Free Trade

A few months back, John McCain talked free trade with people in Ohio. Didn't Senator McCain know, you can't talk free trade in Ohio? It's bad politics. The Left has claimed free trade as an enemy to life, liberty, and all we hold dear. Never mind the fact that this is the same Left that, under President Clinton, cheered the passage of NAFTA back in 1993. The steady drum beat of the Left is now that free trade is bad because it takes jobs away from Americans and, if you believe Senator Obama, causes them to cling to religion, guns, and antipathy toward those who are different. But is free trade such a bad thing?

When we're discussing economics, we have to take the discussion back to supply and demand. Competitive markets mean that people will buy at the best personal value. In other words, if two firms are selling identical products but one is offering it at a lower price, that company will sell more units. The competition will force the other company either to lower prices and compete or go out of business. So, if a consumer can buy a DVD player, a pair of shoes, or a laptop computer for less money, why wouldn't she? If the quality is good, she would buy, even if it came from another country. That is, until governments attempt to tie the invisible hand up.

Tariffs, a tax imposed on imported goods, have always been a sticky issue. The Smoot-Hawley Tariff Act of 1930 was supposed to protect American jobs by charging a higher tax on imported goods. However, the other nations of the world retaliated with their own tariffs, making it more difficult for US goods to be sold abroad. This cut US exports in half and was a major cause of the Great Depression. In fact, since talk of the Act was ongoing for months prior, there are those who speculate it contributed to the Great Crash of '29. Whatever the case, tariffs attempt to protect one group of sellers by artificially inflating the prices of another. Consumers are punished with higher prices, foreign sellers are punished with less business, and the domestic sellers are exempted from the forces of competition. Without competition to drive down prices, there is no incentive to innovate, reduce costs, or change for the better. While this may help them in the short run, competition catches up over time.

Innovation is really the key to the power of free trade. If the US economy were not so vibrant and capable of imagining new industries, free trade could be a detriment. But the American tradition is finding new ways to run, and this is part of our national identity today. Let's look at an example. There is really no such thing as an American television set. Way back in 1974, Motorola sold off the manufacturing wing for the old Quasar TV group. These TVs were still marketed as Quasars, but they were completely manufactured by Matsushita in Japan. In this way, an entire industry was outsourced. According to the stereotypical view of the Left, there should be throngs of unemployed TV manufacturing employees. But, mysteriously, there aren't. Why is this? Because as jobs are outsourced and industries go offshore, new jobs and new industries are created. The dynamic nature of the American economy is what has kept it strong through the years. One can see this individualism and innovative spirit as far back as the 1790s (see USS Constitution). The model of outsourcing has repeated itself time and time again. American ingenuity develops new industry, industry thrives in US for a while, and then the industry is picked up in places where operating costs are lower. Then the cycle starts over again. And again, and again, and again.

While we're talking trade in a global market, it makes sense to bring up outsourcing as well, since they have a lot of the same effects and motivations. John Kerry in 2004 and Barack Obama this year both promised to take away tax incentives for companies who move jobs offshore. This raises two questions in my mind. First, what direct incentives are offered by the IRS to build a plant in Indonesia? Is there a box to check on a corporate tax return for a job outsourcing deduction, exemption, or tax credit? If there is, I haven't been able to find any information on it. Secondly, will raising taxes on corporate profits provide more or less incentive for companies to earn money outside the US? Raising taxes in itself (which Obama promised to do) creates the opposite incentive.

The other argument against offshoring is that it exploits the Third World as US companies hire local workers for a fraction of what they would be paid in the US. This thinking is absurd, because it fails to take into account local cost of living standards. We see this phenomenon domestically, where firms are moving out of high-rent areas and settling in places where wages, rent, utilities, and transportation are less expensive. This is probably the biggest source of growth for the Reno area, as companies have moved out of the Bay Area in favor of a better tax structure, plentiful labor, cheap real estate, and access to good distribution. Moving to countries with lower costs is just an extension of this idea. Furthermore, when a US company opens a plant in the Third World, it provides jobs for the poorest of poor who often have no opportunity to find work. Yes, of course there are potential chances for abuse, bad working conditions, and other undesirable situations. But a great many companies, large and small, operate businesses in Third World countries that provide a valuable service to the local people.

I suppose the danger of free trade comes when the tax and political environment are not favorable to the development of new industries and growth in existing ones. When taxes are high, businesses large and small have less operating capital to invest in new ideas and products. For those who have never run a business, it's no small thing to come up with something new. It requires creativity, yes, but also analysis of the market, development of supply chains, and sufficient capital to cover operating losses until it takes off. It's a risk, and less capital available - to say nothing of reduced buying power for an over-taxed consumer - means that risk is less likely to be taken.

Here's an example of the misguided thinking of the Left where free trade is concerned. The Colombian Trade Protection Agreement would allow for free trade between the US and Colombia. The Democrat-controlled US Legislature is blocking this treaty from coming to a vote, saying it will harm US workers. While this posturing makes for great soundbites on the six o'clock news, it is, as Shakespeare said, "sound and fury, signifying nothing." The idea is that, by signing such an agreement, the US would have low-price Colombian merchandise flooding the market and putting good American working folks out of work. While that is a poignant image, it just doesn't hold up to scrutiny. First, many Colombian products already enter the US market duty-free, thanks to the Andean Trade Promotion and Drug Eradication Act (ATPDEA). This deal was made to help encourage South American countries to transition away from the sale of narcotics by strengthening other industries. However, the ATPDEA is one-sided. It allows Colombian product into the US duty-free, but US goods are still subject to tariff when sold in Colombia. There are many mining operations in South America, and the US heavy equipment industry sells a lot of tractors, trucks, and other machinery into countries like Colombia. By signing a free trade agreement, it would allow companies like Case and Caterpillar to have a strong advantage over companies like Mitsubishi and Komatsu. In my estimation, that helps the American worker. Yet the Democrat-controlled Congress will not vote on the Agreement, despite the fact it has been in their hands since April of 2007.

In essence, free trade is a good thing. It's good for the consumer, because she can buy products at the lowest possible price and is not punished for where the goods come from. It's good for exporters, because free trade agreements mean that US goods sold in other countries can be brought in without adding burdensome tariffs. The risk of US industries being buried by foreign competition over time is legitimate. However, the strength and innovation of the market has overcome this countless times, and will continue to do so as long as the environment for job creation is preserved. So, rather than spending time fighting the iron horse of the free market, we should be tuning up the engine of our economy by removing obstacles to developing new ideas and new industries.