OldVet on "Taking the other side of Trade – what’s free and what’s not"

This one is by OldVet. It complements, but doesn’t entirely agree with a recent PGL post.


Today I read the latest newsletter of John Mauldin, an investment advisor who puts out very interesting articles from time to time on a variety of subjects, and today’s was “free trade.” It’s called Draw the Curve, then Plot the Data. My response follows:

Read with interest your latest, “Draw the curve. ….” And the conclusion about trade: “I am well aware that global free trade is not a one way ticket to prosperity for all. If it is your job that goes to another country, that affects you deeply. But the US as a whole has benefited tremendously from globalization, as has the world. And yes, some benefit more than others, but that is the nature of free market economics combined with technological change.”

Sorry, but that’s just orthodoxy and the same old propaganda of recent decades, in my own opinion. (I’m not Alfred Einstein, but am a retired economist of the more practical sort – I worked on audits of very big corporations on their transfer pricing, for purposes of income declaration. I’ve drawn a curve more than once.)

Here’s a curve to draw: US trade balances from 1945 to the present. Look at the last 40 years and tell me that we have free trade again. Really? Thirty years of negatives. Massive transfers of technology offshore, wage arbitrage across borders (mass immigration and mass outsourcing), loss of entire swaths of industrial capacity, wages flat since the 1970’s. I believe thirty years of experience ought to teach America something, and that is that we don’t have free trade. We have manipulated trade, and a pattern of manipulated trade. Changing this trend is not “protectionism” from trade, but a redirection of the rules of trade to make it more free.

Vendor financing from Asia and Saudi Arabia for excess consumption over production means that the US , in both public and private sectors, have become the “sub-prime borrowers” of the world. And do you truly believe this is a stable platform for future “growth” in US economy? Really? Because the US government can afford more interest payments on debt for now, does that mean we should keep increasing debt? Why?

The expansion of the service sector of the economy is a reaction, not an action, and not a useful one. I’m picking your fleas, you’re rotating Grandpa on his nursing home bed, Grandma’s darning socks, and Junior is polishing the boots of a Hedge Fund manager. None of this is tradable, in the way required to bring our trade back into overall balance.

Status-quo trade advocates, meaning the beneficiaries and their pet economists, continue to talk about any intervention as “protectionism.” They consistently overestimate the benefits of today’s trade and underestimate the costs, both industrial and social. When prices paid by consumers are too low, they damage the economic decision making and the future investment decisions of industry – the same as prices too high also distort both consumption and investment.

Currency manipulation, either through artificially low interest rates as in Japan , or by direct intervention as in China and the Middle East oil producers, change end prices to consumers in the US . So US consumers make very bad choices, and policy makers make very bad policies, and industry invests in every country but the US , and pretty soon you have a crisis.

I understand you may have great affection and respect for industrialists and economists who are putting out the “protectionism” message, and who scream we must maintain the status quo. Don’t let it cloud your own judgment. Saying “some benefit more than others” is just the sort of mindless elitism that has created the current grossly unbalanced trade situation. Countries amount to more than the selfish interests of the movers and shakers.

Obviously the defenders of orthodox thought will disagree. What about you?