or disagree with me. I learn something every time I read something you write.
Many times you are writing on WUWT and challenging the arguments someone is making regarding global warming or climate change. Many of the worst arguments for action on climate change are just appealing to emotion, or authority, correlation not causation, or observational bias, or assuming that change has no benefit, only cost.
But in this particular blog post you commit many of those same fallacies, appealing to emotion, flirting with correlation not causation, observational bias, ignoring benefits. I’m not saying you are absolutely wrong, just that I can’t find the data to support your hypothesis.
I have seen that “the middle class has not had a pay raise since NAFTA” meme, but I cannot run that one to ground. The Social Security Administration publishes the Average Wage Index. The site is https://www.ssa.gov/cgi-bin/netcomp.cgi?year=2015. The national average wage index (AWI) is based on compensation (wages, tips, and the like) subject to Federal income taxes, as reported by employers on Forms W-2.
In 1995, the average wage in the U.S. was $27,405.66. In 2015, the average wage was $48,098.63, which is about a 2.816% increase per year. Now, the cost of living went up about 2.223% per year from 1995 to 2015 according to this COLA calculator https://www.aier.org/cost-living-calculator, so the average wage went up in real terms only 0.593%, and in 1995 dollars, the average wage only went up from $27,405.66 to $30,855.66. Not great, but it has gone up.
Now I know the average wage is not “the middle class”. Let’s just define “the middle class” by excluding the bottom 35% and the top 35% of wage earners. That same SSA website allows you to expand out the particular years and get some more raw data. In 1995, the 35th percentile of wage earner was at about $10,000, and the 65th percentile was at about $25,000. In 2015, the 37th percentile was at about $20,000 and the 66th percentile was at $45,000. In real terms, expressed in 1995 dollars, that would be a range of $17,764 to $39,968, which represents some real growth.
If you meant someone making $50,000 a year in 1995 was middle class, roughly $25/hr, that person was at the 90th percentile of all wage earners. In 2015, the 90th percentile was at about $95,000. Adjusted for inflation, that would be $84,378 in 1995 dollars. Again, some real growth.
I admit there are some issues with my analysis, including, but not limited to (1) I don’t have data solely for manufacturing, and (2) in 20 years, you have mobility – that is, the same people aren’t necessarily at the same percentile 20 years later, we move up and down. Nonetheless, it appears real wages have moved for ALL workers.
I’ve seen the “70,000 factories closed meme” from President-elect Trump, but I cannot run down the source of that figure. What is the definition of “factory”? Where did those jobs go? If a plant closes in Indiana, and reopens in South Carolina, does that count as a closed plant? I’m not saying 70,000 factories haven’t closed, just that I cannot find a source for that.
On the causation and correlation front, the last administration is, I believe, the first two term presidency EVER to not have at least one year of real gross domestic product growth of 3%. Going back to George W. Bush’s first term, we have only TWO years in the last 16 with at least 3% real GDP growth. https://www.statista.com/statistics/188165/annual-gdp-growth-of-the-united-states-since-1990/. That was intentional, I believe, because socialists believe economic growth expands inequality, and greens believe economic growth is killing the planet.
Contrast that with the Clinton administration (more particularly the Republican Congress) when we had only TWO years of real GDP growth below 3%. After NAFTA was passed in 1994, our real GDP went up as follows: 1994 – 4.0%, 1995 – 2.7%, 1996 – 3.8%, 1997 – 4.5%, 1998 – 4.4%, 1999 – 4.8% and 2000 – 4.1%.
I would argue that the combination of freer trade and the elimination of the deficit budget led to economic growth and a boom in real GDP and wages. After 9/11, through the War on Terror, and the anti-growth policies of the Obama administration, we have suffered through an ever increasing federal, state and local tax burden, choking regulations and a bloated government structure and THAT is what has killed manufacturing in the U.S.
When a factory closes in a town, it is devastating for the local economy. However, if the factory moves to another part of the country, jobs are created that didn’t exist before. When they go out of the country, the lower prices we all pay leads to a huge jump in spending power. Sure we see the 1,000 people out of work, but if 400,000,000 people save $100 each, the benefit to the rest of us outweighs the cost of the loss of those 1,000 jobs. We don’t have a constitutional right to stay in the same town doing the same thing year after year. We don’t have a constitutional right to be free from change.
One last thing. All of the same arguments we are having about the migration of manufacturing jobs out of the Rust Belt to the U.S. southeast, the U.S. southwest and overseas were made about the poor farmers as we migrated from an agrarian economy to an industrial one.
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Willis says “We’ve had 70,000 factories move jobs overseas since NAFTA. This meant shuttered towns, split up families, and had lots of bad consequences. The main one is that the constant outflow of manufacturing jobs ensures a constant oversupply of manufacturing labor. This, of course, follows the law of supply and demand and drives down wages.”
The other consequence is that NAFTA requires every US government (state or federal) document , every manual for every appliance or instruction for medicine or public news notice of a meeting be written in both English and Spanish. A worker pre-NAFTA considering a job in the US had to overcome a non-government barrier — how to live a life in a new land when you don’t read the local language. Post-NAFTA, no barrier, no problem, no reason not to take that job.
Al Gore and others who sneered at Ross Perot argued that NAFTA might (they said, scoffingly) suck some jobs south. But it would create MORE jobs on the north side of that border. What they did not say is that pedestrians without permission would walk across the border and take those new jobs in the US. Stipulating Gore might (Pouncer said, scoffingly) have been correct that NAFTA was a net job creator; the wages paid, the skill level required (two sides of the same coin) and the language spoken on the job site are all different from what voters were expecting.
Those of us old enough to be fond of Ross Perot aren’t quite as worried about Donald Trump as those of the traditional parties fond of Bushes (George HW or Jeb) and Clintons (Bill and Hill).
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Like with taxation, there must be a Laffer Curve sweet-spot between “free trade” and “protectionism.” Finding it will be tricky.
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Touching story Willis.
The nail industry in the Solomans, the auto industry in Australia (curently in the process of exiting), almost all heavy industry in NZ, simply exemplify that those industries in those places currently have no Ricardian comparative advantage.
That means they are not not good investments for the locals. Whereas for the present lumber, fish, palm oil, some minerals, and the like do represent where investment and people should be deployed, on the proviso that market economies like the US open the tariff doors to those goods in both commodity and added value forms.
The magic of Ricardo is that all communities have comparative advantage, even if one is better than all the others at producing everything.
So given your thesis, are you also advising individual states of the US to erect barriers such that every state should be self sufficient in nails (and by inference everything else)? If not why not? After all think of the new jobs in say nail production or auto assembly that would be created in every state? If successful you could then create trade barriers that protect every city…..think of the improvement that would create…..
I repeat from yesterday that the US benefits hugely from being in and of itself a substantial free trade zone which could be bigger, with proportionately bigger gains. What do you say?
In 1984 NZ abolished subsidies, and unilaterally reduced almost all tariff barriers. Result: a buoyant and resilient economy, innovative, efficient, and competitive un-subsidized agriculture (90+% of all product is exported). It was identified early that benefits of free trade accrue whether or not trading partners also reduce tariffs. This is real, not theory. Yes there was pain as huge industries such as the building of trains, auto assembly, clothing and shoe making, gave way to industries that could compete internationally, but the result was a faster moving, more resilient economy (first to recover from the GFC for example).
Now retired, my background as an exporter of agricultural produce, having to deal with both tariff and non-tariff barriers, has colored my view, and I am not blind to the often life long impact of competition (whether from trade or innovation) on the people that work in industries that close. The solution to that is complex, and comes back to specialization, retraining, and encouragement of entrepreneurs….and is a story on its own. What I have seen in developing countries is that markets work, competition is important, barriers skew market efficiencies, and that the world will be better off if all goods and services are made where they are made most efficiently.
Best wishes
B
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“..The magic of Ricardo is that all communities have comparative advantage, even if one is better than all the others at producing everything…”
How so? Magic indeed.
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I, too, disagree with the post. These islands do not have to be good at something in order to successfully have a business. They just have to be comparatively better at that thing than another country is, given the menu of options. Comparative Advantage allows third party countries tremendous opportunities because richer countries prefer more value-added activities with their work force.
Nevertheless, those advantages may not be in manufacturing, even for low-value production. Making everyone else in the islands overpay for nails does not rise all boats.
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iwe, this is the current economic theory, that of “comparative advantage”. Unfortunately, as my example shows, that theory of free trade and “comparative advantage” sentences the Solomons to never having any manufacturing. That’s not acceptable to me.
w.
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What makes manufacturing obviously superior to agriculture or mining or even tourism? One could use the same logic to protect any “favored” industry, but the result is the same: consumers end up paying the tab.
Most “indigenous” societies suffer from a similar problem: they are not culturally equipped to compete in any free market. The solutions are not found in protectionism, but through much more foundational reforms. Singapore and Hong Kong and the Netherlands have no natural wealth either, but free trade has made them among the world’s richest economies.
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iwe December 19, 2016 at 3:46 pm
Excellent question, I’ve been thinking about writing a post on this. The short answer is, economies of scale and decreasing returns. In agriculture, for example, you can increase your yield by adding fertilizer. But if you add twice the fertilizer you don’t get twice the yield. The returns on your increasing investment are decreasing.
But in manufacturing the opposite is true. You can invest in more machinery, get economies of scale, and increasing returns on your investment.
That’s why manufacturing is the most important of the three ways to create wealth; manufacturing, agriculture, and extraction (fishing, mining, logging). Basically, with manufacturing the more you do the more you make.
w.
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What follows is not my story and I do not swear by it. I have it from a fellow named Muir who claims to have served in an advisory capacity to the Government of Saipan in the Reagan era. It may be true. It may not. It was not told with the intent of deriving the moral I now intend to draw. But I pass it on.
At the start of the short historical era of interest, the demographics of Saipan were in three parts. There were locals. There were “mainlanders” — which group somewhat included locals who had been to school, made good, and held jobs in the westernized urban economy. And there were tourists — the cash crop upon which that westernized economy was founded. The local government kept taxes low on the local businesses and high on hotels, car rental firms, and other businesses that could pass the costs on to tourists. AND the government had a relatively low but comprehensive tariff on all imports. Clothes, manufactured goods, US beef, Japanese electronics, Austrailian wool, Arabian oil … all taxed, all at the same rate. (IIRC)
It turned out that this tax on imports meant that imported wine and liquor was lightly taxed, in Saipan, compared to nearly everywhere else the world. The whole place was like an airport Duty Free Shop. It was mostly tourists who bought imported liquor though, and an interesting little racket arose bringing, (say) Jack Daniels from Kentucky to Saipan, to sell to a New Yorker at fraction of the price he was accustomed to pay, who would stock up with a year’s supply and carry it home.
The “mainlanders” benefitted by being able to drink, once in a while, a much better quality of booze than the locals’ hooch, at very little greater expense.
The locals brewed awful and dangerous hooch in the hills, in Saipan as hill people do everywhere, every when, worlds without end, amen.
So, in the course of events, the government ran a deficit. (ever and always, amen) and created a specific, high, tax on imported liquor. Targeting the tourists. The tax made imported booze more expensive than it had been, but it was still slightly cheaper than the same booze in older, higher tax, jurisdictions in the rest of the world. And it taxed those who could not vote, so, YAY! So the Laffer curve worked, a little, for a while. Fewer sales, but a higher rate on the sales, and higher revenues. From the tourists.
The “mainlanders” in Saipan, though — those who drank, anyway — saw the cost of good booze go up quite a bit by comparison. They started demanding the local hooch brewers produce (untaxed) potables comparable to the Jack Daniels and Jonny Walkers that they’d grown accustomed to.
The market — responded. The quality of hooch skyrocketed. Investment in new stills, (made with locally sourced components) development of brand reputations, distribution channels. The cheap local stuff not only supplied the “mainlanders’ ” demand but started to sell to tourists – taking home “novelty” booze. After all, it was as (nearly, usually) good as Jack Daniels, half the price, and nobody else at a New York City cocktail party had ever heard of the smooth golden stuff in the oddly shaped bottle behind the colorful label. Status and virtue signalling! “I’m wealthy enough to travel to exotic lands and generous enough to support their industries and cosmopolitan enough to enjoy the local hooch”
So, a year or so into the higher import tariff, revenues fell. Local producers had satisfied demands. A lot less luxury foreign booze was ordered or shipped to Saipan. Fewer imports, less revenue.
So the government lowered the tariff. Then actually lowered the tax on imported booze to a rate lower than other imports.
But, in fact, the volume of luxury booze NEVER returned to the pre-tariff level.
Now, the original moral of this story was – “don’t screw with targeted taxes. It never works out like you plan. ”
But it seems to me that the effective moral of the story is, that local manufacturing CAN match the quality of imports, if the market pricing is right, and the manufacturing methods are long established and well understood.
Like nail making. Or distilling hooch.
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Willis – the US analogy is flawed. American manufacturing is at or near an all-time high! But automation (thanks in part to protectionist policies like unions) has reduced employment considerably, especially in the last 10 years.
Similarly, while Japan has been very protectionist, they have suffered for it. Their populace has a significantly lower standard of living than the US.
The US has all kinds of problems. But protecting manufacturing (or any industry) is not the solution. Americans can add value in all kinds of ways.
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I fear that far from being at an all-time high, the number of manufacturing jobs continues to drop.
And no, this is not mostly from automation. American factories are nowhere near that automated. A good chunk of it is from the 70,000 factories that have moved factories and assembly lines overseas since NAFTA. Manufacturing as a share of US GDP has been dropping for decades, and is now about half what it was in the 1970s.
Government jobs increasing … manufacturing jobs decreasing … what could possibly go wrong?
Thanks for your reply,
w.
PS—I cannot stress enough the importance of the book “How Rich Countries Got Rich … And Why Poor Countries Stay Poor“. If you don’t want to buy it, read the first comment on the linked page. I believed just exactly as you guys do … until I read that book and I turned 180* on the question.
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Willis, seeing that this book does not seem to be widely available and that copies that are appear to be rather pricey (perhaps your blog posts have caused a spike), you might want to consider writing a more detailed summary of it.
Mike Dombroski
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I’m writing something of the sort. In the meantime, you can read the first comment on the Amazon.com website I linked to. It’s a pretty clear outline of the thoughts.
Thanks,
w.
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Can I also recommend this excellent book which looks at the success or failures of nations on a wider basis? It’s very readable and thought provoking. For instance, the US and Mexico have a lot of similarities, but one is a successful state and the other is almost a failed state. Why? This book seeks to answer such questions and also criticises some of Jarod Diamonds conclusions on the issue.
https://en.wikipedia.org/wiki/Why_Nations_Fail
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An interesting alternative to Austrian economics. I should point out that Africa is not allowed to complete in agriculture with Europe which is highly protectionist in that area. There is also the black market of smuggling which is the inevitable result of protectionism. There is some sort of balance there I suppose.
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Find me one politician who has read the free trade agreement and understood it , free trade only works where all constraints are equal ie equal pay and conditions , safety OHS requirements , quality of raw material to name but a few .
How each country sets their taxes on business however will be the bigger own goal .
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I to have spent much time in the Solomon’s and note your comments on the forces of trade.
What does come to mind is the saying relating to correlation and causation.
Your first point was the observation that the people of the Solomon’s have a sort of commercial blindness, that is in my mind the biggest issue. Their biologically programmed gains from trade instincts have been killed by trade.
Trade at all levels is the cornerstone of the advantage that Man has over all other species.
We need to ensure that it happens in a state of equity.
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Don Boudreaux of GMU puts it very well at his Cafe Hayek this morning.
“Few truths are so well-supported by theory and so universally verified by experience as is the truth that the greater the number of people with whom we are free to exchange and trade, the greater is our prosperity and the more peaceful and enriching is our culture. Yet few truths are as stubbornly resisted as is this one. The myth persists, in myriad forms, that the more surely we restrict our access to other people’s offerings and creativity, the more wealthy and secure we become. It’s the absurd notion that impoverishment enriches – that Jones’s options expand and his prosperity grows if force or superstition restricts Jones’s options and makes more scarce the goods and services at his disposal.”
The Russ Roberts essay I recommended on this subject featured in the 19th Dec WSJ I see.
I’ve added Reinert, and the McCloskey trilogy on the factors that produced the great post 1700 world enrichment to my holiday reading list.
Porters “Wealth of Nations”, Acemoglu and Robinson’s “Why Nations fail”, and particularly, given the greatest enrichment of the masses ever in China, the old master Ronald Coase and Nancy Wang’s “How Capitalism came to China”, (hint: its about development of product markets and opening up, the value in international trade lies in imports, exports are the price one pays for imports) are all very relevant to this discussion. (the late Ronald Coase (Foundations of the Firm, and The Problem of Social Cost) was 101 years old when this superb book was published.)
Thank you Willis for opening up this subject….it seems that there are two sides to the debate, and just as with climate change, only one real world, no opportunity for controlled experiments, we have historical data, lots of correlations lots of confounding factors, economic models, and all of us have observations and experiences that lean us one way or the other. Furthermore as soon as adverse predictions are published, economics actors can and do act to ensure the predicted outcome doesn’t happen. Huge scope therefore for confirmation bias…for each South Korea, there is a New Zealand or a Singapore.
Finally, and sorry for waffling on, manufactures in and of themselves are typically not wealth. Its not the car, its where you can go; its not the painting, its the enjoyment; its not the drill, its the holes; its not the washing machine, its the time saved. And I suspect jobs are not a good proxy for manufacturing….its the output, or the output per unit input that is a better measure. Factories too are not good units with which to measure manufacturing. Does 70,000 factories disappearing mean the US is net better off due to efficiency gains, consolidation (locally here we had 40 cheese factories producing a total of 10,000MTpa of cheese 30 years ago; now we have one producing well in excess of 100,000MTpa), with workers mostly reallocated to better paying work? Or worse off because the cost of supporting newly unemployed is greater than the consumer surplus generated by lower costs of consumption (and the money so liberated not being reallocated to better investment)?
Since 2008 and QE, interest rates have been comparatively low, this in itself would presumably drive more capex aimed at relocation, automation, scale up, etc, than in other periods.
Now, importantly, none of this says that the trade deals (NAFTA, TPP, etc) were good or bad for any given country. But I can say that the anti-free traders here in NZ were complaining endlessly about how it advantaged the US over NZ!
Best
B
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Brian Dingwall December 20, 2016 at 1:54 pm
Sorry, Brian, but when a man starts out by telling me how “well-supported” and “universally verified” his ideas are, it’s an almost sure sign that they are neither.
In the world there is lots of agreement on free trade. What doesn’t agree is historical evidence. The US did NOT get rich by free trade, nor did Britain, nor France, nor Germany. They all got rich by protectionism. So figure.
See my latest post on the subject here.
w.
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I wonder if this applies to states in the USA and provinces in Canada. Has free trade between these entities produced winners and losers?
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Thanks, William. Free trade between states and countries at the same economic level is not generally a problem. However, much, perhaps most world trade is between countries that are far from equal.
Regards,
w.
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Again, and still, no type of agreement on trade between nations can work when only one party adheres to the terms of that agreement as all the others continue on with their protectionist policies. That is the root problem.
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Willis
Life is trade offs, both on the personal and policy level and should, to the extent possible, be subject at least to a cost-benefit analysis. I don’t dispute your description of the nail factory but this only half of the story. What this brought to mind was recently reading in a blog about how the government was considering only the costs in what was supposed to be a C-B analysis about carbon.
Then it dawned on me: it was your article on “The Bogus Cost of Carbon” from about five days ago! Please re-look at the first few paragraphs and advise where you have taken a piece of paper with pluses and minuses at the top and made the nail factory entries. Without such, in your own words, “this is scientific malfeasance”
It is entirely possible the nail factory closing was a net or even a total loss to the local economy and, without a parallel universe, we never will know as this is the seen and unseen conundrum. Perhaps cheaper imported nails enabled other activities. In more substantial activities, one can hypothesize that the shuttering of local brick/siding/shingle production due to more economical imports might enable a sizable increase in building to the benefit of construction activity and an improvement in quality of housing. One can’t tell without looking at both sides of the story.
I have enjoyed your musings over the years and would like to read your response if so inclined.
Mike Irwin
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Thanks, Mike. I thought I’d covered the advantages of free trade as well as my focus on the costs of free trade.
There’s only one advantage to free trade. It is the one advantage that is hammered on by supporters of free trade. It leads to lower prices for the consumer.
However, the cost to the country is to be forever without a manufacturing sector. Not worth it.
I’m writing another post on this question, I look forward to your comments.
w.
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“There’s only one advantage to free trade. It is the one advantage that is hammered on by supporters of free trade. It leads to lower prices for the consumer.” I’m sure you could come up with a substantial list of advantages if you were to try. But don’t take my word for it. Listen to what your own (US) teachers say. Look for both what is seen and unseen.
“One benefit is obvious — less expensive clothes, toys, and gadgets. But if that’s the end of the story, it’s a pretty bad deal…….
…….This standard calculus — cheap toys vs. lost jobs in manufacturing and elsewhere is woefully incomplete. It leaves out the most important and positive impact on our lives that trade provides. To understand the full story, we have to understand the fundamental connection between trade, productivity, innovation and economic growth. Without that understanding you cannot understand what’s going on when we buy toys from China this holiday season instead of making them ourselves within our borders.” Professor Russ Roberts essay published in the WSJ
“………the importance of defending free trade honestly, unconditionally, and without apology.
Such a defense begins with the insistence that jobs are not lost to imports or to foreigners; instead jobs are lost to fellow citizens – in two ways. First, it is the spending decisions of fellow citizens that determine when particular jobs are created and when they are destroyed. Second, the job lost by Smith is replaced with a new (and likely very different) job filled, if not by Smith, then by Smith’s fellow citizen Jones. So when someone complains about losing his or her job “to imports,” it is right to note that protecting that job necessarily requires that fellow citizens’ freedoms be curtailed and fellow citizens’ economic well-being be reduced. Protection necessarily shrinks the spending power of countless fellow citizens. Protectionism also destroys the actual jobs of many other fellow citizens (for example, jobs in domestic machine-tool factories that disappear because steel tariffs take a bite out of domestic machine-tool production) and destroys the job prospects of still other fellow citizens (for example, retail-store-management jobs that never materialize because tariffs on consumer goods reduce consumers’ demand for such goods).” Prof Don Boudreaux (GMU) today at Cafe Hayek where they are currently addressing the same issue.
No one knows what the extra spending power that buying lower cost items will be used for. But whether it is spent on the kids, blown in LV, or simply invested/banked it will stimulate the economy.
Look forward to what else you have to say about this much traversed topic.
Cheers,
B
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Willis, I have usually been on the side of Trade Is Good, Smoot Hawley Not Good, but you raise a good point. So does the comment above about the liquor trade in Saipan. A tariff is a tax, and a tax killed the New England boat building industry a while back, so the sword cuts both ways. I look forward to the next installment, and afford you the opportunity to do the right thing, but I wonder if this is an area where gentle applications of shades of gray matter.
Wandering well outside my zone of competence, there may well be some key skills that need protecting, such as metalworking and various defense industries and skills. There may also be some areas that are not worth protecting.
Taking this a bit further, some skills are not exportable. The plumber comes to mind, outsourcing that to India may not work too well when Grandma is facing the dreaded Brown Trout outbreak. On the other hand, a lot of the plumbing supplies and fixtures may very well be offshored, to the net benefit of both parties. But as with Japanese cars, a lot of the design and marketing can remain here.
This looks to be an area where the judicious judgement is needed, especially when trying to convince an audience rolling in abundance.
One of the problems, among many, you will need to deal with is the role the industrial unions played in the demise of so much US manufacturing (health care, pensions, work rules) and another is the role of the burgeoning regulations at the federal and state and often municipal level. All have arguably gone beyond the primary purpose of preserving and improving health and safety.
Best wishes on the coming essay.
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This is an interesting and contentious debate that I feel is going to be one of the major points of discussion in the coming years if Donald Trump acts as if he has promised. There can be no dispute that when manufacturing jobs, the sorts of jobs suitable for a substantial proportion of ordinary people, move elsewhere the consequences in social terms can be absolutely disastrous. The city of Detroit is a good case, there are videos on YouTube that illustrate its decay and the sense of hopelessness of those left behind.
There is no single path to this consequence, besides taxation, most of the advanced nations have taken it upon themselves to burden manufacturing with ever constrictive rules, the costs of energy and environmental factors come to mind, limitations that are much more severe in places like the United States than elsewhere. To meet these charges is a considerable business overhead every time a new cycle of manufacturing plant has to be put in place. Also at work are the human factors, the numbers of people required to manufacture any particular product in quantity tends to reduce with each new generation of product. Some of this is mechanisation through using robots, other elements are just different methods, materials and techniques that simplify how the product is made so reducing manufacturing headcount.
Then there are issues with getting skilled employees, with educational standards in free fall this is not a simple to rectify problem. Then there are the many protections given to workers, demands that exert substantial costs, costs that increase the risks for the employer should any said worker prove unsatisfactory but cannot easily be dismissed even in a country like the United States. Further political interference comes from a host of factors that also invoke race and gender as justifications for political meddling. While not as common as it might have been you must also consider the issue of trade union obstruction to effective changes that are necessary for a business to survive. Although now this is primarily a problem for government employed workers.
As it stands today few countries have escaped the decline in manufacturing, although the United States has been hit really severely in contrast to Germany that has to date largely escaped and kept its manufacturing base in good order. Although this is now threatened by influxes of uneducated violent peoples who have no intention of doing anything, unless this can be reversed Germany is doomed as a centre of manufacturing because of the need for educated disciplined workers is vital.
Given that the United States is the world’s major market for products there can be little question that in the short term it will be able to repatriate a significant proportion of its manufacturing base. While the full ramifications of this might be uncertain, the foreseeable future offers genuine opportunities for the United States to rebuild its decaying infrastructure and perhaps help many of its people recapture some of the dignity that comes from working for a living doing honest toil. It must be remembered however that this cannot be achieved on its own without bringing the corrupt corporate world to heel. From the early 1990’s it was clear that those at the top of the corporate world were enriching themselves and their investors first. Any sense of responsibility they may have thought was owed to their employees appeared to vanish. It is essential that President-elect Trump rectify that corruption and restore confidence that business is not simply for Board members and faceless investors to make a fortune, all companies have a duty to consider the employee just as the employees should consider the company.
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Reblogged this on Kirk M. Maxey: Blog and Website and commented:
A very timely piece about how it was the the moneyed elites sold American manufacturing jobs overseas because they alone, the elite, made huge profits from it.
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