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The Case For Free Trade

Summary:
The Marxists and Socialists are winning the day, folks.   Apologies for the simpleton buzzwords but they are all the rage these days. The escalation of the trade war is bad, bad, bad news and could if we are not careful, end in a shooting war.   Many argue that one of the main factors that motivated Japan to bomb Pearl Harbor was the U.S. cutting off of trade, mainly in airplane parts and aviation fuel, with good reason, however, as imperial Japan was running rampant throughout Asia. No, we’re not suggesting war is imminent but we admonish you to study history. A potential  Thucydides Trap supersedes all the bluster, posturing, tweets and goes way beyond just trade. China: Guilty On Some Charges Yes, China has been a bad actor in many areas, including intellectual property theft,

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The Marxists and Socialists are winning the day, folks.   Apologies for the simpleton buzzwords but they are all the rage these days.

The escalation of the trade war is bad, bad, bad news and could if we are not careful, end in a shooting war.   Many argue that one of the main factors that motivated Japan to bomb Pearl Harbor was the U.S. cutting off of trade, mainly in airplane parts and aviation fuel, with good reason, however, as imperial Japan was running rampant throughout Asia.

No, we’re not suggesting war is imminent but we admonish you to study history.

A potential  Thucydides Trap supersedes all the bluster, posturing, tweets and goes way beyond just trade.

China: Guilty On Some Charges

Yes, China has been a bad actor in many areas, including intellectual property theft, being stingy in further opening its markets, among others. They do need and should be addressed in a multilateral framework with the heft and support from our allies, who are with us on many of our disagreements with the Middle Kingdom, by the way.   In that framework, we believe this mess could have been wrapped up long ago and U.S. farmers would be in much better shape.   Nevertheless, some kudos for POTUS for finally taking them seriously.

However, China guilty of making quality and less expensive products that Americans prefer over domestic goods?  Using tariffs as a blunt tool to address the issues discussed above?  Totally absurd.

Make China pay for its sins by other means, not through higher prices and taxes on the American consumer or U.S. farmers and businesses.

Moreover, we totally reject the “Art of the Deal” bullshit.

There is no plan, no method in this madness.  The negotiations on the U.S. side are all impulse, based on economic ignorance and steeped in a very dangerous nationalism at the top, vacillating from tweet to tweet, and our negotiating team is conflicted with a deep seeded dialectic between the hardliners and doves.

Karl And Tariff Man

Check out the date on this thing.  What happened on February 23, 1848?

Look it up.

The Case For Free Trade

Hat Tip:  Deep Fake Anachronisms

A spectre is haunting the world — the spectre of protectionism.   The world is going to be much poorer.

Tariff Man has no clue and seems to share the same philosophy as Karl about free trade.

Who’s your Socialist, now?  Protectionist policies are almost always pure socialism, folks.

The Case For Free Trade

Take a hypothetical case of a pair of blue jeans made that was made in China, for example, but through policies and jawboning is now manufactured in America.  The cost could increase from $10 to, say, $80 per pair (again, a hypothetical price).   Not only would inflation skyrocket, but there would also be almost no consumption and zero production of blue jeans because most middle-class consumers could not afford them.  Trading and exchange in blue jeans would thus cease to exist.

At best, very few new jobs – and expensive ones, at that —  would be created and many old jobs lost, through retaliation or the reduction in real incomes of consumers.

Sorry, folks.  When I go to Costco or Walmart and purchase a BBQ for $200 less than the American made version in the next aisle,  I don’t consider that as “an act of war” perpetrated by China on America or our workers nor do I feel the Chinese are ripping me off.   Moreover,  my deficit with Costco or Walmart just went up by $500.

Do I feel unpatriotic about buying Chinese goods?  Absolutely not.

I am a proud flag-waving, card-carrying compassionate American capitalist.

In fact, the very purchase of the cheaper imported Chinese good increases my real income by $200 that I can now spend at the local restaurant, give the waitress a bigger tip and get my car that needed tune up, all, of which expand economic growth and creates additional jobs.

Trade Adjustment Assitance 

Absolutely, the U.S. manufacturer and its workers of the American made BBQ have been hurt by Chinese competition.  No question.

That $200 I saved, however, part of what economists call the “gains from trade”,  should include a small fee, tax, or whatever euphemism Grover Norquist would accept, to fund a program to help those workers hurt because of my free choice to buy the Chinese over the American product.  Remember “Free to Choose?”

We have been all over the case to expand the Trade Adjustment Assistance (TAA) program, which has an annual budget of approximately $600 million to help those displaced by free trade.   That is an outrage as much as it is stupid, and one of the reasons why we are in such a political mess and the world teeters on the brink.

Moreover, Trump paid $12 billion to pacify U.S. farmers as China targeted soybean imports as retaliation in his trade war.   Now there are reports that POTUS is considering purchasing an additional $15 billion in farm products as China will almost surely retaliate against Friday’s new tariff hike.

That $27 billion is almost five years of the TAA program budget.  Don’t you think that would have better spent on helping the displaced workers from trade in the first place?  The U.S. and the world would be growing at a faster clip and all of its workers, including farmers, would be much better off.

Yes, the opening of China was big and very disruptive, and while many greatly benefited, U.S. policymakers were ill-prepared and ignored the costs of the new Chimerica.

But, China’s not going away, folks.  It’s impossible to Make China Small Again.

The Price of Gas And Free Trade

Why is it when the price of gasoline declines we are all happy, our real incomes increase and feel much better off yet we have no worries or consideration for the oil roughnecks in Midland, Texas of the workers in the small towns in, say,  North Dakota who are devastated by the fall in oil prices?

Could it is because there is no foreigner to blame for their pain?

We are beginning to buy into the argument we all are hardwired genetically and predisposed to fear and blame those who are “different” or foreigners for many of our problems, which is a consequence of spending 95 percent of all human existence on the savannah fleeing the “different.”   Robert Sapolsky, the Stanford professor, writes,

To understand the dynamics of human group identity, including the resurgence of nationalism—that potentially most destructive form of in-group bias— requires grasping the biological and cognitive underpinnings that shape them.  Such an analysis offers little grounds for optimism.

Our brains distinguish between in-group members and outsiders in a fraction of a second, and they encourage us to be kind to the former but hostile to the latter. These biases are automatic and unconscious and emerge at astonishingly young ages. They are, of course, arbitrary and often fluid.

Humans can rein in their instincts and build societies that divert group competition to arenas less destructive than warfare, yet the psychological bases for tribalism persist, even when people understand that their loyalty to their nation, skin color, god, or sports team is as random as the toss of a coin. At the level of the human mind, little prevents new teammates from once again becoming tomorrow’s enemies.  – Robert Sapolsky

We all need to better train our prefrontal cortex to control the impulses of our amygdala.   Try using that in a presidential campaign stump speech.

The Fork In The Road

Socialism has won the day, at least for today.   Governments are trying to control and manipulate the preferences of individual consumers in the name of…whatever.

This is really the pushback from the result of unfettered capitalism, not giving a rats ass about the workers hurt by free trade and underfunding programs such as  Trade Adjustment Assistance.   If this escalates the whole world is going to be much poorer and a significantly more dangerous place to live.

The complacency is stunning.  The classic boiling frog syndrome.

There you have it, folks, our rant for the weekend.   Take it or leave it but it is our firm conviction, which may or may not become a reality.  We hope it doesn’t and even if it does, many will claim an alternative reality or other excuses for the mess that has become.

Don’t say you weren’t warned.

BTFD.

Gregor Samsa
This site is designed as a “go to” source for traders, investors, policymakers and any interested in markets and the global economy. We provide informed opinion, timely market information, sources, and links.

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