Thursday, July 02, 2009

The Impacts of Free Trade

I was blatantly trolling through a friend's magazines while he took a call during our discussion (fair is fair). This friend happens to be a student of foreign policy, and had marked up an issue of Foreign Affairs, which had an article on the pros and cons of free trade. He'd written in the margin, "What's the advantage of free trade domestically?" While he continued his phone conversation, I grabbed a post-it note and offered my own suggestions. The topic has been interesting to me for some time, after reading Jerry Pournelle's site. I thought I'd attempt to recreate and amplify my comments here.

With the anti-globalization movement getting so much press in the Bush era, we tend to forget how pro-free trade the Bush I and Clinton administrations were (NAFTA was signed under Clinton, CAFTA under Bush II). And China, despite being a primary regional threat in Asia, is one of our largest trading partners because of its low-cost labor and expanding consumer market.

Free trade is a bit of a misnomer, as that implies that there are no barriers, tariffs, or regulations between nations covered by the agreement. In contemporary usage, "free trade" is more a matter of reduced barriers, tariffs, or regulations. The end result of free(r) trade for United States citizens is that we have access to more goods and services from overseas, many of them at lower prices than might be available here. If we have access to more and cheaper goods, we can spend less for them, buy other things as well, and increase our standard of living.

One of the primary down sides of free trade is its effect on labor. Businesses seek to reduce costs, with one of the primary costs of any product or service being labor. Given the sheer supply labor in places like India and China, workers can always be hired more cheaply in these countries, so companies will gravitate there. This causes jobs to be exported and unemployment to increase here in the U.S. Companies will also go to non-U.S. locations because they have fewer business regulations, including no OSHA or EPA, which explains how you can get union members and environmentalists combining on an issue they otherwise wouldn't agree about.

The questions become trickier when you start asking, "What do we do about this situation?"
  • A pure advocate of free trade would just let the market rule the day, even if it leads to unemployment among unskilled workers in this country, which are typically the first ones hurt by free trade.
  • You could spend taxpayer money to retrain those workers, understand that not everyone will accept, want, or be helped by job retraining.
  • You could enforce immigration laws more stringently so that there are fewer people here "doing jobs Americans won't do." Increase the threat of jobs being exported and decrease the number of people competing for low-wage, low-skill jobs, and you will find fewer jobs that "Americans won't do."
  • You can undo NAFTA/CAFTA slightly and set a minimal tariff on goods coming into the U.S. to protect workers here, possibly setting off a trade war.

The solutions above are incompatible, to some extent. They depend to a great extent on what your priority is:

  • Do you want to promote worldwide free trade?
  • Do you want to ensure employment for American citizens?
  • Do you want to reduce friction with other countries?
  • Do you want to increase the self-sufficiency of American industries?

Each of those priorities leads to different solutions. Right now our policy is nearly suicidal worship at the altar of free trade. Jobs hemorrhage out of the U.S., with only goods and services coming back--goods and services which fewer people can afford because there are fewer people working. And meanwhile, the decrease in low-skill jobs here in the U.S. combined with increased illegal immigration results in even more people on the welfare rolls. Combine this situation with the decrease in trade-skill education in this country, and the recipe for an economic disaster seems to be in the making.

Ah, but what do you fix first: immigration, education, or trade? Or do you take them all on at once? Obama has a different set of priorities than I do, so I won't speculate on what he might do--if anything. As a Coolidge conservative (occasionally I list my political affiliation as "Whig"), my priorities would be:

  1. Enforce the laws against illegal immigration and increase the number of high-skill immigrants coming into the country. This has the advantage of bringing in the best-and-brightest, reducing the competition for jobs on the low-skill, low-wage jobs, and reducing the crippling impacts of illegal immigration on our welfare and healthcare institutions.
  2. Place all manufactured and agricultural products under modest tariffs (no more than 10%) but allow no other regulations to reduce the likelihood of a trade war. This is hardly a shocker, as Europeans have been protecting their farmers for decades--one of the major stumbling blocks to full European unification. The end result of this is might be to reduce the amount of exports, but also to increase domestic consumption, thereby resulting in a net-zero impact to our domestic economy, but an increase in the number of Americans employed.
  3. Increase funding or tax incentives for public and privately funded trade schools to give low-skill Americans opportunities that might otherwise pass them by if they were forced into (bored by) a "world-class prep school education," as Bill Gates would have it.

Just floating some ideas. Your mileage may vary.

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