The Coming Scuttling of Free Trade

It was 1949. Abraham Levitt and his two sons, William and Alfred, were about to sell their first ranch homes in the nation’s first suburb of Levittown, Long Island. The homes sold for $7,990 and were built on the site of a former potato farm. Thousand of middle class New York City residents eagerly lined up to buy what for them was a fabulous home with new appliances and green space.

On the prairies of America it was another story. Many areas were just, for the first time, receiving electricity. Not every home had indoor plumbing. Life was hard and living standards were comparatively harsh on the rural farms of America. But, it was these same hard working farmers who grew the food that eventually ended up in the new supermarkets that served the residents of Levittown.

Suppose in 1948, a resident of Long Island had argued as follows: Levittown should not be built. We are growing potatoes here on Long Island. If it is built, we will start importing potatoes from North Dakota and that just isn’t right. If we import potatoes, Long Island farmers will lose their livelihood.

The argument might continue with the assertion that competition from North Dakota farmers just isn’t fair. In North Dakota, living standards and environmental standards are less than our standards. Some families out there still use candles and outhouses. Labor is cheap; their children wake-up early to do farm work before they go to school. How can a Long Island farmer compete?

Precisely! Long Island famers couldn’t compete. That is why Levittown came into being. Long Island land was more suited for Levittown homes than it was for potato farms. Of course, there was never a possibility that North Dakota potatoes could have been banned from Long Island because no state can interfere with trade between states.

But nations can and do interfere with trade between nations. Yesterday, at the university where I teach, we were interviewing a candidate for a faculty position. During his presentation, a colleague explained why she was for free trade—but only if it is fair trade. Trade is not fair, she explained, when countries have lax environmental standards, pay their workers lower wages, do not provide health-care benefits, etc.

As I listened to her passionate denunciation of free trade, my mind flashed back to the Democratic debate last week. Both Obama and Clinton threatened to scuttle NAFTA if the agreement was not renegotiated to put in place stricter environmental standards etc.

The standard of living in much of Mexico is not much better than the standard of living was in North Dakota in 1949. To expect Mexico to adopt the environmental standards that the United States has in 2008, before their standard of living matches the standard of living of the United States in 2008, is far from fair. It will never happen. And if now, in 2008, the Mexican government did impose such environmental standards, the standard of living of their people would never reach that of the United States.

Many farms are now abandoned on the North Dakota prairie. Why? Rising standards of living in the cities attracted farmers. In a world of free trade, the lax environmental standards and the sweatshop factories that we see in many countries will also vanish just as soon as rising living standards increase the demand for a cleaner and safer way of life.

In a protectionist’s world, living standards fall. Falling living standards, in turn, increase the amount of environmental damage. Poor people worry about feeding their children; they do not worry about meeting American environmental standards. More than that, a poor world breeds war, and war is the ultimate environmental catastrophe.

Here is the bad news. To have both Clinton and Obama promising protectionism is a harbinger of a political trend. An intensifying debate that focuses on limiting free trade is a leading indicator of difficult economic times. Why? Bull markets call forth feelings of inclusiveness—a brotherhood of man so to speak. Bear markets call forth feelings of exclusiveness—with corresponding feelings of nationalistic pride.

Difficult economic times are coming. Fear increases during difficult economic times, and fear demands scapegoats. Politicians will be all too eager to supply scapegoats. Bet on free trade to be an early one.

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7 Responses to The Coming Scuttling of Free Trade

  1. E says:

    Were we supposed to expect anything less? I mean, come on… let’s be real. If none of the candidates are going to address the $34 Trillion Dollar problem, then are we really expecting them to tackle real problems? The $34 Trillion Dollar train-wreck is Medicaid. Okay, Medicaid and Social Security. The entire US economy is only about $14 Trillion Dollars (GDP). In seven years, Medicaid taxes will fall short of expenditures. In ten years, Social Security payments will outstrip tax revenues. By 2030, we won’t have a Social Security program left. By 2050, we may very well spend 100% of the budget on entitlements and nothing else. Whoops… I guess the magician holding the rabit in one hand, and waving a wand over “free trade” in the other will make the illusion of catastrophic fiscal issues go away.

  2. M. Harris says:

    I’ve been trying to make these very points to my Sports and Globalization instructor this entire semester. I guess Professor B teaches me economics for two semesters, so I can spend the next semester trying to teach economics to my Sports and Globalization instructor. It’s been an incredibly frustrating semester to say the least. It’s almost impossible to have an intelligent discussion on globalization when the instructor doesn’t grasp these basic concepts. How can you learn anything as it relates to globalization from someone who has protectionist views?

    I was watching TV last night and from what I could gather the jobs that left Ohio all went to Texas and not Mexico or Canada. Apparently Ohio has one of the highest tax rates and Texas has one of the nations lowest tax rates. I think if people were to dig deeper they would see the real reasons that people lose jobs have more to do with over taxation rather than corporate greed.

    I’m trying to understand the Democrats stance on immigration and stance on trade. To me they don’t seem to mesh very well.

  3. E and Michael,

    What you describe: runaway spending, high taxes, inconsistent views on trade and immigration are all symptoms of economic illiteracy. It is frightening how widespread the problem of economic illiteracy is. I am frightened because difficult economic times will increase the demand for even more ruinous policies.

  4. E says:

    Michael,

    To some degree, I think the manufacturing jobs that left Ohio did go overseas. There are alot of variables that go into the issue of “job losses”. On the one hand, corporate greed is a problem of the downward pressures exerted by shareholder expectations. That’s the reality of having a publicly traded company — the downturns and cycles are brutal. Companies are forced to ask “what did we do wrong?” and reconsider their management choices instead of accepting certain truths of business (which is that there will be down-cycles). On the other hand, there is validity to the issue of over-taxation. However, from what I’ve seen in business, “over-taxation” is the slogan and often cited excuse for “I need cover.” Show me your balance sheet and I can, in almost any case, make a case that your capital expenditures and losses are mounting (depreciating assets, etc.). In most cases, you can defer recognizing revenue til later (in some cases, pushing out even 99 years). So when companies cry “over-taxation”, they either (a) don’t have great accountants to maximize profits and shelters, or (b) they need to move to a “free trade” zone like Dubai where there are no taxes. That said, most economists know what the problems are. We’re just to scared to tell the “average Joe”. I think the Democratic candidates should, if they were really interested in being real, tell voters in Ohio and Texas the unvarnished truth — “though you work incredibly hard physically, you’re lazy mentally because you’re afraid to learn new skills (such as CAD Programming) as your labor intensive jobs are going to countries where labor is dirt cheap and union-negotiated obligations aren’t absorbing a significant portion of our revenues… the solution you need is, take out a huge loan, go back to school as a 40-something-student, and learn a new skill…” Instead the Democratic position on immigration is “vote us into office and we’ll sort this out later” and their stance on trade is “vote us into office and we may consider giving you guys a break but probably not because Corporations are giving us too much money to really fix it.”

  5. Frank v2 says:

    I would like to start this discussion off by saying that I am a big supporter of free trade, primarily because of the long term positive impact that it can have on the economy. I must say I have been quite amazed at all of the new anti-free trade rhetoric that is currently being bantered about in the political arena. Although I am now a US citizen, I grew up and spent 18 of my 27 working years in Canada. Canada and the US (and Mexico as well) signed the NAFTA (North American Free Trade Agreement) which came into effect in 1994. Initially the impact in Canada was quite devastating. The reason for this is because for years the Canadian government used tariffs and tax advantages to encourage US companies to set up Canadian manufacturing facilities, even when the production requirements really didn’t justify the necessity for these facilities.
    The manufacturing firm with which I am presently employed with was a prime example of that. We had a facility north-west of Toronto, despite the fact that our plant in Baltimore could easily have handled the supply requirements that the Canadian market demanded. However, initially the tariffs and extra import taxes would have made exporting Baltimore manufactured product to Canada uncompetitive.
    However, with the introduction of free trade, the necessity of having the plant in Canada became questionable, and after a cost / benefit analysis, the plant was eventually closed. Over 200 people were let go and the building and assets were all sold. Clearly not a good thing for those workers affected.
    That for about a 4 or 5 period after free trade came into play was a common theme in Canada: US companies closed their Canadian plants and either picked up the volume with their US facilities, or moved all manufacturing to Mexico where labor was significantly cheaper. Many white and blue collar jobs quickly vanished in the short term. From my perspective the plants that were closed were really government sponsored “make work” facilities and when the government interventions were removed, the plants could not really sustain or justify their existence.
    As one can imagine for the short term the unemployment rates rose in Canada. But an interesting thing happened: the nation began to leverage their strength which primarily lies in the area of natural resources and resource processing. Lumber, oil, gas, nickel, gold, etc. are items that Canada began exporting very heavily. That in turn created jobs in those sectors. And with the surge in oil prices, Alberta now has the lowest unemployment rate of any province in Canada. (As a side not Canada is our biggest trade partner, and number one supplier of oil). So the bottom line is that initially there was “pain” for Canadians as Canada determined where their competitive advantages were and began to leverage them accordingly. The result is that today Canada has one of the strongest and fastest growing economies in the G7, but it took almost 15 years of “pain” to get there.

  6. Economist Thomas Sowell has a new column up called “Rescuing the Rust Belt” which addresses the issue of job loss. Sowell is always an interesting read.

  7. Frank v2 says:

    Dr. B.,
    Great article and in my mind, right on the mark!
    Frank v2

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