Reader Cathy, a member of the US Military Intelligence Brigade pinged me about free trade.
Cathy writes ....
Hello, Mish:
I love your blog - thank you, for all your efforts.
You speak about free trade, but what I have noticed throughout history is that free trade only exists immediately after everything has been destroyed in war. Then the carpetbaggers move in cheating, stealing, trying to get something for nothing. Subsequently, the same "business cycle" with all its attributes returns. People who can take advantage of the system do just that until it climaxes to war once again.
Thank you - have a great day!
Cathy
China Doesn't Play Fair!
My inbox and comment box is filled with reader comments and emails telling me "China doesn't play fair".
As part of that allegation, many point out Chinese pollution. I've written about that many times myself. Yes, it's disgusting.
Let's assume for a second that China is the one and only nation that plays unfair, or if you prefer plays the "most unfair." Let's also assume China subsidizes its manufacturers.
Who Benefits, Who Loses?
The logical conclusion of such an arrangement is the Chinese government is robbing its people for the express benefit of citizens of the United States.
There is no other logical conclusion. To subsidize exports, every person in China has to pay a cost, via taxation, pollution or both.
The winners are US consumers.
Reader Stuki eloquently explained the math in response to one of my free trade posts. He writes ...
In order for a foreign government to subsidize one sector, it must necessarily pull the money from others, rendering them less competitive. Conversely, by subsidizing steel, the Chinese government is indirectly subsidizing each and every industry that uses steel as an input, in the US and elsewhere. While simultaneously taking that subsidy back from their home market companies, in order to pay for the steel subsidies.
So, the net result is the Chinese government subsidizing a low value add, albeit politically well connected, industry at home, while disproportionately subsidizing higher valued add industries abroad. Any way you look at it, it's a better deal for foreigners than for the domestic Chinese. Which shouldn't come as a surprise, because, as Friedman has pointed out, the Chinese government is taxing it's own people, in order to pay for free gifts to foreigners.
If we would only be so lucky...... Of course, the Chinese collectively aren't nearly stupid enough to not understand that. So the whole "subsidize" gift we're supposed to be getting from China is, in reality, nothing more than the figment of some congressman-on-the-take's imagination, planted there by the lobbyists for whatever LBO shop happens to have bought the steel maker that paid for his campaign.
Trade barriers
Sugar, Sugar
For all the pissing and moaning by the US about China, the US is one of the worst when it comes to agricultural commodities, especially sugar and corn.
Countless US candy manufacturers moved operations to Canada and elsewhere to avoid paying the US price of sugar.
The US sugar lobby is among the worst in the world. Were it not for EU agricultural protections to preserve inefficient French farms, the US would be the worst.
It is a constant source of irritation to small countries of whom the US demands free trade on exports but will not allow them on agricultural imports.
Problems with Free Trade
There are no problems with free trade, but there are two rules that prevent free trade.
- Every country wants free trade for exports
- No country wants free trade for imports
Trans Pacific Partnership (TPP) Agreement Hits 5,544 Pages
As a direct result of those simple rules, the TPP Trade Deal Hits 5,544 Pages, Longer Than Obamacare PLUS Rubio's 'Gang Of Eight' Cheap-Labor Amnesty Bill.
As a side note, only 20% of those 5,544 pages have anything to do with trade.
The rest pertains to global warming nonsense, corporations rights to sue governments for damages, and God knows what else because the whole thing is secret.
For more on TPP, Tariffs, the WTO, and free trade, please see ...
- April 7, 2015: Obama's Trans-Pacific Partnership Fiasco vs. Mish's Proposed Free Trade Alternative; How Will TPP Function in Practice?
- April 11, 2015: Legacy Skills and Capital; Sugar and Steel; Turning TPP to TP
- May 30, 2016: Stacked Deck: US Bullies WTO, TPP Revisited
Genuine Free Trade Agreement
A genuine free trade agreement would consist of a single statement: "Effective immediately, all tariffs and subsidies, on all goods and services, are removed."
"Fair Trade" is a concoction by industries that seek or need protection via tariffs and import restrictions, to the damage of everyone else.
It would be idiotic to have everyone pay triple for underwear to "save 500 underwear manufacturing jobs" but that is precisely what the "fair trade" nut cases seek.
Fair Trade Irony
The irony in the "fair trade" argument is no jobs are saved by tariffs.
In the example above, additional money spent on underwear means consumers would have less money to spend on something else (to the detriment of jobs in other industries).
