A Questionable Experiment in “Free Trade”

With U.S. government experience in trade policy (i.e., Export-Import Bank and Trade Adjustment Assistance) I have spent the last 30+ years in trade finance. Donald Trump’s bombast on negotiating “good deals” with our trading partners or else … at first glance looks like a recipe for disaster akin to the Smoot-Hawley tariffs that helped create the Great Depression in the last century. But after watching the U.S. trade balance steadily deteriorate under both Democrats and Republicans for 40 years, while being completely indoctrinated — both as student and later as adjunct professor teaching international business — by the dogma of economists who worship Ricardo’s theory of “comparative advantage” providing for the greater good when countries freely trade, I am now convinced Trump may be on to something.

Henry Ford well understood the virtuous cycle between producer and laborer: both benefiting when wages were increased sufficiently to consume, that which was produced. He would be shocked in today’s America where that which is produced is essentially uncoupled from that which is consumed. With most consumer goods originating elsewhere, typically in low cost labor markets such as Mexico or Southeast Asia, the link between producer and consumer has now largely been broken. In the span of a decade or so, Walmart went from proudly proclaiming American made products to becoming the superhighway of Chinese goods with “everyday low prices.”

Since American’s public policy bias has always been to support and defend the consumer, typically at the expense of the producer, the hollowing out of America’s manufacturing base was encouraged at the expense of a few pockets of resistance in the once proud Rust Belt. The catechism of “training” has been the government’s solution to these necessary casualties — encouraged by academia and eagerly consumed by unwitting politicians. But the world is flattening out and the Internet is eliminating layers of service providers at an accelerating pace. Those once scattered pockets of sacrificial economic distress are spreading beyond the neglected Midwest. Disney, in the heart of the Sunbelt, is outsourcing its high paid tech workers to lower cost providers, either in the form of guest workers perverting the H1B visa program, or outright off shoring to well educated Indian engineers ten thousand miles away.

An outspoken German pastor (Niemoller) of Hitler once said:

First they came for the Socialists, and I did not speak out — 
Because I was not a Socialist.

Then they came for the Trade Unionists, and I did not speak out — 
Because I was not a Trade Unionist.

Then they came for the Jews, and I did not speak out — 
Because I was not a Jew.

Then they came for me — and there was no one left to speak for me.

The decimation of America’s work force under the encroachment of globalization has left Donald Trump among the few protesting this existential threat. Five million manufacturing jobs have gone offshore since 2000. Middle class trades (plumbers, construction workers, electricians, etc.) and service jobs have been almost completely taken over by illegal low cost immigrants in most major U.S. cities. Middle management jobs are being jettisoned by technology, often in conjunction with offshoring (think Tata Consulting in India). The American electorate has awakened to the reality that nobody is looking out for them. They know that politicians, who are largely bought and paid for by large business interests, aren’t going to speak for us when they come for our jobs?

Of course, Trump’s solution of slapping on illegal tariffs and taxes won’t work. As Ted Cruz points out, similar to other lemmings marching to free trade, creating a trade war will drive up the cost of all that stuff we buy at Walmart. But herein lies the genus of Trump: he understands that for decades the U.S. government has ineptly boxed us into a structure of so called free trade that inherently has put the U.S. producer at a disadvantage thereby indirectly putting the American worker at risk. He claims he will finally reverse course and push for a fairer trading system, something that should scare the current world order.

We have always taken an asymmetrical position that the U.S. will give up more access to our markets to induce our trading partners, which have generally always been more protectionists, to agree to improved access to theirs. There was some justification to this in the beginning since the U.S. economy was so much larger and robust than the rest of the world. But as the Donald rightly points out, our trading partners, particularly those in Asia, were laughing all the way to the bank. From the days when the Japanese ever so slightly cracked open their doors by granting small concessions to American business interests after protracted — mostly unproductive — years of negotiations, to the Chinese who learned well from the Japanese and not only mastered our ineffective, legalistically driven trade solutions, they used brute force (i.e., a market of 1 billion consumers) and outright theft of intellectual property to best our naïve government.

Following the mercantilism pioneered so successfully by Japan in the 1960’s, every major economy in Asia has used currency manipulation, trade barriers — tariff and non-tariff — and government managed economic policies to take market share in one industry after another from the U.S. — steel, T.V.’s, computers, cars, telecom, software, call centers, etc. Since our bias has always been to favor the consumer this has been permitted because ultimately free trade improves our economy in the long run. After all, our companies stand to prosper with larger market access. Aren’t Apple, GE and HP American? Remember the largest part of the trade imbalance is generated by so called American companies driving down their costs and improving their profits by producing products overseas for the American marketplace. Of course, these same companies also support the politicians that feed at the trough of free trade.

The thread worn mantra of training for “the jobs of the 21st century” rings hollow in the current anemic U.S. economy. Trained for what? Software programming is cheaper in India. IT hardware is all made and increasingly designed in China, Taiwan and S. Korea. Green jobs? The Chinese dominate solar panel manufacturing (remember Solyndra) and increasingly other green manufacturing. Installation of the solar hardware is low wage construction work often carried out by illegal labor. Chinese managers, many trained at the best U.S. schools, build low cost goods often infringing on American intellectual property rights with unregulated factories (one excellent byproduct of this trend is America has managed to export our pollution to less regulated markets) and then sell them to the wide-open U.S. marketplace. With their U.S. based competitors no longer price competitive, they either move production (join them) or sell out. Displaced workers then lose their spending power with lower paying replacement jobs in the service sector. As Henry Ford well knew, if workers don’t make enough money, there isn’t enough demand for the products companies are selling. (It should come as no surprise that the biggest reason this expansion has been the slowest since World War II is lack of consumer demand.)

Who knows if Trump really means what he says? Or is he just another leader selling hope and change to a purple America? We have nothing close to free trade, and therefor Ricardo’s economic model is elusive. As Trump colorfully points out America is a sucker whose future will be the continuing loss of jobs and whole industries to much savvier competitors. We can no longer wait to see whether or not this experiment in free trade is in our best interest. College graduates and comfortable upper middle class professionals driving your Asian cars and talking on your Asian smart phones, they are coming for you next when they off shore the educational, medical, accounting, financial, software and legal services and there will be no one left to speak for you.

Alan Beard is an international trade expert and adjunct professor at Georgetown University who currently manages an export trade fund (Ex-Works Capital) and management-consulting business (Interlink Capital Strategies) focused on financing U.S. exports.

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