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Where Are We on the Road to Substituting Balanced Trade for Free Trade?

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The following is a submission by W. Raymond Mills

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We have reached a significant milestone.  How far have we come and what obstacles are on the road ahead?

Milestone  –  We now have a significant number of Blogs on the internet that are populated by writers and commentators who agree that Free Trade was a mistake because it resulted in reducing the size of the U.S. economy and that the intellectual rationale for free trade is unpersuasive.  There is also a consensus that Balanced Trade should replace Free Trade as the goal of U.S. trade policy.  A logical consequence of these two conclusions is that the U.S. should withdraw from the World Trade Organization as it is now constituted.  We need a new World Trade Organization aimed at increasing Balanced Trade among the nations of the world.

Appraisal –  Development of consensus among so many independent commentators is important.  The persuasiveness of ideas is the only weapon we possess.  The more people agree on a proposal the more important it becomes.  But we do not want agreement to support bad ideas that turn out to be blind alleys.

On Blogs, the quality of a proposal or an idea is determinative of how many people join in support.  Quality can only be determined by argument.  If enough people join in a critique of an idea or a proposal, an improved result can be anticipated.  Consensus should be achieved not by shouting but by quiet deliberation.

The band of true believers is small.  The potential of conversion to true believers is large.  Over 80% of people in this country think we are “on the wrong track”.   But  so many things need improvement.  And trade is not the first issue that comes to mind for most people.  The impact of trade on the lives of ordinary citizens is not obvious.  One must trace the consequences of purchases made in the U.S. to the decisions of business men to locate production of goods overseas to see how what we do every day reduces U.S. output of goods.  And it is the total of all those purchases that is relevant, not just what one of us buys.  In addition, the action of the government must be brought into focus.  What is allowed to be imported and sold in the U.S. is controlled by the Federal government.  Consumers make choices among what options are available to them.  If we as a people insist that we want all the options for purchase of goods available to us without governmental restrictions on imports, then our economy will continue to struggle.  The decision to maximize consumer choice at the expense of domestic production is not necessary.  Balanced trade will provide plenty of options for consumers.  Also, providing support for domestic production is a responsibility of the federal government.  We should not expect consumers to by-pass or ignore what is available to be purchased because it is produced in a foreign country.  The share of imports to domestic production should be decided by the national government as a part of U.S. foreign policy.

Most people find this discussion too abstract to follow and capture their attention.  But the conditions under which local producers are able to sell to local consumers are critical for the size of our domestic economy.  Local producers are competing against foreign producers that are subsidized by their government.  Instead of subsidizing our domestic producers we should make it difficult for imports to come into this country that are manufactured in nations that have maintained a large trade surplus with the U.S.  This action would be effective.  And it avoids the difficult (probably impossible task) of attempting to determine exactly how much subsidy is provided by each government for each product.  It is also better for the federal budget.  Instead of large expenditures for subsidies, we are provided with revenue from tariffs on imports.  It encourages competition among domestic producers, a result that is very important to many people.  And it is an action we can recommend that all our trading partners adopt.

Obstacles –
1.  We must persuade more of the general public that free trade is making production difficult for domestic producers and that we can reduce imports enough to move toward balanced trade without destroying consumer’s ability to choose among many options.
2.  We must persuade economists that the intellectual case for free trade has many faults and that the large trade deficit experienced by the U.S. for each of the last 36 years is proof that free trade does not benefit all participant nations.
3.  We must persuade politicians that the growth of the U.S. economy in the last 36 years has been restrained by our continuous trade deficit and that import restraints applied to imports from only 3 nations (China, Japan and Germany) will be effective and will not result in a trade war.

Divide the tasks –
1.  Persuading more people that free trade is a bad idea is perhaps the first task.  The founder of the Blog Economy in Crisis has been sounding the alarm for years that Free Trade is harmful to the U.S. economy.  He has been having some impact but he wants more.  He is exploring other options, including other media, to try to reach more people.  Some of the true believers will concentrate on this task.
2.  Economists are a hard nut to crack.  They are all wrapped up in the assumptions shared among economists.  One of the most dangerous assumptions (from my perspective) is that precision in communication is of first importance and that mathematical models are the means to precise communication.  Combine that view with the quite reasonable assumption that one must simplify to get to the essence of a causal relationship and we get models of trade that assume no unemployment and balanced trade.  That mistake was made by none other than Paul Samuelson, the father of modern model building (Journal of Economic Perspectives, summer of 2004).  This kind of behavior is one reason Economists continue to support free trade.  They create models that ignore facts inconsistent with their prior beliefs.  Not all true believers will wish to tackle economists – but some will.
3.  Politians are risk-adverse.  They think voters tend to vote against rather than far someone.  They fear getting out on a limb that will give a competitor a good shot at them.
Some of the true believers will attempt to placate the fears of our elected officials.  Thus, we can have balanced trade without significantly reducing consumer options.  We can move gradually toward balanced trade without creating a trade war if we are careful to avoid the kind of triggers that created past trade wars.  Domestic businessmen will be the major benefactors of balanced trade.  Workers will be the major benefactors of balanced trade can also be whispered in the ear of politicians supported by unions.

Conflict among True Believers – Conflict among true believers is valuable if it increases the chances of winning more adherents to our side.  We must have the best proposals possible.  We cannot assume that any proposal or idea is good just because many people accept it.  What the Unions have believed over the years should be up for discussion as much as any new idea.  For example, I believe “fair trade” is a bad slogan because it is vague and incomplete.  What is fair trade?  And how do we work towards achieving it?  I also believe depending upon improving trade agreements is a mistake.  It puts us in the position of trying to figure out how to enforce an agreement on a sovereign nation – an impossible task.  Also, attempting to negotiate an improvement in trade relations with a nation that has worked for years to create a trade surplus with the U.S. is a blind alley.  Warren Buffett’s proposal for Import Certificates creates unnecessary problems.  A tariff targeted at the 3 nations most responsible for our trade deficit in goods is a better idea.

Just because I advance an idea does not mean it is the best option available.  Arguments are the fire that purifies our ideas.

14 Responses to “Where Are We on the Road to Substituting Balanced Trade for Free Trade?”

  1. maggie says:

    Just walking around stores and looking at “made in China” labels on stuff is not a theoretical abstraction. Neither is the proliferation of contaminated and counterfeit and dangerous products “made in China” an output of some economic theory, nor is the fact that only a tiny percentage of imported food is ever inspected, or that the WTO ruled against country of origin labeling of beef. Take the argument outside the cozy bubble of theoretical economics and into the real physical scary world of the global supply chain. Throw in a dash of cybersecurity and what may be going into all those gadgets and software too.

    • Tom T says:

      Maggie, the things you mention are government functions that mainly happen through regulation and action (both of which have been sorely lacking when it comes to big money constituent interests).

      These things are as important as going after terrorists and probably do much more damage to more people here in the U.S. than terrorists do. Yes, it is a little at a time, but it adds up.

      I too am surprised at how little is inspected and tested. Even after our lead in toys scare, there is much that is not tested except in real time on real humans.

      It is absolutely incredible that Country of Origin Labeling isn’t a priority of our government. It is an old legal trick hide evidence and not requiring COOL labeling allows this to happen. It has been stifled by politicians who are on the take by the industry. These politicians are really traitors to the country.

      Public interest groups should be able to test products at the retail level and get compensated if they find anything (like 200%). We simply can not trust our government to be competent in these areas if we look to history as a lesson.

      If we ever do get a balanced trade policy, some of these need to be in the fine print as an enforcement mechanism. It is too bad they aren’t already in every trade agreement.

      Tom T.

    • W. Raymond Mills says:

      Maggie – Its takes more that just walking around a store and seeing “made in China labels”. A naïve observer does not know what you know – that some of the products are counterfeit, most not inspected or the role of WTO in allowing such products in the U.S.

      There are several steps of knowledge and logic required to get from observation of labels to a decision to enlist in the effort to change U.S. trade policy.

      Apparently, something about my presentation strikes a wrong cord with you. Is it my statement that “most people find this discussion too abstract to enlist their interest”? That sentence is merely a recognition of reality, as I see it. Not crucial to my argument that more persuasion is needed and that diverse approaches are needed to reach different audiences.
      I see many advantages of arguments beginning with facts on the ground. But connections must be pointed out between bad products and public policy. These connections are not “theoretical economics”. Logic is larger than economic theory and much more important.

  2. Mo says:

    When it comes to trade issues there is really never ever any mention about how unsound money distorts trade and the economy. Washington creating money out of thin air to fund unproductive and wasteful activities like war and policing of the world has severely hampered US competitivenes in trade.

    Since Bretton Woods has ended, the US has been running increasing budget and trade deficits. This is due to unsound money which constantly causes future prices to be higher than expected. The US dollar has only depreciated against many currencies since Bretton Woods ended which has only increased the trade deficit further. The trade deficit has increased further because the cost to import goods like commodities have increased in price when paid in dollars. Additionally, the depreciation of the dollar has also caused domestic prices to rise faster then trade partners which has also contributed to the US being less competitive.

    It took over 20 years of unsound money before the big offshoring bubble began. Other symptons of inflation today can be seen with issues like food fraud. Today because of the high price of some ingredients, there are increasing cases of fake or artificial ingredients being used in lieu of the real ones. Other examples of inflation today include paying higher prices for a smaller quantity of food and etc.

    Since 1960, the money supply has increased by over 3000%, consumer prices by over 1500% and wages by only 550%. This explains why it takes two or more incomes for a growing number of people to have a decent standard of living. Back when the dollar was anchored by gold, one hour of work could buy a few goods like food, a movie ticket and etc with some money left over. Additionally, rent would only take a few days worth of work to pay. Now it takes over two or three weeks of work for a growing number of people.

    What the gold standard did when it comes to trade was to anchor exchange rates. By anchoring exchange rates and keeping them relatively fixed*, it kept trade in relative balance, interest rates stable, prices stable, allowed real wages to grow, kept savings stable which lead to stable investment and a stable manufacturing sector. Whats also interesting is that the gold standard did this with gold only backing about 20% of the US money supply. So any complaints about there not being enough money under a gold standard is false.

    *Actually exchange rates would be kept within specie points (cost to import and export the gold commodity) that would link price levels and interest rates between countries. This allowed for capital restructuring to occur in a more timely fashion. The idea today that exchange rates need to adjust was a concept that really applied to the gold standard. Today technically every exchange rate is manipulated because the gov’t can create money at will.

    • Will Wilkin says:

      Hi Mo, I have some questions about your positing the end of the gold standard dollar as the cause of rising trade deficits.

      Towards the end of Bretton Woods, keeping the value of the dollar was under a lot of pressure, not just from already-liberalizing trade deals but also more travel abroad, various foreign aid programs, budget deficits due to combining a War on Poverty with a War on Vietnam. Nixon’s decision to go off the gold standard was a way to relieve all that pressure, and was therefore more an effect than a cause of those pressures, which have only increased since, but again, I would argue not because of fiat money but rather because of the real differences in costs between American manufacturing and foreign. These real differences are the in real wages, real regulations, and real differences in the amount of subsidies available to industry in the different countries.

      You say “the US dollar has only depreciated against many currencies since Bretton Woods ended which has only increased the trade deficit further. The trade deficit has increased further because the cost to import goods like commodities have increased in price when paid in dollars.” But that strikes me as backwards, since depreciating currency deters imports due to the rising import prices you mention. In fact, the whole idea of currency wars, which use currency depreciation as a means to boost net exports, would have to be wrong if your statement is right.

      In his book “Currency Wars,” James Rickards on page 40 goes so far as to say that “when a manufacturing country has both large foreign export sales and also large purchases from abroad to obtain raw materials and components to build those exports, its currency may be almost irrelevant to net exports compared to other contributions such as labor costs, low taxes and good infrastructure.” And I would say that describes the real reasons America is uncompetitive in a free trade environment. That is why I believe we need legislation to require balanced trade, which seems to me would be most directly effected by using Import Certificates issued in the same valuation as our exports. Once we redirect American spending power to domestic industries by taking it away from the trade imbalanced portion of our imports, we will grow the GDP and employment significantly (4% directly and more by multiplier-effect), giving America the added wealth and decreased social welfare needs that, together, could be used to address our crumbling infrastructure and rejuvenate our public-private cooperative institutions of science and technology.

  3. Mo says:

    Will you are correct that Nixon broke the link of dollar to gold to pay for increased social programs and the Vietnam War. By breaking the link, the gov’t was allowed to monetize budget deficits which is another way of saying it was for by inflation. This inflation is one of the main reasons why America lost competitiveness in trade.

    Since the 1970s the dollar has depreciated against many currencies. The dollar used to be worth over 300 Yen and over 3 German Marks in the 1970s which means the dollar has depreciated enormously against the Yen and German Mark and this has only increased the trade deficits between these two countries. Another example is 2001-2010 when the dollar depreciated against the Yuan by 20% but the trade deficit only increased.

    When it comes to depreciating the currency to increase exports, this only works if a country has high or stable savings. When a country like China or Japan subsidies their exporters with huge lines of credit, they are doing it at the expense of their savers. Depreciating the currency to increase exports which is the price of imports is like working longer and harder to buy less goods.

    Because increased exports increases GDP, many people mistakenly believe that it creates economic growth which is not the case. Economic growth is capital accumulation which means the structure of production fits the structure of demand that can continually increase the amount of goods produced. An increasing amount of goods produced per worker translates into lowers prices for all income earners and means real wages have increased. If the US ran perpetual deficits to import capital that enhanced the capital structure it actually wouldn’t be bad. But the deficits today is a reflection of the inflation that causes as a country the US to export the cow for milk.

    The US could do the same and provide unlimited lines of credit to it’s exporters to subsidize them, but if savings are low then it would just further increase inflation. A country with a high savings is another way of saying that it’s resources are being invested like in factories, machinery and infrastructure to increase future consumption. In the US resources are being wasted on wars and other activities that are not productive. Because countries like Japan and Germany are not wasting resources on wars, they can subsidize their exporters and accumulate surpluses. If the US tries to subsidize their exporters like other countries do and then continues to waste resources, then it’s just going to increase the inflation rate which will further hurt living standards.

  4. W. Raymond Mills says:

    Mo – Listen to your friend Will. The gold standard worked a long time ago before all the speculation in currency, trading and other uses for currency. Nobody wants it except gold mining interests and a few thinkers like yourself. We must have currency. Gold is too cumbersome to actually use to pay debts. If we have a gold standard with currency that requires a nation or some international group to stand ready to redeem currency for gold. The U. S. became unable to do that in Nixon’s time. And we had a trade surplus then. No nation is willing to assume that role. The tidy world you envision is just that – a vision or a dream based on a selective memory. GIVE IT UP!

    I will agree that trying to goose the current economy with low interest rates has done all it can do kick the can down the road and should now be abandoned. But I want the public and political leadership to come to that recognition. We cannot impose an external standard like Gold to replace the short-sightedness of the public and our leaders. The only cure for bad judgment is good judgment.

  5. Tom T says:

    Mo, I agree with a lot of what you say but I do have a few comments on our differences. The U.S. could (and is) deflating its currency by buying U.S. Treasuries and bad home loan portfolios. Up until this current crisis, we debt financed everything. This is a little different. Now we are monetizing the debt because we have hit the limits of the Fed’s low interest rates and easy money to banks. The kind of easy money isn’t trickling down as it should and much is being captured by those who ran a scam on our financial system. We are still bailing them out hoping the banking system will work again. The financial crisis was precipitated much because real incomes were decreasing and people made up for it by borrowing against their assets (homes) to keep up. Lower interest rates allowed them to increase the cash out based on their income stream (their current income stream was capitalized). This helped fuel the housing bubble and became self perpetuating. Then there was all the fraud on that income stream and its capitalization to investors.

    Increasing imports helped displace many workers and helped put the strain on their aggregate incomes. The banks responded by fudging on the income stream that backed up the loans.

    There is no doubt that a weaker dollar should increase exports and decrease imports. China adjusts its currency to allow the economics of this to work for its industry. They are trying to keep those jobs that went off shore.

    I have said it once and I will say it again. World trade is not necessarily based on any of these factors but they do help encourage certain actions. We can, for instance, stop importing Chinese goods as a matter of policy. It wouldn’t matter what they did with their currency and its exchange rate. We haven’t so it does matter.

    I don’t believe getting in currency wars is the way out of perennial trade deficits. It causes too much adjustment pains and your policy depends on what other country’s policies are which means you lose control of the value in real terms and it is dictated by their terms.

    We should stop thinking we need to “compete” with China. I don’t want my kids working at their wages and our environmental laws to stoop to China’s level. We have been through that. The question is, why does our trade policy allow it? Do our politicians not care about U.S. jobs or industry? I personally believe they are more interested in playing political games than seeing and fixing problems. It is to the detriment of the nation’s economy.

    Getting on the gold standard would be bad for a variety of reasons. The money supply needs to be adjusted to the demand for money as the velocity (economic activity) fluctuates. Gold would always be going up in value because the demand of currency in an expanding economy out strips gold supply. It isn’t a good substitute for good policy.

    I don’t think we need to get into the game of subsidizing exports to beat out other countries just because we want to keep some non existent ideology of Adam Smith when it comes to trade and national income.

    I would agree with you that we have been borrowing instead of taxing to finance our government way too much. We are breaking income statement because our politicians would rather spend and print or borrow than to tax to pay for current expenditures. During a great recession is not the time to do this however. The republicans have the worst timing ever and this makes me think they are just too incompetent to govern economic issues. They pushed the Gramm-Ruddman Bill that brought on the taxpayer subsidizing failure and allowing profits to be banked. That was the result of really bad policy. Our trade policy is just another example of bad policy that isn’t being fixed. It has a whole lot less to do with the gold standard. By the way, if we ever went back to the gold standard, we would have to get all the other countries in the world to do it too. The dollar would not be the world’s currency, gold would. I am not sure we would ever get that system back. For one, there just isn’t enough gold in the world. The real economy works off of supply and demand and the intersection where it is profitable to produce or engage in an activity.

    By the way, do you know the country that consumes the most gold?

    Tom T.

    Tom T.

  6. Tom T says:

    This is, in part, Mo’s argument and the basics of a gold standard:

    “Informal regimes
    Previous regimes

    In the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold; gold was used to settle international accounts. The gold standard maintained fixed exchange rates that were seen as desirable because they reduced the risk when trading with other countries.

    Imbalances in international trade were theoretically rectified automatically by the gold standard. A country with a deficit would have depleted gold reserves and would thus have to reduce its money supply. The resulting fall in demand would reduce imports and the lowering of prices would boost exports; thus the deficit would be rectified. Any country experiencing inflation would lose gold and therefore would have a decrease in the amount of money available to spend.

    This decrease in the amount of money would act to reduce the inflationary pressure. Supplementing the use of gold in this period was the British pound. Based on the dominant British economy, the pound became a reserve, transaction, and intervention currency. But the pound was not up to the challenge of serving as the primary world currency, given the weakness of the British economy after the Second World War.

    The architects of Bretton Woods had conceived of a system wherein exchange rate stability was a prime goal. Yet, in an era of more activist economic policy, governments did not seriously consider permanently fixed rates on the model of the classical gold standard of the 19th century. Gold production was not even sufficient to meet the demands of growing international trade and investment. And a sizeable share of the world’s known gold reserves were located in the Soviet Union, which would later emerge as a Cold War rival to the United States and Western Europe.

    The only currency strong enough to meet the rising demands for international currency transactions was the U.S. dollar. The strength of the U.S. economy, the fixed relationship of the dollar to gold ($35 an ounce), and the commitment of the U.S. government to convert dollars into gold at that price made the dollar as good as gold. In fact, the dollar was even better than gold: it earned interest and it was more flexible than gold.

    Another view is that in the time of discount banks, discount was the interest earned on gold, and that the only way to repay interest on government bonds is by printing more dollars, thus raising the price of gold. If gold is fixed at $35 then other countries will demand gold and not accept dollars. The closing of the gold window in 1971 was the result.”

    You can read the whole discussion on international monetary policy that is pretty accurate in the “Bretton Woods System” in Wiki. The “begger thy neighbor” policy is the one we are seeing today with China with some nuances. These are not new issues. They have been around in international trade for some time. It is just that our current politicians are incapable of governing competently. They would rather react in a political way as we just saw with Hillary Clinton’s testimony than to see the world as it really is and react intelligently. They would rather try to score political points and finger blame.

    • Mo says:

      Tom under the classical gold standard the world was all using the same money gold. This is what allowed price levels and interest rates between countries to be linked. Even though most currencies was backed by gold, exchange rates were only relatively fixed. They actually fluctuated within specie points(cost to import and export the gold commodity).

      There seems to be this myth that being on the gold standard caused there to not be enough money to keep with the growing amount of international goods traded. this is false. Under the classical gold standard only about 5% of UK money suppy and 20% of the US money supply was ever backed by gold. What gold served to do was anchor exchange rates, keep interest rates at more natural levels and caused investment to be recycled mostly within the real economy. The managed fiat monetary system could only dream of having the same growth that occurred under the classical gold standard.

      Another agrument against the gold standard was that is was deflationary. It was deflationary in the good sense. The supply of new goods and services increased faster then the growth of the money supply. This had the effect of causing prices to decline. It’s important to note that just because prices declined, there wasn’t any harder time of repaying debts because the money supply was stable and still grew. The only time deflation is a problem is when banks collapse and then money disappears from circulation. This causes a decline in the money supply thus making it harder for all participants in the economy to repay their debts.

      Just to note, the period that people refer to with the gold standard causing a harder time of repaying debt occurred when silver was demonetized in 1873. This had the effect of hurting silver holders. The value of silver declined after this which thus caused farmers and other debtors to have a harder time of repaying debt in gold. Silver should never have been demonetized because it was sound money as stated in the constitution.

  7. W. Raymond Mills says:

    The original post under this heading began with praise for the consensus that has developed around Balanced Trade as the substitute for Free Trade. It ended with a call for conflict among us over the issue of how we get to balanced trade. The difference between the beginning and the ending is that Balanced Trade is an excellent alternative to Free Trade. By contrasts, most of the “solutions” that have been advanced recently are unsatisfactory.

    We should not hope to rely on getting the right words in trade agreements. Ditto negotiations with any other nation. Ditto expecting the recent spurt of manufacturing in the U.S. caused by market forces to solve our problem. Nothing can be gained by attempting to work within the framework set forth by the World Trade Organization. Import certificates have many disadvantages.

    The best solution is tariffs uniform across all products manufactured in the nations of China, Japan and Germany with all other nations excused from this burden. This initiative can begin slowly, 10% at first, with a schedule of increases of 5 percentage points at regular intervals, until the three nations reduce their share of imports down to the level of the share of all our exports purchased by each nation. This is not our goal of balanced trade. But it is close enough to be a logical stopping point.

    I am seeking a knock-down drag out fight over this question. Only a fight can produce the best solution. Who would like to join the discussion? (I hope the owners of this Blog will not object to this challenge). This is not my blog. I am grateful for the space given me so far and take nothing for granted.

    • Tom T says:

      Raymond, the worst thing to do when you are in quicksand is to not recognize and continue to flail around. I am for any movement that starts to get us out of this quicksand. The details matter less when the current course sucks us deeper and deeper in the quicksand.

      Our government is losing tons of tax revenue because we have such huge deficits with China. We need tax revenues with the countries that are scabbing off our economy and not likewise buying our goods with our dollars. Call it tariffs or call it some other quippy made up word— we need to tax those imports that end up taking up net jobs from U.S. citizens. I wouldn’t even care if it was achieved by taxing Walmart or other large importers and calling it a competition tax. It isn’t imports that are the biggest problem but the imbalance in imports to exports with these nations.

      Tom T.

      • W. Raymond Mills says:

        Tom T – I agree it is the balance of imports to exports that matter. I think the Congress and the President has 100% control over the conditions that control the legal movements of goods into this country. Exports are different – much different.

        But the danger of rushing out there with any old proposal is that it will get shot down by our opponents. Why waste time promoting solutions that appear to be ineffective or to arouse opposition?

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