Who Benefits From Free Trade?

Simple question, but it has a two-part answer.

IF it is free trade between roughly equal economies with similar labor costs, everyone benefits. That’s just more competition. Free trade in most goods with say England would in general be a net plus.

However, IF the trade is between an industrialized and an unindustrialized economy, the only winner is big corporations and their management. Not the workers. Big corporations win, workers lose.

For an example of trade between unequal economies, free trade between the US and Mexico, and between the US and China, have both been hugely damaging to the US economy. The problem is simple.

If I own a factory just on the US side of the border, I can move my factory one kilometer south and pay $3 per hour for my labor costs instead of $18 per hour. I’d be an idiot not to do that.

Up until 1994, that was not a problem. What made the difference? NAFTA, the North American Free Trade Agreement. It lead to what H. Ross Perot presciently called the “giant sucking sound” of jobs being sucked across the border to Mexico.

 

As a factory owner, if I moved my factory to Mexico I’d get rich paying my new workers three bucks an hour. But what about my old employees? Suddenly they are all out of work. Dozens of families devastated.

Now, the benefit of free trade is supposed to be cheap Mexican goods … but if you lose your job, inexpensive avocados are meaningless.

That is the problem with free trade. Yes, it’s great to have cheap goods IF YOU HAVE A JOB. But we have shipped millions and millions of factory jobs overseas.

Many people seem to be puzzled at the huge and growing current disparity between the wealthy and the poor. Others seem mystified by the fact that the working-class income in the US hasn’t changed much since the eighties.

Both of these are adverse results of free trade between unequal partners. The constant shipping of factory jobs overseas has left a big working-class labor surplus in the US. Inevitably, following the laws of supply and demand, this labor surplus has depressed working-class wages for decades.

But at the same time the same free trade between unequal partners has enriched the corporate ownership and management. The combination has led to the aforementioned widening gulf between the wealth of the rich and the poor.

A note. People often say something on the order of “But free trade works well between the states of the US.” This is true. However, there are a couple of reasons why. The first reason is that we have national labor laws that ensure that there is not a drastic difference in labor costs. These include national minimum wage laws and more importantly, national health, medical and safety standards whose costs apply everywhere. This national framework plus a shared history and long-time economic connections mean that the economies of the states are roughly equivalent. Contrast this with undeveloped foreign economies where there are no such laws and no such shared history.

The other and perhaps main reason that free trade works in the US is that workers can move to where the better-paying work is. This means that employers must provide some given level of pay and benefits to attract workers, or they’ll go where wages are better.

However, none of that is true with respect to say Mexico or China. They don’t have equivalent worker protections. They don’t have workmen’s comp and safety regulations of the kinds we have. There is no free passage of labor from here to China or the other way. And beyond that, because their own economies are so screwed up, people in those countries are willing to work for three beans a day plus a dry place to sleep.

Here is a historical view of what the siren song of free trade has cost the US. After World War II and up until the 1980s, we were running on the old system with bilateral trade agreements and the occasional trade war. And it was a time of general economic growth of all sectors including the middle class. Go figure …

But since the eighties, the tariffs have been gradually removed year after year as the proponents of free trade and globalization have gained power and imposed free-trade and anti-tariff policies.

us-global-balance-of-payments

As you can see, currently we are losing money through our foreign trade at the rate of about two-thirds of a trillion dollars per year. Since 1980, we have sent a total of nine trillion dollars overseas. 

Nine terabucks, that is serious money. It is half of our national debt. It is money which we could be paying to our own factories and to our own farms and to our own workers and keeping it circulating within the country … but instead, free trade is steadily sucking that money out of the country. And that doesn’t even count the lost jobs.

So … how do we know that this change in our long-term trade balance of payments is due to the free trade lunacy? It is perhaps clearest with Mexico, since the change in the trade policies happened on a certain date—the date when the North American Free Trade Agreement (NAFTA) went into effect. NAFTA eliminated tariffs and opened the doors to free trade between the US, Mexico, and Canada. For the US-Canada trade this didn’t make a lot of difference, because the economies were and are not all that different. But with the US-Mexico trade, the economies are greatly unequal, and look at what happened.

effect-of-nafta
Unfortunately I can’t find a longer set of historical data, but the change is clear. Up until 1994, our balance of trade with Mexico was about zero—we bought about as much in the way of Mexican goods as we sold them of US goods, so there was no net outflow of dollars.mexico-trade-2

The above figure shows clearly what NAFTA is currently doing to our economy—it is costing us sixty billion dollars per year. It gets worse. Since NAFTA went into effect, it has cost us a total of just under one trillion dollars.

This is a trillion dollars that could have gone to US factories and US workers. Now, would that have meant more expensive avocados and more expensive Corona beer and more expensive electronic gear and so on down the line?

Absolutely … but to offset the higher costs, we’d have a trillion dollars more circulating in the economy to buy expensive avocados. And more specifically, much of that money would have been paid to US workers instead of foreign workers. So the money would not only be here, it would be in the workers’ pockets.

This means that the cheap goods that come from free trade are a false economy—the cheap goods are more than offset by the damage to the economy.

Let me note that this idea is far from new. It has been known for centuries. Here is Philipp von Hörnigk writing in 1684 on “Nine Points On How To Emulate The Rich Countries” (emphasis mine);

Ninth, except for important considerations, no importation should be allowed under any circumstances of commodities of which there is a sufficient supply of suitable quality at home; and in this matter neither sympathy nor compassion should be shown foreigners, be they friends, kinfolk, allies or enemies. For all friendship ceases, when it involves my own weakness and ruin. And this holds good, even if the domestic commodities are of poorer quality, or even higher priced. For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.

So avocados will indeed be more expensive without free trade… but free trade isn’t free. Philipp von Hörnigk is correct. Without NAFTA that trillion dollars would still be circulating in our economy, Yes, we got cheap avocados, but it has cost us a trillion dollars that have left the economy forever.

Obviously, this constant money hemorrhage of six hundred billion dollars per year cannot go on. It will lead to our eventual ruin. President Trump is right that we need to renegotiate all of these agreements. We need to remove and reduce taxes. We need to remove and reduce regulations. We need to improve conditions for starting and running businesses.

And more than anything, despite the screams of the free-traders, we need to impose tariffs. All of the freedom from taxes and regulations can’t compete with $3/hour labor. For that we need tariffs.

Sadly, free traders react to tariffs like vampires react to daylight, with shock and horror. They say thinks like “But … but … that might lead to trade wars!”.

So what? Why are people so afraid of trade wars? They happened from time to time when I was a young man … minor clouds on the economic horizon. People just bought something else.

In addition, is there anyone who thinks that the US is likely to lose a trade war? We have the largest and strongest economy in the world … or at least we did until we shipped 70,000 factories overseas. But the President is doing all he can to reverse that trend, and to date is having success.

Finally, people say that the President can’t bring the jobs back because they are gone forever, lost to automation. Me, I say that’s crazy. Carrier Air Conditioning was about to move a factory to Mexico just after the election. It was not because of awesome Mexican robots. It had nothing to do with automation. It was because of awesome Mexican wages … $3 per hour.

Are jobs lost to automation? Yes, every day … but automation and factories moving overseas are two very different and generally unrelated problems.

To summarize:

• Yes, if we impose tariffs at the Mexican border, avocados and Corona beer and other Mexican goods will cost consumers more, and

• Despite that, everyone ends up wealthier when the dollars remain in our own economy.

The choice is simple—expensive avocados and American jobs, or cheap avocados and no jobs … tough choice, huh?

w.

PS: I ASK that if you comment, please QUOTE THE EXACT WORDS YOU ARE DISCUSSING, so we can all be clear on what you are referring to.

FURTHER REFERENCES:

The best text on this matter is How Rich Countries Got Rich … And Why Poor Countries Stay Poor. It lays out these ideas much better than I can.

My own previous posts on the subject are here.

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33 thoughts on “Who Benefits From Free Trade?

  1. Been working on this topic for a long time. Got black balled from the l’boys club for my views… But folks don’t get it… As I said in 2009…

    Protection versus Free Trade

    Historically countries have protected industries that they recognise as desirable. They do this by setting high import duties for those goods that they wish to produce themselves. This gives any national business an advantage in the domestic market.

    In the case of the Solomon Islands the domestic markets are small. With only 15% of our population living in urban centres the demand for goods that can be produced locally is small. Unlike other developing countries, even if a company is protected from foreign competition, we may never have enough local demand to become ultimately successful.

    However, there are two reasons for contemplating protectionist strategies. Firstly, having an advantage in the domestic market may make the difference between a firm being profitable or not. The fact that jobs in manufacturing generally have higher wages is a good reason to desire a manufacturing sector. The question has to be asked whether, in opposition to comparative advantage theory, it is better to protect an inefficient manufacturing sector than to have no manufacturing sector at all.

    https://wordpress.com/post/nativeiowan.wordpress.com/557

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  2. to quote something I’ve heard in the last couple of weeks, a trade agreement that is 1000 pages long can’t possibly be real “Free Trade”

    Like disarmament, dropping Tariffs unilaterally is suicide, and far too much of the time we’ve been doing that.

    I’ve been hearing a steady drumbeat about how horrible the TPP was going to be from Left-leaning sources for the last couple of years, only to see them flip around about how abandoning it just lets China walk away with all our trading partners as soon as Trump officially withdrew from it.

    Bilateral trade agreements are much easier to work out because you only have to balance the interests of two countries, but it’s a lot harder to ram things like mandatory copyright changes down countries throats in a simple deal (and then claim that US law needed to change to comply with the new massive treaty), so the powers-that-be have not been interested in doing the simple bilateral agreements for the last couple of decades.

    Trump is pragmatic, he’s seen the problems with the results of the deals made by the academics “experts”

    It’s also a lot easier to make a Bilateral agreement when both sides enter into discussions honestly aware that each is representing the best interests of their own country.

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  3. I was once a “free trader,” believing that free trade ensured each country would focus its resources on what it did best, and that this would be best for every economy in time. That belief, as you have pointed out, Willis, is wrong-headed. If one wants a Pareto optimality for all humanity, then maybe it IS best. More families are helped in Mexico and China than are hurt in the US by free trade. Global optimality.

    But, as an American should I care equally for families in China and Mexico as I do for families in the US? If you are a “globalization” advocate and believe that the fundamental reason for conflict and war are nation-states that covet their neighbor’s wealth, then maybe you’d feel that shipping factory jobs from the US to Mexico and China is the right thing to minimize conflict and war among nation-states because it ultimately breaks down the nation-state (see the EU).

    On the other hand, if you feel that nation-states are better protectors of human freedoms than some world order or government (e.g., the UN, Group of 7, Group of 20, NAFTA, etc.) and that some wars among nation states are the price for that greater freedom, then maybe it does make sense to protect the wealth of nation-states. Of course, there is the natural affinity of tribe and nation that is a powerful human emotion that cannot be easily overcome; cf. the Soviet Union and the EU.

    I’ve come to believe that strong local government is better than strong central government at protecting individual freedom, which is a primary requirement for justice. Our Founders knew that, although they worried that the nascent individually weak colonies would be economic and military prey for powerful European countries, and so decided that a Federal Government with enough power to deal with hose threats was required. To that extent, they tried to restrict the Fderal Government’s role to NOTHING MORE than military protection for the colonies as a whole and to adjudicating economic disputes among the colonies. Obviously, that core belief has gone by the wayside over the last 80 years…

    But, back to free trade… just as the intellectuals that drove Marxism (and the tyrants who co-opted it) had it wrong; i.e., what would create the greatest good for the greatest number, so, too, the free trade intellectuals have provided a foothold for those who believe that the more centralized the government led by elites the better. There is an effort afoot (Brexit and Trump) to turn away from these wrong-headed ideas of globalism for which free-trade is the camel’s nose under the tent.

    Let’s hope both Brexit and Trump succeed at creating more individual freedom with more fulsome economic outcomes. People respond to economic outcomes more clearly than to the more diffuse condition of individual freedom, although the latter is necessary for the former. Less free trade will almost certainly restrict the speed and certainty of economic development in places like Mexico and China, but that may be a trade-off that is in everyone’s best interests over the long run compared to the outcomes that would eventuate with the progress of global free trade and its inevitable corollaries.

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  4. Matt Ridley in the Rational Optimist makes a valid case for open boundaries: that is free trade and free movement of people. Trade barriers are always bad for countries, history tells us.

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      • Willis Eschenbach: “Thanks, Hans, but history tells us no such thing.”

        Hundreds of years ago grain that was shipped to the ocean from the surroundings of Paris, using the river Seine had to pay toll several times. That toll tripled (!) the price of grain before it reached the ocean, within a two or three hundred kilometres. Europe has long been in the ‘subsistence modus’ because of those ‘artificial frontiers’. US on the contrary was an enormous free market in itself and because of this free market cheap mass production could develop, enormously enhancing the richness and welfare of US people. Cutting up the world by trade barriers in endlessly many pieces will bring us back to subsistence.

        I don’t deny the damage open boundaries can have for weak economies and weak households in the developing countries. Some protection might be needed. But for modern economies depending on ‘benefits of scale’ any trade barrier should be avoided.

        The trade barriers of western countries inhibit the possible export for developing countries, inhibit large scale production over there, inhibit the possibility to develop themselves towards modern production economies characterized by much higher incomes. Our trade barriers inhibit them also to gain the necessary foreign money needed to buy OUR products. When they can not export, they can not import. No large scale production will ever be possible in the hopelessly divided third world as long as trade barriers exist. Especially trade barriers in the West.

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          • Willis: “Wim, I implore you to read How Rich Countries Got Rich and Why Poor Countries Stay Poor. It answers all of your objections in detail and with examples.`

            WR: Willis, I read several books about the subject. I agree that poor countries need some protection. But, when rich countries are closing their frontiers for the products of the poor countries, what can those poor countries do to earn the foreign money they need for medicines, investments in equipment and other necessary things they don’t produce themselves?

            I read a number of the stories about your life. Including the one of the Solomon islands and the one about Kaolack in Senegal. I never met someone else who also has been in Kaolack. I travelled through the city twice in 73/74 and came back to visit the city during some days about five years ago. As you know Kaolack is a city deprived of nearly everything. They have got two small industries: the production of sea salt and the collecting and shipment of peanuts. That is it. Right now they have got a population of around 300.000 people. Where do they live from? I really don’t know. Still the city is nearly deprived of every medical treatment. No one can afford medical treatment either.

            If rich countries and regions like US and Europe close their frontiers for products of countries as Senegal, how can the people of Kaolack ever earn foreign money for the products they need, if only for starting production?

            In the short run it seems to be good for the US to restart production they have lost. But, they will need the same cheap labour China has, otherwise the products will be more expensive and everyone loses welfare. In the US and in China (and elsewhere).

            China, mentioned in the abstract of the book you mentioned had the same advantage as the US: a massive consumption market. Nearly all other countries are deprived of such an advantage. Can you imagine a car industry in Senegal that only is producing for the local market, 13 million poor people? All frontiers closed?

            The abstract also mentions “government intervention, protectionism, and strategic investment.” If the US should make strategic investments in infrastructure, both physical and in people, well guided by the government, I am sure the US doesn’t need any trade barriers to get enough work for their people. And countries like Senegal and the people of Kaolack will have any chance that they ever will produce something that can be exported to a richer market. And after, they themselves can buy goods in foreign countries like the US. Not before.

            I can nearly always agree for the full 100% with your conclusions on climate and I admire the way you do your research, but in this case I don’t understand anything at all about the position you take in respect to this subject. And I am afraid that reading that book will not change anything at all. I am really sorry to say so.

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          • Wim Röst January 30, 2017 at 10:36 am

            Willis:

            “Wim, I implore you to read How Rich Countries Got Rich and Why Poor Countries Stay Poor. It answers all of your objections in detail and with examples.`

            WR: Willis, I read several books about the subject.

            I’m sure you have, and so had I when I got to “How Rich Countries etc. …”. Despite that, it totally reversed my views on the subject. Hey, take a chance.

            I agree that poor countries need some protection. But, when rich countries are closing their frontiers for the products of the poor countries, what can those poor countries do to earn the foreign money they need for medicines, investments in equipment and other necessary things they don’t produce themselves?

            I read a number of the stories about your life. Including the one of the Solomon islands and the one about Kaolack in Senegal. I never met someone else who also has been in Kaolack.

            It is assuredly not on any tourist routes.

            I travelled through the city twice in 73/74 and came back to visit the city during some days about five years ago. As you know Kaolack is a city deprived of nearly everything. They have got two small industries: the production of sea salt and the collecting and shipment of peanuts. That is it. Right now they have got a population of around 300.000 people. Where do they live from? I really don’t know. Still the city is nearly deprived of every medical treatment. No one can afford medical treatment either.

            If rich countries and regions like US and Europe close their frontiers for products of countries as Senegal, how can the people of Kaolack ever earn foreign money for the products they need, if only for starting production?

            This is exactly why we need bilateral trade agreements. The odds of anyone in the US moving a factory to Senegal are slim. They don’t have a lot. And we have little in the way of domestic industries to protect.

            The problem with free trade is that if Senegal is into free trade, they will probably never develop a local peanut butter industry. Cheaper to buy it from a giant factory somewhere else.

            And that means that free trade sentences the people of Senegal to perpetual poverty, because it opposes the industrial revolution in manufacturing that has made the West wealthy. It’s perfectly exemplified by the death of the nail factory in Honiara …

            Thanks for your comments,

            w.

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          • W: “Thanks for your comments”
            WR: Thank you too. I appreciate your comments as well. Even when we totally don’t agree.

            “WR: Willis, I read several books about the subject.”
            W: “I’m sure you have, and so had I when I got to “How Rich Countries etc. …”. Despite that, it totally reversed my views on the subject. Hey, take a chance.”
            WR: I am sorry , I am quite busy right now. But perhaps later. I have put the book on my list.

            W: “The problem with free trade is that if Senegal is into free trade, they will probably never develop a local peanut butter industry. Cheaper to buy it from a giant factory somewhere else.”
            WR: The problem with trade barriers is, that even when Senegal succeeds in establishing a peanut butter industry, they will never be able to sell their products abroad when all frontiers are closed.

            W: And that means that free trade sentences the people of Senegal to perpetual poverty, because it opposes the industrial revolution in manufacturing that has made the West wealthy. It’s perfectly exemplified by the death of the nail factory in Honiara …
            WR: Not being able to export your products because of trade barriers, that is what makes countries stay poor. I understand the example of Honiara. I know also about what happened with the shoemakers in West Africa after the introduction of the plastic shoes. A smoother transit would have been better, with possibility’s to adapt. But I don’t know how many jobs [other party’s] in Honiara gained by the agreement. Perhaps by this agreement a lot of tourists can come to the island in an easy way (as I hope). But perhaps not and perhaps it was only a bad agreement for all. In that case only the one who signed the agreement probably will have earned money by the deal…..

            W: “This is exactly why we need bilateral trade agreements”.
            WR: I tried to check some data about Kaolack. There is nearly nothing over there, not even some data. How can such a country (Senegal) make bilateral trade agreements with the other 194 countries in the world? What are their changes on a reasonable agreement with big brother US? Especially when there is a ‘close the frontier movement’ over there? Chances: nihil.

            I am not telling that free trade is always OK for everyone. No. But closing the frontiers is bad for everyone. An important difference. What we need is a more subtle solution. As soon as the US should close the frontier with Mexico for all products, unemployment in N. Mexico will rise enormously. How many people will wait at the other side of ‘the wall’? How many of their own products the US can sell to Mexico?

            Industrialisation is a way to become rich. But not the only way. For low and middle income countries it is a good way. Wise rich countries should lower the taxes on low paid labour to be able to compete with lower income countries as soon as their industries are ‘outpaced’ by lower income countries. A simple and effective method. And when lower income countries are still able to produce cheaper: give them a chance. Find new ways to earn an income.

            When a government is sure that other governments are causing unequal competition, they should talk with each other about that. But, rich countries have to look at themselves as well. I have not been that busy with this subject since a long time, but from the past I remember a 4 billion yearly US subsidy for 4000 (!) US cotton producers. Millions (!) of African farmers lost their possibility to produce cotton: the prices collapsed. The same for the EU meat export subsidy’s that were devastating for farmers outside Europe.

            I am very afraid of a one sided and short sighted ‘close the frontier movement’ in the rich countries. It is too simple and it is not a solution for anything. Those West African farmers that lost their income, how do they buy their preservatives? How do they pay for the schooling of their kids? How many of them will want to travel to Europe in the future? What we need are solutions that enhance the economic development on both sides. Your ideas Willis about cheap energy for all fit very well in such a solution. I would like to hear more of that kind of solutions.

            Closing the frontiers without a better way out for those who need that way out, is bad for billions of people and from the theoretical point of view it can only be bad for all – on the long run. I am not of the ‘free trade group’ but I hear many alarm bells ringing because of the ‘close the frontier movement’. Logic says that in the end it we will all suffer.

            The US lost jobs in the industry. Europe as well. Japan did. But did we all became poor? Are we all deprived of work? No.

            The Dutch farmers were wearing wooden shoes. They were hand made. We lost that jobs. But our economy seems to be better than 20, 30, 40, 50, 60, 70, 80, 90 and 100 years ago. Stepping back to uneconomic solutions like ‘trade barriers’ can only harm all people involved. We must create solutions that are better than what we had in the past. Let’s not forget that developments in the past were very slow (for example because of all the trade barriers) even when some countries got rich. The cost of that very slow development was for the poor ones: for them no development at all. We both (you and me) met enough of those poor people, friendly good willing people. Without any possibility on a decent income. Let’s work on that. We are in a better position to create possibility’s than they are.

            But perhaps I had to read the book first. Perhaps it already showed good workable solutions for the problems I sketch. But for now I doubt. Looking back to a situation when the now rich countries became rich is not always a good lesson for today’s poor countries. They are not in the same position as the wealthy and powerfull countries were before, countries that could take profit from the poorer ones. The poorer ones nowaday only can develop when they will have (some) profit of the rich. For example by entrance to their markets.

            I wander whether the book gives handy solutions for those poor countries that even work as rich countries close their frontiers. If so, Willis, I will be very pleased when you would like to write a post about that. It will make it far easier for me to digest a ‘close the frontier movement’. As you see, I am very worried. I am interested in any answer for the problems I sketched, but I will not bother you with more commentary from my side about this subject because I have said what I wanted to say. But if you feel the need for a reaction, I will read your reaction with pleasure. As I always read your commentaries with much interest.

            Kind regards, Wim

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          • quote: I am not telling that free trade is always OK for everyone. No. But closing the frontiers is bad for everyone. An important difference.

            Then it’s a good thing that Trump is not proposing to close the frontiers.

            He is proposing a policy that creates trade agreements with each country so that they can be tailered to each country.

            I’m willing to bet that for tiny countries, they will be willing to do template agreements that impose no barriers on the US side, even if the other side has some barriers on a relatively small number of specific items. The reason is that balance of trade will still be very lopsided in our favor, and Trump recognizes that all countries have a responsibility to operate in their own best interests.

            But for the larger trading partners, who have barriers against our imports, play games with their monetary policy, with who we have a significant trade deficit, we can expect more complicated trade agreements.

            The issue of companies moving factories and then importing the resulting products is separate from the underlying trade agreement templates.

            In the IT world, we are seeing a lot of political organizations demanding that servers used to support services in their country be hosted in their country. In part this is a ‘data privacy’ thing where they don’t trust the US government, but in part it’s also a matter of trying to encourage datacenter buildouts in their area.

            David Lang

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  5. Willis,
    Threevpoints in general if I may.
    You get different deductions from different country pair studies. Hong Kong, producing not much, grew rich from mainland China lacking a money-smart Mandarin class.
    Also, natural advantage plays a major part no matter how trade is managed, with Honkers being a contra.
    Finally, few people go beyond thinking that corporations suck; but corporate moneys gained usually go as government imposts like royalties and taxes, plus to shareholders, plus to internal investment to secure futures. Funds do not go into Scrooge McDuck money swimming pools. Eventually the public shares, especially when bankruptcy processes have drained the duck pool fully dry.
    A clear personal remedy for oppression from trade arrangements is to pull up and move to the best place. Not too many seem to, which has long puzzled me.
    Geoff

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    • But, Geoff, money spent on Scrooge McDuck swimming pools goes to laborers, equipment operators, masons, and pool company owners (usually small businesses). It’s only money that is put into gold or government bonds or the mattress that creates no (or little) economic value. ANY spending or investing moves the economy and enriches others.

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      • you aren’t familiar enough with Scrooge McDuck and his “interesting” swimming habits.

        His money bin and swimming habits are exactly the equivalent of the matteress.

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  6. Bingo Willis – you hit the nail on the head with this one. As a Canadian that has driven through parts of the US in my working days or on vacation one could see the damage being done for instance in the “blue wall” states. Couldn’t help but say – this is not working. It’s just not right. Like seeing in parts of Detroit not just slum areas but “good areas” now abandoned and boarded up. Perot was right when he talked of the “giant sucking sound”. And I suspect Germany has done a similar kind of thing by bringing a million destitute immigrants into their country – to bring cheap labor in for their export oriented factories.
    But you have a gift in your way of explaining things so that the BS is cut through and the behind the curtain reasons for doing things revealed. Somehow Trump saw through the curtain as well and decided to do something about it. I wish him well in fixing this.
    Lpcally we just learned this week of 650 Canadian jobs being moved to Mexico by GM. So resistance will build here too.
    Cheers, and I do enjoy your new blog.

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  7. Thank you Willis. The charts are jaw dropping. I’ve been on the fence about this subject and this has convinced me that you’re right.

    One other thing became clear to me awhile ago and that is that we no longer have a capitalist society but a corporatist one that has no allegiance to this country (or any other). The financial sector has taken over our business sector and they don’t give a damn about the quality of our goods nor the people of this country that have made them rich.

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  8. Ron Sinclair mentioned that Canada has suffered the same fate as the US in losing jobs and cash to Mexico:

    “Pre-NAFTA, Canada had a $12 billion trade surplus in manufacturing, today we have a $120 billion deficit,” he told Global News.

    “The overwhelming majority of our trade is in NAFTA, so $12 billion surplus, $120 billion deficit, 22 years.”

    http://globalnews.ca/news/3211196/gm-jobs-are-just-the-tip-of-what-canada-has-lost-to-mexico/

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  9. …IF it is free trade between roughly equal economies with similar labour costs, everyone benefits. That’s just more competition. Free trade in most goods with say England would in general be a net plus….

    Probably not for England (or the UK!). Because the US has a much bigger home market, and could afford to undersell in the UK market, losing a small amount of profit, until it had driven local firms out of business. If a UK company tried that, it would go broke.

    In fact, the US has quite a history of closing its technology markets to foreign competition – I recall that when a European company came up with a technology for using mobile phones on board aircraft the FAA refused to approve it until a US equivalent was available…

    ….However, IF the trade is between an industrialized and an unindustrialized economy, the only winner is big corporations and their management. Not the workers. Big corporations win, workers lose…

    Not exactly. The entire unindustrialised economy will lose out. We can see this today with the European Union – they allow low-tariff trade in unprocessed raw materials and agricultural produce, but the minute the unindustrialised country wants to add value by processing, say, coffee beans into instant coffee, they slap punitive tariffs on to protect their European processors and stop the unindustrialised country developing into a competitor……

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  10. I can move my factory one kilometer south and pay $3 per hour for my labor costs instead of $18 per hour.

    Why are people in Mexico willing to work for so much less? What is different about Mexico? What is different about Mexican citizens? It has to be more than just a warmer climate.

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    • There are a number of differences, but a lot of it boils down to the different cost of living.

      In the US, people in San Francisco demand a much higher wage for the same work than people in the midwest, because it costs a lot more to live there.

      As people in San Francisco have to be paid more, it costs more to run a business there, so the prices that the businesses have to charge for the same goods are higher than the same company trying to operate in the midwest. In San Francisco, $15/hour is not a “Living Wage”, in the midwest, it’s a comfortable middle-class wage.

      Mexico vs the US is an extreme version of this, and over time, the wages of Mexican workers will increase as everyone in the area is paid more and the cascading effect of wage increases show up (and the standard of living, increases and people come to expect a higher baseline)

      We have seen this over time with offshoring IT work, the countries that were the first wave of offshoring have had their prices increase over time, and new countries have become participants in the race, undercutting those first-wave countries.

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      • davidelang January 29, 2017 at 2:47 pm

        Mexico vs the US is an extreme version of this, and over time, the wages of Mexican workers will increase as everyone in the area is paid more and the cascading effect of wage increases show up (and the standard of living, increases and people come to expect a higher baseline)

        We have seen this over time with offshoring IT work, the countries that were the first wave of offshoring have had their prices increase over time, and new countries have become participants in the race, undercutting those first-wave countries.

        Thanks for the comment, David. Sadly, the name for this is the “race to the bottom”, as corporations search out new locations worldwide where there are people so desperate that they will work for nothing.

        Remember the basics. The problem is giving away our entire manufacturing sector, one of the only three ways we can actually generate new wealth. No matter what it costs we need to bring that back.

        w.

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    • When I asked, “What is different about Mexico?” I was referring to this …

      Although PRI administrations achieved economic growth and relative prosperity for almost three decades after World War II, the party’s management of the economy led to several crises. Political unrest grew in the late 1960s, culminating in the Tlatelolco massacre in 1968. Economic crises swept the country in 1976 and 1982, leading to the nationalization of Mexico’s banks, which were blamed for the economic problems (La Década Perdida).

      On both occasions, the Mexican peso was devalued, and, until 2000, it was normal to expect a big devaluation and recession at the end of each presidential term. The “December Mistake” crisis threw Mexico into economic turmoil—the worst recession in over half a century.

      https://en.wikipedia.org/wiki/History_of_Mexico#.22Revolution_to_evolution.22.2C_1940-70

      The economy has been mismanaged by incompetent and/or corrupt government officials. Drug cartels control large parts of the country, it’s public officials and economy. The people making three dollars an hour in factory jobs would be commanding much higher wages if Mexico had a competent and honest government. The Mexican economy would be stronger, the population far better off and Mexico would be a customer for US goods and services instead of a source of cheap labor.

      Then there’s this …

      Mexico is a major transit and drug-producing nation: an estimated 90% of the cocaine smuggled into the United States every year moves through Mexico. Fueled by the increasing demand for drugs in the United States, the country has become a major supplier of heroin, producer and distributor of MDMA, and the largest foreign supplier of cannabis and methamphetamine to the U.S.’s market. Major drug syndicates control the majority of drug trafficking in the country, and Mexico is a significant money-laundering center
      (Ibid)

      Maybe a wall is the answer. I don’t think so but it looks like a simple though expensive solution to a hard problem.

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  11. Our lovely neighbors to the north, Canada, benefits just as much from its trade with the US as US benefits trade with the Canucks. GM just announced it will send one of its cars to be produced from Canada (Ontario) to Mexico. Canadian workers have the same wage and cost structure as US. The only problem is Canada doesn’t have the economic clout as US so can’t make GM reverse it position. Besides, the Prime Minister of Canada: Justin Trudeau, is a casper milk toast ghost elected along the lines of Progressive Politics as observed in US Bernie Sanders and Hillary Clinton. Now Trudeau has to deal with Trump, who, thankfully, realizes our largest and most equal trading partner is on a par with us and doesn’t steal middle class jobs unless they have a superior product like the Blackberry. Innovation has reduced the Blackberry, although US production for the iPHONE or Android is off-shore and should come home. Mostly robots can make iPHONE and iPAD which should keep the costs low and such a manufacturing situation would not infuse China or India with money that would it otherwise would receive. If technology advances improve the three products, all that could be incorporated into US smartphones without leaking such improvements to our competators.

    I am in agreement, economic competition with countries of equal wage and cost structure are to the benefit of the society in general.

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  12. “Now, the benefit of free trade is supposed to be cheap Mexican goods”

    Are things produced in Mexico or SE Asia or China cheaper? I suppose they are, but as much cheaper as they should be for the reduced cost of production? Not that I notice.

    Some of the money gets shipped out of the country with the jobs, and some of it stays in the country as an unearned bonus to the companies. And some of that money sent out of the country does come back.as foreign ownership.

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  13. “Since 1980, we have sent a total of nine trillion dollars overseas.”
    Another way to look at it is: We’ve borrowed nine trillion from overseas.
    Foreigners can’t take US dollars. A trade deficit is paid for by borrowing. Stop spending more than you earn. Government spending is waste.

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  14. Geoff Sherrington January 29, 2017 at 2:48 am

    Willis,
    Three points in general if I may.
    You get different deductions from different country pair studies. Hong Kong, producing not much, grew rich from mainland China lacking a money-smart Mandarin class.

    Geoff, always good to hear from you. You are correct. That is why bilateral trade agreements make much more sense that multilateral WTO style agreements.

    Regarding Hong Kong, it was the only trade outlet for China for centuries, so they grew rich off of that. For most countries that is far from true.

    Also, natural advantage plays a major part no matter how trade is managed, with Honkers being a contra.

    Yes and no, if by “natural advantage” you mean availability of resources. Look at Haiti and the DR, sharing an island with the same natural advantages … one developing and one terribly poor.

    Finally, few people go beyond thinking that corporations suck; but corporate moneys gained usually go as government imposts like royalties and taxes, plus to shareholders, plus to internal investment to secure futures. Funds do not go into Scrooge McDuck money swimming pools. Eventually the public shares, especially when bankruptcy processes have drained the duck pool fully dry.

    Sadly, these days much of the money coming in does go to Scrooge McDuck. That’s half of why the Gini index in the US keeps rising—free trade ensures remitted funds from overseas go to the CEO and the company, not to the working class. (The other half is that free trade ensures an oversupply of labor due to jobs moving overseas. This has frozen the median US income for decades.)

    A clear personal remedy for oppression from trade arrangements is to pull up and move to the best place. Not too many seem to, which has long puzzled me.

    You mean like pull up and move from Mexico to the US? Why do you think we need a wall on the southern border? Most folks are trying to pull up and move here for economic reasons, meaning better wages.

    In addition, when people hear of good-paying jobs opening up in say North Dakota from oil frakking, you can be sure that everyone from roustabouts to cooks to prostitutes makes their way to where the jobs are …

    So I’d say people do pull up and move … but internationally that is usually not possible.

    Best regards,

    w.

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  15. I have some reservations about trade and the fairness of it. However the gains from trade theorem is quite clear it is not a zero sum game both parties are advantaged.
    Further equal wages would be a silly requirement as countries such as the US would have been totally isolated from the world post the second world war if this was a standardized requirement.
    Exchange rates and productivity are the great levelers in this.
    The genetically hardwired desire to trade is the single biggest advantage Humans have over all other species, including Neanderthals who I believe had at least comparable intellectual capabilities.

    Read Matt Ridley’s Rational Optimist rather than my mangled logic. I love the discussions regardless of differences

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  16. I have never quite understood why people complain that Capitalism is bad and we need to do more for the poor, while a purely capitalist approach would be free trade all round. Which, like water self-leveling would (as we have seen) begin to distribute the wealth around the world more evenly. We have already spent our way through Japan, Korea, Taiwan, Singapore, and making our way through China, India, and Mexico – what happens when we get to the other side of those countries?

    Having said that I think there is more to this than rules of trade. There are mindsets, cultures, and work ethics that are better suited to the accumulation of wealth than others – you will always have the poor with you.
    Question: What is a house (or anything) worth?
    Answer: What someone is willing to pay for it.
    Question: What is someone’s time worth?
    Answer: What they are willing to accept for it.
    There is a mental image of self and others in here somewhere between the rules that determines what people will accept or give or think they can offer. Some people just seem to have the art of the deal.

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