The Problems of Free Trade and Vladimir Masch

Vladimir Masch has offered some radical solutions to the problems of globalization. In terms of the U.S., here is how he describes the problem:

The US is currently in a precarious position, one of the most dangerous in its history. In addition to geopolitical threats, we face a severe economic shock. The enormous wealth of this country is transferred abroad at a high and accelerating rate. To finance our voracious consumption, we borrow from potential adversaries. We lose important industries and millions of middle-class jobs. With the industrial base being destroyed, our security is compromised. The country has lost every important economic weapon that can be used in thorny geopolitical situations, which will prevail in this century.

At the heart of the problem is the problem of trade, a problem that few economists have addressed. Instead, we have a “relentless propaganda” machine, headed by economists on both the right and on the left–Krugman and Mankiw are examples–that globalization as practiced will bring benefits to all. Free Trade is the mantra. And here are the results.

In 2006, its current account deficit will probably reach about $900B, or almost 7% of GDP, with its rise accelerating. In just one year, the deficit exceeded more than twice our expense on the Iraq war for four years. The notorious “bridge to nowhere” costs $222 million; in foreign trade, we lose that amount every two and a half hours. In 6 to 8 years, just our return payments on foreign holdings on US securities may reach half a trillion dollars a year. A large part of that debt is borrowed from China, our potential adversary; it holds now more than one trillion dollars of currency reserves, predominantly in the US debt securities, and expects to double that amount in four years. This is an ever-growing mortgage on our country, and the situation is unsustainable. Even President Bush, a religious devotee of free trade, says so.

The just completed draft of the Horizon Project, which is intended to be a Marshall type Plan for America and has been authored by eleven eminent CEOs and policy
innovators, comes to basically the same conclusions. The Horizon Project talks about “a hollowing out of American productive and services capacity,” about “the US international trade position … being in free fall,” about “many U.S. multinational corporations which … seem tempted to off shore almost everything but consumption.” Consequently, “The traditional U.S. trade surplus in agricultural products is nearing zero, in high-technology products it has turned negative, and in trade services it is small and declining as a proportion of total trade.” Moreover, it considers emigration of such industries as chip manufacturing to China, Taiwan and South Korea as “very unwise,” as these areas are threatened by potential geopolitical disturbance in the region that might “greatly diminish U.S. armed forces operations and effectiveness.”

The present relatively low rates of inflation and unemployment and satisfactory rates of growth were bought at an enormous price of transferring our wealth and labor force abroad.

Vladimir addresses the so-called law of “comparative advantage”, which assumes that every country will specialize in what it does best. While theoretically, the law seems elegant and incontrovertible, it ignores important externalities such as adjustment costs–re-training, etc.

Outsource everything–full speed ahead. Damn the costs. And, if the money has flowed abroad or into CEO and corporate coffers, who is to pick up the tab? How are we to adjust? How do we pay for re-training? And in what?

We are not talking here about a few people; we are talking about millions of people and uncountable industries. And then, of course, we have to wait–painfully–while wages equalize…if they ever do. And what has been the result: Enormous polarity in the distribution of wealth. So many problems; so little thought has been given to them.

No economist gave any thought to wage disparity; it simply became tucked into the law of comparative advantage.

No economist ever gave thought to labor rights as essential for sound trade. Again, labor rights became a mere externality–an uncomfortable side issue that deflates the bottom line.

Should the WTO have insisted that China protect labor rights prior to WTO entry? Of course it should have.

Right wingers love to tell us how much better off the poor peasant is in his sweat shop. Does the right winger care about sweatshop labor conditions? Of course not. Meanwhile, the rich get richer. And meanwhile, the U.S. is headed down the tubes.

And while we are at it, let me suggest another difficulty: Specialization has its own difficulties, as I pointed out in this piece: Local or Global .

Specialization puts any country at risk, especially in key commodities. And if big players with deep pockets can quickly shift money to exploit the problems, what then? According to one wag, 60% of the cost of oil is a result of one such shift. (While I do not agree with this figure, many here apparently do. And if they do, what say they then about free trade?)

Vladimir has described the problem, at least for the U.S. And what is his answer: Trade balances must be controlled. He suggests the following:

1. Congress sets annual limits (upper bounds) on the overall U.S. trade deficit in consumer goods and undesirable capital goods (oil and gas excluded)
2. The President of the U.S. allocates the allowed deficit for each of our trading counterparts—countries or groups of countries
3. A country may exceed the limit if its government pays the U.S. Treasury a stipulated percentage (up to the full amount) of the excess deficit, also approved for each country by the President of the U.S. These payments may be capped
4. To raise the money for excess deficit payments, our trading counterparts may either use export taxes and export certificate auctions or pay from their currency reserves

Interesting, but I think unworkable.

Imagine telling China that it must compensate us for its trade surplus! And what do we say to poor Mexico? Or to Canada? Send us our monthly check, please.

My own solution is three-fold and it is based on the following–over 60% of China’s exports are from foreign companies inside of China. Unless we address that uncomfortable fact–almost 80% in IT–, our goose is cooked.

1. Insist that all countries protect labor rights. No more fast track trade deals that are merely grease for our companies to find cheap labor.
2. Reform the WTO or withdraw from it. The WTO should immediately start a process whereby all WTO countries move towards an acceptable standard for the protection of labor. Better late then never.
3. Tax goods that U.S. companies make with cheap overseas labor. Put a price on outsourcing and offshoring. Hey, Intel and Apple, no more free rides. Hey, Walmart, your prices are going up. Time to compete fairly.