Reader Cathy, a member of the US Military Intelligence Brigade pinged me about free trade.
Cathy writes ….
Hello, Mish:
I love your blog – thank you, for all your efforts.
You speak about free trade, but what I have noticed throughout history is that free trade only exists immediately after everything has been destroyed in war. Then the carpetbaggers move in cheating, stealing, trying to get something for nothing. Subsequently, the same “business cycle” with all its attributes returns. People who can take advantage of the system do just that until it climaxes to war once again.
Thank you – have a great day!
Cathy
China Doesn’t Play Fair!
My inbox and comment box is filled with reader comments and emails telling me “China doesn’t play fair”.
As part of that allegation, many point out Chinese pollution. I’ve written about that many times myself. Yes, it’s disgusting.
Let’s assume for a second that China is the one and only nation that plays unfair, or if you prefer plays the “most unfair.” Let’s also assume China subsidizes its manufacturers.
Who Benefits, Who Loses?
The logical conclusion of such an arrangement is the Chinese government is robbing its people for the express benefit of citizens of the United States.
There is no other logical conclusion. To subsidize exports, every person in China has to pay a cost, via taxation, pollution or both.
The winners are US consumers.
Reader Stuki eloquently explained the math in response to one of my free trade posts. He writes …
In order for a foreign government to subsidize one sector, it must necessarily pull the money from others, rendering them less competitive. Conversely, by subsidizing steel, the Chinese government is indirectly subsidizing each and every industry that uses steel as an input, in the US and elsewhere. While simultaneously taking that subsidy back from their home market companies, in order to pay for the steel subsidies.
So, the net result is the Chinese government subsidizing a low value add, albeit politically well connected, industry at home, while disproportionately subsidizing higher valued add industries abroad. Any way you look at it, it’s a better deal for foreigners than for the domestic Chinese. Which shouldn’t come as a surprise, because, as Friedman has pointed out, the Chinese government is taxing it’s own people, in order to pay for free gifts to foreigners.
If we would only be so lucky…… Of course, the Chinese collectively aren’t nearly stupid enough to not understand that. So the whole “subsidize” gift we’re supposed to be getting from China is, in reality, nothing more than the figment of some congressman-on-the-take’s imagination, planted there by the lobbyists for whatever LBO shop happens to have bought the steel maker that paid for his campaign.
Trade barriers
Sugar, Sugar
For all the pissing and moaning by the US about China, the US is one of the worst when it comes to agricultural commodities, especially sugar and corn.
Countless US candy manufacturers moved operations to Canada and elsewhere to avoid paying the US price of sugar.
The US sugar lobby is among the worst in the world. Were it not for EU agricultural protections to preserve inefficient French farms, the US would be the worst.
It is a constant source of irritation to small countries of whom the US demands free trade on exports but will not allow them on agricultural imports.
Problems with Free Trade
There are no problems with free trade, but there are two rules that prevent free trade.
- Every country wants free trade for exports
- No country wants free trade for imports
Trans Pacific Partnership (TPP) Agreement Hits 5,544 Pages
As a direct result of those simple rules, the TPP Trade Deal Hits 5,544 Pages, Longer Than Obamacare PLUS Rubio’s ‘Gang Of Eight’ Cheap-Labor Amnesty Bill.
As a side note, only 20% of those 5,544 pages have anything to do with trade.
The rest pertains to global warming nonsense, corporations rights to sue governments for damages, and God knows what else because the whole thing is secret.
For more on TPP, Tariffs, the WTO, and free trade, please see …
- April 7, 2015: Obama’s Trans-Pacific Partnership Fiasco vs. Mish’s Proposed Free Trade Alternative; How Will TPP Function in Practice?
- April 11, 2015: Legacy Skills and Capital; Sugar and Steel; Turning TPP to TP
- May 30, 2016: Stacked Deck: US Bullies WTO, TPP Revisited
Genuine Free Trade Agreement
A genuine free trade agreement would consist of a single statement: “Effective immediately, all tariffs and subsidies, on all goods and services, are removed.”
“Fair Trade” is a concoction by industries that seek or need protection via tariffs and import restrictions, to the damage of everyone else.
It would be idiotic to have everyone pay triple for underwear to “save 500 underwear manufacturing jobs” but that is precisely what the “fair trade” nut cases seek.
Fair Trade Irony
The irony in the “fair trade” argument is no jobs are saved by tariffs.
In the example above, additional money spent on underwear means consumers would have less money to spend on something else (to the detriment of jobs in other industries).
Mike “Mish” Shedlock
Excellent article; the USA is protectionist as is the EU. The best joke is aircraft where the US complains about subsidies to Airbus while starting wars to subsidise Lockheed and Boeing. Corruption is another joke, where the US complains about corruption abroad ( this is only interesting to those Americans who know where ‘abroad is’) while engaging in legalised corruption through the Lobbying System at home.
The UK is far from blameless in both case, hey we had Blair! Hopefully now we’ve dumped the Eu – o – coats we can strive for an economy with no tariffs.
Boeing will be hollowed out like the automakers withing 20 or 30 years. It’s transferring technology to China, and Japan started making planes this year with Boeing tech.
.. Unfortunately
MISH Mishes the Boat on Free Trade.
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Between Countries, Countries with different Ideology, Free trade is in fact for idiots.
There is no such thing, nor should their ever be. Nor will there ever be.
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Why ? Because you want your citizens employed. And because you have some morals, you do not want others to be enslaved.
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If the Chinese Government has no environmental protections, no worker protections, no media protections, no rights of civilians, they can always cut your price. Don’t you want to be able to have them have morals, and have some environmental control ?
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OK – Better Yet Say North Korea
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If North Korea were given Free Trade, and Kim Jong-un (who has effectively enslaved all his workers), were allowed to produce steel ( or anything else) then he could always and would always beat the prices in the US and EU, and his Government would THRIVE and the US and EU citizens would have no manufacturing employment at all.
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Kim Jong-un would enslave his people under Free Trade and the US would have decreased employment ( and decreased strength) .
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Is That What You Want ?
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@alexisback
Quit playing chess while “free” trade advocates* play checkers.
You are spot-on, of course.
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*owners of capital who stand to benefit financially offshoring everything not bolted down.
Ricardo’s free trade model depended on a gold standard that would alter currency values if there was a trade imbalance. Fiat currencies allow unlimited trade imbalances, particularly those that benefit the Global elites….
Ricardo also assumed the Portuguese couldn’t move to England. He also assumed a loom could be turned into a wine press and a textile factory would be as skilled at making wine as making cloth.
Ricardo also never envisioned a fiat global reserve currency with one player, the USA having the ultimate comparative advantage, that of printing and exporting the planets currency.
For the time being the US owns the board the global economy is played on. The board is being abused and when it falls apart it’s……game over.
Not that simple. A lot of theoretical work has been done on Ricardo’s trade on the basis of comparative value. As you might imagine, things are more complicated than it seems, and balance does not set in at an optimal point for all parties. Discussion would require a lot of room.
It is worth pointing out that modern transport and communications have created wage arbitrage, which swaps out manufacturing jobs to low paying workers in the third world. The limit to this arbitrage is the wage differential, until American workers earn the same as people in Burma or Haïti (although you cannot survive on that without moving to Haïti): There’s at least 3 billion people who would like to enter the labor force.
It is also worth pointing out that Asian economies (Japan, Hong Kong, Taiwan, Korea, China, Thailand) have been able to pull themselves up by their own boot straps pursuing a mercantile policy that has at any rate bequeathed them a capital stock that is a real achievement and have positioned them higher up the value-added chain, something many other nations have failed at.
Yes, free trade theory assumes balanced trade, enforced by a limited amount of gold backed currency. Fair trade is balanced trade. Trump is all for free trade so long as it is balanced trade. In lieu of a balance of trade sanctions must be applied.
This is the most concise and simplest explanation of fair trade I have read. I have to believe the D knows this but is using his bluster as a negotiating tactic for better deals, I am hoping. People are blissfully ignorant and only want to hear fairy tales from politicians. No one would ever get elected telling the truth.
Mish — Here’s the problem. I knew a guy who ran a sock manufacturing mill in Mt. Airy NC. He was from Pakistan–came here for school and married an American girl. Around the year 2000 he moved the entire operation to Pakistan. Now Pakistan was –and is still– in the need of the hard currency US dollars. For oil for many things. So he was able to get an exchange rate bonus from the Pakistan government of 15% for bring dollars back into the country. This allowed him to sell the socks below cost in the United.States but make a profit because his expenses were in the local currency.
So he was in a warehouse operation in Los Angeles where I met him. He had webcameras installed in his Pakistan factory so he could monitor his factory from Los Angeles.Still in business but making much more in this setup than in a My Airy factory. Four or five workers in Los Angeles Probably needed a 100 in IMt. Airy.
So maybe The US Consumer won? But it seems nuts from an American society full employment type of view.
BTW he has the cheapest socks in LA if you buy a truck load
I understand your arguments for free trade, and agree with them. However, as we have to have tax revenue from somewhere, why don’t we replace income tax with a import tariff? Same ultimate buying power of the customer, and it makes domestic production more competitive. Or is the fear this will spark a trade war?
Mish,
I can’t disagree with any of your free trade stances. But don’t these trade agreements boil down to game theory? Where the best strategy is tit-for-tat? If one country becomes protectionist on some imported products, the exporting country “loses” market share, jobs, etc. So that country becomes protectionist on other imported items. And so it goes until the two countries are sick of playing the game and decide to scrap the protections entirely.
But then you are left with a country’s welfare/labor laws and schemes pricing some domestic labor out of international competition, which eventually – either by unions or by “advocates” for the poor” – feeds lobbying for protectionist game theory all over again.
The proper way to account for lost taxes is to replace business profit taxes such as the cooperate income tax with a Value Added Tax. Imports wold be taxed at full value, the same as good produced here – less internal costs such as local taxes, regulatory compliance costs, etc. for local goods which provides a partial offset against goods produced in conditions that would not be tolerated here. Over 200 countries use a VAT including the major exporting countries.
What free trade advocates fail to account for is that INVESTMENT follows the jobs out of the country. Economists seem fixated on lowest costs arbitrage but even though know that it is productivity that drives living standards and that productivity comes from INVESTMENT in plant, equipment, human capital, skills, infrastructure, etc.
Capital cannot be retrained. When the auto factory closes, it doesn’t become a semiconductor maker. It shuts down and is sold off for scrap or shipped along with the jobs. The workers are also out of jobs and may or may not be able to be retrained for jobs with similar skills or pay. Property values fall as businesses that service the factory cut back or also shut down. The local banks see their balance sheets shrink as homeowners default on mortgages. Drug addiction, crime rates and welfare use rise. Within a couple decades the town is a hollowed out shell that no business wants to enter. Then along comes a socialist who promises to increase taxes and regulations on the whole country, supported by millions of people who are out of work thanks to free trade. The businesses in the country demand even more immigration to drive down wages and keep their businesses competitive, so they don’t have to move abroad as well.
The country that engages in unfree trade has factories humming, rising savings, it keeps people employed and paying taxes. Local businesses spring up, such as the tire factory that locates next door (which also moved from a nearby town in the free trade country), the research center, the mechanic school and the various cleaning services, restaurants, etc. that also open up around the auto factory. The cost of capital is lower because of all the savings and investment generated by economic activity in the country, in the banks, in the financial markets, while the free trade country stagnates. Plus the money that was made selling off the factory, that went to invest in the protected country too.
Yup, things are really humming along great in famously closed North Korea and Myanmar, compared to famously open Hong Kong and Singapore……..
And Latin America, who collectively and consciously chose to follow a path of explicit trade barriers and encouraging import substitution; in order to protect nascent industries from well funded foreign competitors; around the same time the so called Asian “Tigers” went the other way and opened up their economies; really have lots to show for it, don’t they?
You forgot the best paradise of all – Venezuela
All the Asian economies are famour for their mercantile trade policies, always exporting more than they import, and turning the savings into their own capital stock. All have had severe discouragements to cheap imports from abroad.
@webej
The only ones who have made the rising Asian economies “famous for mercantilism”, are those of the Krugman bent (not sure about Krugman himself in that case. trade is one of the things he actually bothered studying up on, instead of just hipshooting to a political gallery), who insist on looking at everything from a million miles up macro perspective. Glossing over every single detail and nuance.
When an economy is poor, but rapidly expanding in it’s productive potential, it is completely natural to run huge trade surpluses with wealthier, slower growing economies. Capital will poor in from the latter, to where the investment has the most upside. While consumers in the former, are still way to poor to buy much of anything.
In addition, in Asia, the people who left the countryside for the cities, powering the industrial boom, saves for their retirement. They have to, having no subsistence farm to live off when they can/will no longer work. They don’t, at least didn’t, have idiotic governments that take those savings and spend them, replacing them with some vague promise that they’ll steal from future generations as well, to “pay back” those they’re currently looting.
So, it’s natural for Asians to save more. It’s kind of what people have been doing since the dawn of time. Put aside something during ones productive years, that one can draw down once one gets older. Only in the West in the post-gold era, is savings by regular people rendered largely impossible, since any conceivable pile of money, will inevitably be seen as an available honeypot for corruptocrats, banksters and ambulance chasers. All angling to get their grubby hands on it, and all being better connected to the ruling Junta than a regular guy just trying to put something aside.
So, IOW, the “savings glut” in Asia, has nothing to do with Asian countries running some sort of nefarious mercantilistic policies. But rather, that the West are running explicitly “anti mercantilistic” ones. Wiping out naturally desired savings, and replacing it with rampant overspending, as if it was some sort of religion. Which it pretty much is by now. But, again, the Asians are the ones letting freedom and individual preference dictate their savings/spending allocations. While the West is not. Meaning, if there is a problem, the West are the ones who needs to change, and become more like the Asians. Not the other way around.
The fact that the West has let politicians get away with robbing them dry, to burn every penny on cheap Chinese hookers and blow; while the Asians, instead of returning the favor by buying the American versions of above, choose to buy machinery from Germany and Japan (still importing stuff, no trade restrictions….) so that their kids can inherit more competitive hookers and blow factories, is hardly a sign the Asians are the ones “cheating” and needs to change.
On another note, if the world still settled trade in some kind of proper money, the West would never have been able to fall so far down the rabbit hole before balance of payments would have slowed their decline. But again, it’s not like it was some poor Asian developing country, that designed the world’s monetary system to work less as an exchange medium, and more like an extraction mechanism for banksters and governments. The Asians are just playing the hand they are dealt, and if Americans are content to keep unconditionally supporting the George Soros’ and Franklin Roosevent’s of the world at their own expense……..
Surely you jest in trying to compare NK / Myanmar to the US.
You and Mish share a deeply flawed logic … and not ONCE has Mish (or you) has ever expressed how the US comes out ahead in the job count with “free” trade.
Lower prices don’t mean a damn thing if you have no $$s / job.
But owners of capital will do quite nicely. Enjoy your riches.
“Job count” isn’t exactly a particularly meaningful metric. I’m sure everyone in North Korea is counted as having a job. Or at least noone is counted as unemployed. Looks better for the government that way.
Also, if prices are low enough, having no job at all is quite a nice lifestyle……
Leaving corner cases aside, the lower prices are in the US compared to other places, the higher US real incomes can be, for equal productivity labor. Dump zoning, Obamacare, all and any bailouts and corporate welfare, public unions, all and any subsidies to anyone for anything, the Fed and taxes, and American workers could work for half to a third of their current wages, and still come out ahead. You don’t think they would be more attractive hires at those wages? Then get rid of non-contract civil suits against non criminal defendants, and you’ll make America a more attractive place to locate a business still.
In general, how much someone can command in wages, is capped by how much value he can add. How much value he can add, in any advanced economy, is highly dependent on the amount of capital he has available to work with. Being able to source the best and most cost effective capital from wherever he feels like, makes him more capital rich. Could you imagine how expensive a simple US handyman would be to hire, if the only tools available to him, was SnapOn, instead of less expensive Asian stuff? And ditto, if the only gas available, was domestically sourced stuff, because imports from Arabia was banned?
That would make about as much sense as Asian countries deciding to ban imports of US software and microchips, and go back to doing calculations with an abacus. You really think their workers would benefit from that policy? Their “job count” may well have gone up, since noone could ever afford not to take a break. But an improvement?
Asian tools, cars, computer screens etc., are to US workers what American software and chips are to Asian ones. Both enable the other to generate value more efficiently, hence allowing them to command higher wages.
The fact that whatever an American worker produces these days, has to be split 90% for them, 10% for him, with an army of lawyers, banksters, politicians, public unions and other assorted net negative leeches and trash, most certainly makes it suck to be a worker in the US today. But the focus needs to be on getting rid of (at least 90%) of all of the latter groups. Not to play along as they try to deflect the blame away from themselves and onto some dudes in Asia.
Did you cut and paste that from Sim City 5?
Japanese companies famously retrained and changed industries from “old” to “new tech” back in the ’70’s and ’80’s.
But at the time, and now, there were others like IICS who thought so little of people in “old” industries that they could not conceive of such people being anything other than charity cases.
Well, each to their own world.
I’ll bet a government true to the Constitution could easily fund itself through tariffs without causing states to want to secede.
Mish: I like your blog. Your explanation of free trade is valid in a static world under equilibrium conditions. (Readers with an interest in physics may find a simple explanation of the profound difference between equilibrium and nonequilibrium processes in https://en.wikipedia.org/wiki/Non-equilibrium_thermodynamics#Difference_between_equilibrium_and_non-equilibrium_thermodynamics ). Your sentence “The logical conclusion of such an arrangement is the Chinese government is robbing its people for the express benefit of citizens of the United States” is profoundly modified if you include what happens during this process. A simple example is predatory pricing followed by monopolistic pricing. This is not an argument against free trade per se, but a comment on how incomplete an equilibrium analysis is.
Essentially you propose China (or some other country) could subsidize everything, lose money on everything, and rule the world.
I think you need to rethink your model
Mish
Ah, kris, Yessssss. Price-em-out-of-the-market-and-then-clean-up. Perhaps it’s never happened, but don’t let that stop us now.
Name a product that goes for around ten bucks and give me lots and lots and lots of dough. I’ll sell the product for $1 a pop until there is no competition. Then, heh, heh, heh, we’ll clean up by charging $100. No one can stop us! You devious, clever businessman, you.
Not being an economist, I chose what now seems to be a bad example. If the end state differs from the initial state only by how much the “Chinese government robb[ed] its people for the express benefit of citizens of the United States”, then your argument is valid. My point is that there are other factors. Perhaps they are unimportant, but that needs to be addressed.
Agreed, kris. And I apologize for launching on you. That bad example comes up so often and seems to be the essential backing for so many conclusions that I got carried away.
Mish and others assert the other factors are, in fact, unimportant. That point might be argued. Or, at the least, as you note, other factors should be considered when it’s time to make a specific policy in specific instances.
Countries tax things they want less of — the US taxes savings, interest thereon, capital gains (not inflation adjusted).
Countries subsidize things they want more of — the US gives a tax break for interest paid on debt.
Ipso facto, the US has very little savings but lots and lots of debt.
This isn’t China’s problem, it is the US’s problem. If China wants to sell us cheap steel, etc — the US could use it to build higher value products… well, we might if we had any savings.
The real problem the US government has with cheap imported steel is that it can’t be pledged as collateral for more and more debt
… and the US Federal Reserve attacks savers every chance it gets by keeping interest rates lower than they otherwise would be.
That is why Americans have too much debt and not enough savings — because the US government taxes savings while subsidizing debt
the US gives a tax break for interest paid on debt.
It’s called “cost of doing business”. Sounds legit to me.
Note that households USED to be able to count interest on debt as “cost of running a household” but Reagan eliminated all of it except for home loans. He was dead wrong to eliminate such costs as a deduction, but I find it interesting that most people now think even deducting home loan interest is wrong.
@robs — Why is money borrowed from others a business expense, but money borrowed from owners (aka capital) not also an expense? Both are cost of capital
You obviously didn’t think your comment through at all.
“free trade only exists immediately after everything has been destroyed in war. Then the carpetbaggers move in cheating, stealing…” Cathy, a member of the US Military Intelligence Brigade.
Interesting that no one commented on the first part of the article. Maybe too much to keep in memory. But if Cathy is right, then we should be studying NATO’s triumph in Libya or the USA military triumphs in Iraq (twice) and Afghanistan, as well as the Napoleonic Wars, World War I and World War II to see if she is right that Free Trade is just an Evil Side Effect of War and has otherwise never existed in Human History and is Otherwise Impossible. Unfortunately, off the top of my head I cannot think of an example of Free Trade in human history.
If you read the DoD interpretation of the TTIP, it is intended as a military tactic meant to surround and weaken China. Trade agreements, like economic blockades (e.g. Cuba, Russia, Iran), are really just weapons of warfare like in medieval times when cities were brought to their knees by blocking or destroying food and water supplies. Today blockades, economic sanctions and trade agreements similarly are pre-assault tactics to weaken intended military targets (e.g. China, Russia). There is no real interest in trade per se, except as a weapon of war, which is why Hilary and Obama supported TTIP, with the corporate side an added benefit. Germany in World War II operated similarly, with military and corporate goals intertwined; and Britain in the 1800s used trade blockades as part of its military strategy to weaken France and later against Germany..
I am sure Cathy’s superiors would support free trade if they saw in it a military advantage. Was watching Trump the other night, and he said we need Military Intelligence because we are currently woefully lacking Military Intelligence, though on trade I interpret him as saying he would do whatever was to the most advantage of the USA (which does not automatically preclude free trade). So, is Cathy right that Free Trade of the type Mish talks about is pure hogwash and has never existed once in human history outside of cheating and stealing in the aftermath of wars? Of course, very few decades without warfare seem available for study. While I agree with you completely on Free Trade, Mish, I think Cathy’s assertions need to be refuted with some real historical examples if the free trade case is to be taken seriously as a viable option by a militaristic state..
@joelg5 : cannot think of an example of Free Trade in human history.
Trade is and has been relatively free among the United States. The carpetbaggers who “moved in cheating, stealing…” after the 1770’s war did pretty well. Interesting.
Trade is and has been relatively free inside several large cities in this world. Even inside some States, whether nation or otherwise.
Trade is and has been relatively free inside my own household, if not Cathy’s.
But, joelg5, am I piling wood on your dry humor and lighting a fire?
Like
Do not know much about the carpetbaggers of the 1770s, Felix, but does indeed sound like an interesting era. Honestly, my mind did a real blank on a free trade example. Never encountered anything like Cathy’s statement before, that free trade was something bad that like cholera appeared when war knocked out all the infrastructure and rules. Certainly ISIS has done a good a bit of free trade in oil in Iraq and Syria in the aftermath of war, and maybe also in Libya post-NATO pulverization. A strange route to free trade, but understandable how it would be wild and crazy under the circumstances.
Seenitallbefore’s observation about USA-China trade in the present as an example of free trade many hours later was an “aha” moment. It was not like China went to war, destroyed the USA and carted up all the USA factories. And the USA consumer did reap lower prices and arguably also a higher standard of living in exchange for the Chinese taking our currency and debt. Maybe free trade is economic warfare, but in the case of the USA and China, both sides agreed to it. Given the trend to higher wages, automation, etc., the USA factory jobs would have been eventually lost anyway. Even China is now losing the jobs to Vietnam, Bangladesh, Central America and other places offering cost advantages, as well as to robotics. So, to think the USA can take back the jobs seems far-fetched. As Mish says, take the cheap steel or whatever and turn it into value-added construction and goods; that would be a better deal for the USA as a whole than tariffs and trade agreements benefiting select politically-connected industries.
The odd thing is that USA-China free trade is right in front of me in plain sight, and yet I did not see it. Perhaps an overdose of anti-China invective about dumping, currency manipulation, unfair this and that, South China Sea, etc.
Now I am not a big time importer but when building a house recently I bought windows and doors, kitchen joinery, LED lights and a spa pool from China. The experience dealing with these lovely people was amazing. I think they should run courses for western sales people to show them how customers should be treated. Oh, and the price was right too.
Secret no more. Happy Reading.
https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text
TPP Full Text – TPP Final Table of Contents
The bank’s printing press prevents free trade from lowering CPI prices. IOW, bankers use the printing press to confiscate the benefits of trade and productivity improvements, and then some. Joe average has actually been going slowly backward since the gold window was closed.
One obvious thing : when a country subsidizes the exports of some goods, the producers of these goods in other countries will die. When they are all dead, the subsidizing country has some kind of monopoly and can then increase a lot the price of these goods.
Sigh. Which has happened, when?
And how often have the prices stayed low?
Count ’em. Both.
Isn’t that what OPEC had supposedly done in the past with the oil market? Arguably, you could say they are attempting to do the same thing currently, and are being successful in some of the more chaotic countries (i.e. Nigeria and Venezuela). Even when the price of oil rises again, some of these countries will be very slow in recovering… and when they do, the Saudis flood the market again.
Well, for the sake of argument assume everyone is a cheapskate who saves all their money except for absolute necessities. In this instance, wouldn’t raising the price of underwear be better for economic activity, because otherwise that money would just have been saved under a mattress and not be used?
Ah, the cheapskate argument. Prudent savers are labeled as cheapskates, whereas profligate borrowers and spenders are patriots.
How much do we save in welfare and unemployment benefits if barriers are erected against imports? Those savings should be netted against the higher prices caused by tariffs. That is seldom done by analysts on the free trade side.
We don’t save anything
Tariffs cost money for the reasons stated
Please think!
Again, couldn’t you offset the tariff costs with income tax cuts?
“In the example above, additional money spent on underwear means consumers would have less money to spend on something else (to the detriment of jobs in other industries).”
But aren’t the owners and employees of the sock manufacturer also consumers? If so, wouldn’t that money still be spent on something else? And, if so, aren’t we just really talking about who gets to do the spending, you or the sock maker?
No, the owners are not consumers. Most of their money is put into financial instruments, such as bonds and titles to real estate. That is why the most expensive thing of all is space/location — we are paying a huge part of our wages for space, something that has always existed and is not produced. Half of all income does not come from current employment.
It is funny everyone talks about free trade. Nothing is free especially when it is trade. This is commerce. Capitalism is all about getting the most for your product. Whatever the market will bear. If someone takes advantage of you it is because you let them. When America says China is being unfair they are just whining that another is getting the best of them. If we don’t like it, fix it. Oh wait, then people will call us protectionists and we will be accused of stopping that non existent free trade as we seek to get advantage.
The truth is that China and America have an agreed upon free trade considering our debt and other factors that determine the trade balance. If we want real free trade then we have to pay the price to make it happen. Of course we don’t want to do that. First on the list, stop running up a deficit.
I think you got it right, Seenitallbefore. It is currently mostly “free trade” between the USA and China, and of course there will always be some winners (consumers, competitive players like Apple iPhone) and losers (uncompetitive players) and human greed (companies hiring tariff lawyers and lobbyists to tilt things in their direction). China-USA at the moment may be as trade gets.
Another proof that you are right that there is free trade between China and the USA is that USA apparel manufacturers have been shifting production to Vietnam, Bangladesh, Pakistan, Central America etc. as Chinese wages and production costs go up. I think most of the other commenters see it as USA versus China, but it is a multi-player world at the moment, which is an irritant to China but good for USA consumers.
So, the only reasons for these so-called trade agreements like TPP are two: 1) another source of corporate lawsuit revenue streams (from sovereigns), and 2) American strategic military objectives for world dominance (not necessarily a bad thing; but another discussion). Of course, Mish has been saying all along that these agreements have nothing to do with free trade, and in fact mostly do just the opposite, so nothing much new here.
In last sentence of first paragraph meant to say: “China-USA at the moment may be as free as free trade can be.” I just marvel you got it so right, Seenitallbefore.
On the microeconomic scale, “free trade” can exist. On the macroeconomic scale, due to the huge amounts of money at stake resulting inevitably in the development of crony capitalism, it can’t. Theory vs reality.
Another thought from a retired business person who ran a few companies in his younger life……..My first reaction to the word “free” is to hold on to my wallet, not waste any time on it and go back to running the business.
I tend to think people who get excited about things being free are naive or inexperienced or both.
My take on Trump is that he knows corruption is everywhere and government spending is outrageous and he will pull it back some and shake out many of the crooks which is a good thing thus the negative media.
Spent many years in Aerospace and watched the sellout live and whether you believe it or not the government/politicians get “vig” off every transaction.
Mish, this is one of your better pieces in a long time. Nice work. The discussion has been interesting as well. Few people realize the costs that come with protectionism. While they may create jobs in certain protected industries, they do so at a cost to the standard of living of the entire country, and of losses of jobs in other areas. The best example of this can be seen in the 1930’s when trade wars caused global trade to spiral downwards, and with it the standard of living.
So…if Hillary is FOR the TPP, and Trump is AGAINST the TPP, and the TPP is a BAD 5,400 pages…….
..who do we vote for…??? Hmmmmmmmm…….
Hillary is not in favor of TTP
She was as Sec of State and is not now unless she changed her mind in the last week or so
Technically, you are correct Mish. But what matters is what either Trump or Hillary will actually do after being elected and taking office in 2017, not the campaign promises of the moment. Any predictive forecast on that? Is one politician more honest or believable than the other? Should either of them be trusted even a smidgen?
My only prediction is on war
Hillary more likely to be involved in one or escalate one in progress
This a place I disagree. You may be right with regard to minor wars, but if Trump’s trade policy leads to a world-wide depression, we could see a very large world war. This is what happened in the 1930’s and it could easily happen again.
You miss the fact that pollution kills. If China invites American Citizens to get organ transplants from political prisoners? If the “one child” policy is done by taking but compensating born babies and using them for pharmaceutical or other monstrous experiments?
Property might be the proper object of arbitrage, even regulatory arbitrage. Yes, we are evil on that (Sugar is an addictive poison, see dietdoctor.com).
I should wonder how much it would cost to hire a Chinese assassin to kill you, or a Russian hacker to do all kinds of ID theft, hack your site, destroy you and your wife’s life. Now you might object yourself, but wouldn’t that be “free trade” since they have different moral and legal standards than you do?
I’ll add – is child pornography including snuff films served from another country (consider ISIS might be able to get income) okay? What about child prostitution – I think there are tours in Thailand, and there’s the Friend of Bill (Clinton) who is rumored to do so on his Island.
Marx was correct when he said “A capitalist will sell you the rope which you use to hang him”. But that is because the capitalist assumes the other fundamental rights will be preserved for him so that he won’t be hung, or that there will be a cost to hanging him greater than most reasonable people would bear.
Ask the concertgoers in Paris. Those in the Gay Night Club in Orlando. Those watching the fireworks in Nice if it should be so easy to have free trade in terror and death.
At some point trade will be so free the barbarians will outbid the civilized, then sack, rape, pillage, destroy, and burn. How safe is Sweden? Civilization, security, safety, and especially liberty do not arise ex-nihilo. They must be fought with great difficulty to attain, and still fought to maintain. When free trade makes barbarians strong, do not expect civilization, liberty, or free trade to last. Hillary apparently engaged in “free trade” with her foundation.
Free trade does not make barbarians civilized, no more than dropping arabic translations of Man, the Economy, and the State across the middle east where ISIS is, or in pashtun in Afghanistan will transform them into Switzerland. If you choose to trade with barbarians and making them stronger over your fellow civilized peoples, you will not long retain the ability to choose.
The only external cost of ubiquitous free trade is the cost of your soul.
Incidentally, have you voted with your feet and escaped Chicago and/or Illinois? They are going the way of Venezuela. I’d be interesting what can be traded in the city of Chicago on the black market. Free trade would fix the problem of gun bans as the gangs could mail-order guns and ammo from China or anywhere else.
Dear Mish,
I’m a long years reader and great admirer of your blog!
However, I feel your reasoning to let my thirst intact. Isn’t it too simple? Not that it needs to be complicated nor that I have a problem with simple things, but if things were as simple as you said, while will dumping ever exist as a word?
Sincerely
Francois
China does have export tariffs…particularly on speciality metals which gives them a profound advantage when it comes to manufacturing over others who either lack such special metals or lack the slave labor to produce said “super widget” or both.
The USA does not have this problem….but then again the USA and China contrive to set the rate of Exchange for the Yuan which is prima facie anti competitive and anti trade period…let alone anti “free” or “goods trade.” Great way to create bubbles in debt and equity though and indeed as Machiavelli famously said “look to the result”….interest rates have never been lower, we equities never higher…all with zero growth and the annihilation of the Middle Class.
Best deal ever if your Mr Politico with nothing but a cookie jar for your electorate…but even e blind man can see the Politician could care less what happens to his State or City…so long as he or she are getting paid a million bucks for saying “I love Wall Street and blah blah blah” and “the media is freedom” and blah blah blah and “there’s something wrong with you but I’ll make sure the insurance company gets the loot” and on and on it goes. 13.5 Billion for an Aircraft Carrier…and still the thing can’t get put to see? 250 billion for 6 fighter jets…3 of which we are told flew to Fransborough and, well…we know Marines never break anything so thank goodness we’re only talking 100 million each “give or take.”
Yep…”free trade”…real winner here! Nothing like free smack for the heroin addict too.
The fact remains Americans…and Chinese … are being played for suckers in this “cloud cuckoo land” scam Chimerica has going. Everyone knows China wouldn’t last five minutes in a Naval War over the South China Sea…but it’s in the interest to pretend that we exists because it keeps the Debt Ponzi alive and well for both side…so the corrupt in both sides can steal ever moar and ever moar.
Sorry but this is neither capitalism nor free enterprise…let alone GDP or “economics” but just legalized prositution without the sex.
Somewhere in there I imagine is some “rule”being violated I guess…but it sure isn’t something the Courts will ever think is even untoward let alone unethical or illegal.
Sad thing really…no wonder the violence is out of hand.
“Long gated communities….
Free trade is a oxymoron. Trade between nations in it’s nature can never be free. Only in a free market and proper price discovery will there anything close to free and balanced trade.
Therefore only trade conducted within the borders of one nation has the potential to be free. And yet our one nation has created imbalances in that trade.
You want free trade lets start he at home.
As for China, Once they have all the jobs who can afford to buy there goods.
Again once you realize that Trade between nations can never be free and balanced.
I assume the consumers in Greece, Italy and Spain all can say they benefited from German exports. “Free Trade”. But as a Nation they failed to understand that there will be a price to pay.
Trade is not between nations!
Trade is between individuals (albeit sometimes with gov’t influence, especially war goods)
Mish
Mish
In simple terms yes Trade is always conducted at the lowest level. Between the individuals. But currently the Individuals do not set the rules. Hell kids can’t even sell lemonade without some restriction on the trade.
We both advocate for a system of Free Trade where trade is not encumbers by any nation or laws.
That would be perfect, but it is not the current reality. This country was founded on issues of free trade. We live in a world where the nation states dictate with whom we trade, and what can be traded.
Would Mr. Shedlock be singing the same tune about ‘free trade’ were the Chinese allowed to take a massive amount of business from the US financial services ‘industry’ effectively placing him and most of his colleagues into the ranks of the permanently unemployed? After all, I am sure that Chinese Economystics services are much cheaper than Americans.
Economystics look only at prices. They ignore quality, resilience and redundancy among many other things. They seem to think that energy magically appears out of the ground. They do not care if employees are slave laborers, prisoners or free people. They do not care about the extent of environmental destruction. Price is all that matters as long as their jobs are not at stake.
Economystics look only at prices. They ignore quality, resilience and redundancy among many other things.
Given that people buy Chinese – they must be happy with junk. Who are you to tell people what they should like or don’t.
China can try and take my job anytime they want. So can you. If either were good enough, it would happen.
So, yes, I would be singing the same tune.
Mish
«Given that people buy Chinese – they must be happy with junk.»
No, because there is no continuous spectrum of offer. If you don’t like what is mass produced you face enormously increased prices. For example I would like my computer to have a greyscale, not color, monitor, for my PC, but there are very few greyscale monitors and cost a lot of money. Manufacturers have decided that most buyers want color monitors and that’s it.
In practice most products are me-too imitations of each other at given price points, because most manufacturers try to sell what they think the median customer can be sold to. Neoclassical economists could say this is because there are increasing returns to scale in most product categories, but then neoclassical economists take as an article of faith that returns to scale are decreasing.
There is even a book about how “the markets” often deliver limited choice: http://www.web.ca/~tslee/ “No One Makes You Shop at Wal-Mart” “Every week, millions of North Americans take advantage of their freedom of choice by shopping at Wal-Mart. Ironically, the cumulative effect of these actions may be to remove real choice by driving alternatives to Wal-Mart out of business. As a result, many who spend their money at a Wal-Mart store may nevertheless end up wishing that it had never been built.”
Manufacturers have decided that most buyers want color monitors and that’s it.
And you tell me China is producing what people don’t want – and no manufacture will produce what customers do want.
Please look in a mirror and tell yourself “That’s ridiculous”
«And you tell me China is producing what people don’t want – and no manufacture will produce what customers do want.»
That’s nothing more than a very unfaithful paraphrase.
«No country wants free trade for imports»
The word “country” here is meaningless: countries don’t hove interests or policies or want or don’t want anything; it is always the current governing faction/coalition that wants or does not want something and sets policy accordingly.
But more importantly the governments of what became the Confederacy and currently the governments of the USA for several decades have been very keen on free trade for imports.
Not free trade for everything, but In particular for products and services where there are still unions or working class or lower-middle class people are employed.
The official excuse for that is that imports keep “inflation” down, which means imports keep the wages of working class and lower-middle class workers.
More explicitly, the governing factions of the USA have decided after the strikes of the 1960 and 1970s to destroy all USA unionized industries as a way to destroy their unions, by massively offshoring those industries by opening wide to imports.
Either through a tacit or maybe even explicit agreement, the governing factions of China and the USA have settled on two policies:
* As long as the Chinese government buys USA debt keeping interest rates low and thus boosting asset prices powered by financial speculation…
* … the Chinese government gets to export unemployment to the USA, which also helps keep inflation low and thus interest rates low.