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Trade Agreements versus Trade Liberalization

By       Message Seymour Patterson       (Page 1 of 1 pages)     Permalink    (# of views)   5 comments

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Traditional economic trade theory holds that free trade is a "win-win" strategy inasmuch as it enables the trading countries to "specialize" in the areas of their comparative advantage. Or another version of this requires a labor-rich country to produce labor-intensive goods, while a capital rich country would produce capital-intensive goods--and the trade these goods. The general effect of trade under trade liberalization is both more trade (with lower costs) and higher incomes. This is a rationale for countries coming together to eliminate trade barriers among themselves--examples include but not limited to NAFTA and the EU. It is also the rationale for the Trans-Pacific Partnership (TPP).

Free trade?
Free trade?
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Trade agreements, however, lead to strange bedfellows--namely, Bill Clinton pushed through NAFTA with a mostly republic Congress providing legislative support. Though opposition was hardly muted, it was ineffective to stop it: Ross Perot warned of a "Giant Sucking Sound" referring to American jobs going to Mexico. It also put Bernie Sanders and Hilary Clinton on different sides of the conversation and the vote on NAFTA. In hindsight, it appears that Bernie Sanders was right and the Clintons wrong about NAFTA.

Recently, President Obama put the weight of his office behind the TPP arguing that it would raise income in poor countries without harming American workers. Initially, Hillary Clinton backed the agreement, but Bernie Sanders opposed TPP at the outset. Hillary Clinton has moderated her position on TPP and that position is now similar to Senator Sanders'. That is understandable inasmuch as politics is about currying votes, in this case to ascend to the highest office of the land. Sanders has a populist message that appeals to workers; Hillary has a perception that she carries water for Wall Street. However, there is little daylight between Donald Trump and Bernie Sanders' position on TPP.

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What trade agreements do is bastardize trade theory. How? The agreements open the door for businesses to take a largely unanticipated aberrant leap in trade. By removing barriers (such as tariffs and quotas and other restrictions), CEOs were able to move their operations (companies) overseas--to Mexico, China, etc. and reduce their labor costs. This is understandable, too. Reducing costs is exactly what shareholders would expect them to do in their effort to increase profitability and stock value. Trump has openly charged that Ford's plan to build a $2.5 billion automobile plant in Mexico will cause thousands of American jobs. (See The Detroit News) And you could argue that U.S. income goes up even when the distribution of that income goes mostly to the CEOs and not U.S. workers: National income is higher and the financial types reap billions because they can sell their goods in the U.S. market profitably. What is going on here? When a U.S. company moves to Mexico to produce goods, like Ford, we are not competing with Mexico by trading our U.S. goods for Mexico's goods. We are competing with ourselves. We are producing American cars in Mexico and selling them in the lucrative U.S. States auto market. This is not what advocates of comparative advantage and free trade envisioned.

Trump's threatened taxes on imports of American firms that produce abroad is easier stated than actualized. There's a plethora of international trade agreements that a unilateral discriminatory tariff would violate. But there are ways to get around these legalities--The Europeans, the Japanese, and the Chinese have found ways. We complain they don't play fair. One way not to play fair is through currency manipulation: The Chinese have been doing this when Yuan for years. By keeping the value of the currency low relative to other currencies like the U.S. dollar, the Chinese make the goods relatively competitive in these markets, and simultaneously, make foreign goods more expensive to Chinese buyers. This strategy has two effects: (1) it grows the Chinese economy through exports, and (2) runs and trade surplus cum the U.S. Not to be overlooked is the possibility that open global markets are good because they help to mitigate the lives of the poor. (See Krugman)

The Europeans use another strategy--they might band genetically treated farm products or they might impose value added tax (VAT) on imports. A VAT is applied to goods in the hands of domestic consumers but it does not apply to the good sold to foreign buyers. However, imports are taxed to keep the system fair. Such a system creates a price disparity between the value of imports and exports--it also discourages imports and encourages exports. And as in the China case, tends to create balance of trade surpluses in these countries with respect to trade with the U.S.

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Trade agreements open the door for the shenanigans of CEO's to avoid higher labor costs, stricter environmental standards, and higher corporate taxes in the U.S. Trade agreements invites companies to move their operations abroad (to lower their costs) and then leave these companies free to sell their goods in the U.S. market.

The presidential debates have revealed interesting discussions around trade agreements on both sides of the political divide. Hill1ary morphed her thinking on TPP evolving to a place where Bernie Sanders has long been--against it. President Obama tried to assure Americans that TPP would be good for American workers. The problem is how! Democrats are generally against trade agreements because they believe American workers are harmed by them. Republicans, on the other hand, are strong advocates of trade agreement--NAFTA was voted on by a minority of Democrats. Among Republicans who tend to be pro-trade agreements, Donald Trump, the brash leading presidential republican candidate, is a glaring exception for his opposition to trade agreements he believes, not only hurt U.S. workers, but also the US. economy. After all TPP is a secret trade agreement with the input of 600 corporate advisers. There is hope that the incentive to export companies (engage in foreign direct investment) will be mitigated with the November 2016 general election results--the anti-TPP Hillary Clinton or the builder turned politician anti-TPP Donald Trump.

 

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
 

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