Free Trade

Free trade is a highly volatile subject to discuss in any forum. It means so many different things to different people. A lot of how you feel about the subject I think has to do with your initial political or intellectual bent.

Being in business, free trade is a good thing. It means being allowed the freedom as a businessman to do what you do best and compete for customers fairly. The USA has long been a proponent of free trade and by and large lives by what it preaches. There have been instances where we haven't but that should not be used as a straw man argument to claim we are hypocrites. We've created free trade in the international community as much as any nation before us.

What often confuses people is the disruptions that are caused because of free trade. If my business makes an innovative product in the USA and decides to newly export that innovative product to say Australia. The result in Australia may be that I take business from a local supplier/producer resulting in job losses to Australians. However, the ultimate result is that Australian producers either change to compete with me or fail. Either way my innovative product (cheaper?, faster?, etc.) is now available to Australian consumers. THEY WIN EITHER WAY. If you are one of those workers that loses the job, you may not see this as fair.

However, what you can say is that the best (however the market defines that) won out and the result is more effective and efficient use of the capital in the industry and better products for the consumers. In the long run, this creates wealth.

The alternative viewpoint tends to argue that there is somehow a limit on the wealth in this world and business is about hoarding as much of it for yourself and your business as you can. This is way too static a model for wealth creation and is disproven in numerous ways.

I was arguing recently about Chinese protectionism after reading an article by Robert Samuelson in the Washington Post on the subject. He points out the protectionist policies of the Chinese government via currency control. This violates rules in free trade in the world. No one calls them on it for fear of retaliation - no one wants that scenario. But after repeated persuasive tactics, nothing has really changed. The call to do something more forceful is real.

What should have happened with China in a free trade situation is that as the Chinese export economy grew due in large part to the abundance of cheap labor, the Chinese renminbi should have risen in value via inflation due to the robust economy in China. This would have valued the cheap Chinese labor ever so less cheap until the point at which the export driven economy would have been tempered. Business might look elsewhere (India?, Indonesia?, Africa?) for that cheaper labor supply. China's economy would have seen a nice increase in the standard of living due to the rising wages and increasing buying power of a stronger currency and thus moved more toward a domestic consumption balance. The result is a win-win for the world economy and Chinese trading partners. Do some US jobs get lost in the process? Yes. But, they are jobs that could have likely moved somewhere besides China as well. And, presumably a stronger domestic Chinese economy would have allowed US businesses to increasingly sell products there.

That hasn't happened. And it isn't going to happen to any large extent as long as the Chinese government holds the value of the renminbi artificially low. The buying power of the Chinese consumer is depressed and the export capability continues untempered creating big trade imbalances. This is not healthy. It creates an unfair trade situation and the currency imbalances promote unhealthy economic situations like we have now. The consumer economy becomes debt dependent and the producer economy has its wealth depressed, addicted to exports.

At some point this pot will boil over. I can already hear it bubbling from where I sit.