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 Richmans' Trade and Taxes Blog

The Negative Consequences of a Free Trade Policy in an Unfree Trade World
Raymond Richman, 4/1/2015

As you have been reading on this blog, US free trade policies have resulted in huge chronic trade deficits for decades which have converted the US from the world’s leading creditor to the world’s leading debtor. Pres. Obama is seeking to extend free trade with the low-wage countries in the Pacific region. He is committed to equalizing income and wealth but his policies have only succeeded in exacerbating inequality in the US. He is equalizing wages but only with low wage countries around the world  He has succeeded only in reducing wages as a proportion of US national income domestically. The policy of globalization pursued by him and previous administration has been a disaster for the United States. It is equalizing wages around the world which means that US real wages are tending lower and will continue to edge lower while real wages are increasing in the rest of the world. Unbalanced  trade with low wage countries like China means lower wages for US workers in American manufacturing. 

William Galston in an opinion piece entitled “How the Vise on U.S. Wages Tightened” (Wall Street Journal, 4/1/2015) writes: “According to the Wall Street Journal’s James Hagerty and Jeff Bennett in a March 24 article, the U.S. imported $138 billion in car parts last year, which       works out to $12,135 of foreign content for every light vehicle built in America. …The story isn’t restricted to auto parts.” Galston also cites a paper written by Avraham Ebenstein, Ann Harrison, and Margaret McMillan published by the National Bureau of Economic Research in which they “…found significant wage declines for workers exposed to globalization, especially among workers performing routine tasks. Older workers and workers without post-secondary education are disproportionately affected.”

This explains most of the decline in manufacturing, the millions who have left the labor force   and the disproportionate number of unskilled workers and teen-agers unemployed, especially black workers and teen-agers. The minimum wage laws are a major reason why the latter groups are unemployed. Yet Pres. Obama is calling for another increase in the minimum wage. And some states and cities have imposed rates exceeding the federal minimum wage. Economists have known the negative effects of minimum wages for decades. Government legislators with no economic understanding persist in making economic policy.

The decline of manufacturing and loss of jobs caused by the trade deficits does not mean that free trade is necessarily bad. Free trade works in a world in which all countries practice it and no country purposely devalues its currency to achieve a trade surplus, or imposes tariffs, subsidizes imports, and uses other means to achieve a trade surplus. A simple defense that a country has to counter such practices is the single country variable tariff, the so-called scaled tariff, which we describe in our book, Balanced Trade (NY: Lexington Books, 2014). It is imposed when a country experiences chronic trade deficits with a country believed to be employing such mercantilist practices. Reliance on international agencies like the World Trade Organization or the International Monetary Fund have proved useless.

Americans are needlessly suffering the consequences of our government’s support for globalization and free trade in an unfree trade world.