As if we need more cars imported into this country, China will soon be pouring them in. This is to the severe detriment of our own manufacturers. Yet, some people in our government are only too happy to establish trade agreements that let the Chinese (and everyone else) push their low cost products on us.
Who, specifically in our government, are responsible for implementing these pacts? What do they get out of it?
Economically, importing cheaper stuff from abroad isn’t such a bad thing. It hurts domestic producers, but it helps other industries that depend on the imported goods as raw materials, and of course consumers, because it spares them the need to pay the higher domestic prices. There’s evidence that overall, protectionism, i.e. the doctrine of establishing barriers for imports in order to keep domestic prices above the world market level, has more disadvantages than advantages for the national economy. Economists have been arguing as such for decades; governments are just beginning to understand this and to abolish barriers that were established earlier after pressure from lobby groups of domestic producers.
And of course China joining the WTO, with all the legal consequences this has for trade barriers, is a factor to keep in mind.
Lower trade barriers do not cause trade deficits under floating exchange rates.
Free trade is an economic philosophy that has gained widespread acceptance in this country since World War II. In fact, some economists blame the Smoot-Hawley tariff of 1930 for taking a needed correction to the stock market and turning it into the Great Depression.
During the 19th century, however, the U.S. was mainly protectionist in its trade policies to protect the growing industries of the North. Free trade proponents calling for worldwide free trade even for developing nations often forget this.
To avoid getting into a debate about the worth of free trade, which will certainly happen when this thread is moved, the answer to the question in the OP is that those in the government who want open markets fall into two, overlapping, groups: those whose economic philosophy predispose them to free trade and those whose powerful constituents want cheaper goods. The former include members of both parties: free market capitalism has long been a tenet of the Republicans and free trade agreements such as NAFTA were pushed by the Democrats. The latter also include members of both parties, because every consumer wants cheaper goods and it has been proved beyond any doubt that they will pass up more expensive American products to save money.
There is no going back to the 1950s, when the U.S. was the only manufacturing power in the world. The only question today is what course is best for the total U.S. economy in a global business environment that has lower manufacturing and employee costs elsewhere. Most economists and most of those in all branches of the government agree that free trade is the best current answer. Is that correct? Well, in the old saying: ask a dozen economists and get thirteen answers.
Well we have another factor, China is not exactly our friend, and can become a superpower and challenge the US some time to come. Destroying our ability of manufacture goods of all types through ecconomic methods now put us in a worst situation to fight back in the future.
I am not an economist, so what I say is just my personal opinion.
One of the posters mentioned exchange rates. If everybody’s rates floated, there could no long-term trade deficit. But China doesn’t. The effect is that Chinese goods are much cheaper than they would be were China to allow its rates to vary. What it amounts to is that Chinese gov’t is trading low wages for high employment. To them, it looks like a good trade-off. It will end only when China decides to cash all their chips. This is likely to mean that China will end up owning a good portion of US industry. Already a German company owns Chrysler. GM is now selling at least one Toyota car under the GM label and it wouldn’t surprise if Toyota ended up owning GM. Can Ford be far behind?
In the end, the cost of labor will have to fall. We will no longer be able to afford imported goods and we will no longer have much of an industrial base to make our own. It won’t be pretty, but I am unlikely to be around to witness it.
The people that purchase goods at a lower price are beneficiaries.
Thanks all.
Back in the 50’s I took a course - Economics 101 - and that professor was decidedly in favor of free trade, insisting wages would adjust. Japan, for example would ultimately raise wages to match ours. So I give him credit for his view on that.
But…
First day of class, he asked us what - in the realm of economics - interested us most. The hands shot up and every damn one of us wanted the to know what caused the Great Depression. Flabbergasted, he hemmed and hawed and finally said that it was due to a breakdown in personal relationships.
That evening at dinner, I told the family I had my first class in economics today. “Oh,” said my uncle, "“did he mention what caused the Depression?” (Honest!)
I then parroted the professor’s explanation — verbatim. My uncle Joe looked at me as if I were speaking Swahili. I could only laugh, sheepishly.
Mods, please close when the mood suits you.
But only if:
Exporting jobs overseas always has a net longterm negative effect.
A big oversimplification the way I see it, and not true in some obvious cases (i.e. worker in US plant, who makes and also buys this product)
This is a favorite argument European labor unions use in wage negotiations: Employees need to get more money so they can buy more things, pushing up the economy.
It’s an argument examined a lot, and there are studies suggesting that the positive impact of higher wages on domestic demand does not, not neven nearly, compensate for the higher labor costs. I’m willing to bet bet that whenever anybody is using this argument in public debate, he’s not thinking about the benefit of the economy as a whole but about his own benefit (or the benefit of the people he represents). It’s of course perfectly legitimate that groups interested in higher wages (mainly unions) use such arguments; but the other side and the general public should be aware that they’re not worried about the economy, as they pretend, but about their own purses.
Let’s take the OP’s example. Importing cheap Chinese cars to the US will hurt American manufacturers and without a doubt result in American workers becoming unemployed. On the other side, it helps those industries that depend on mobility, and that’s an awfully big part of a modern economy, not only the obvious examples such as trucking. Thus lower car prices create new American jobs because new companies are founded in sectors that have become more profitable.
It also helps consumers because they have to spend less money on cars and can spend more on otger goods, creating new jobs in sectors that benefit of risen demand.
Economy is not linear, everything is dependent on everything else. But theoretical analyses on social welfare, examining the effects of state involvement in private business, show that the net effects of artificially keeping prices above world level (through import restrictions, tariffs, etc) on the domestic area is negative.
I like what schnitte says.
Also,
This makes no sense to me. If there are no jobs which pay well enough to afford the imported goods, then there will be no trade deficit. Seems like an equilibrium will be established at some point.
Well, they care about their own purses because the size of their purses determines how much they can buy, thus contributing to the economy, so it all comes out in the wash.
Exactly. This is just what’s so concerning. If a job was a job was a job, the scenario you describe woudl be a net positive. But the person who gets to spend less money on a Chinese car uses the extra money to use more gas taking more trips to Wal-Mart.
So the high-paying union US manufacturing job reappears as a minimum-wage position as a retail clerk or gas station stooge. I call that a net negative in the end.
You make a fatal assumption here (or are unintenionally throwing up a strawman.) No one ever said that there would be NO jobs which pay well. Under free trade there are plenty of people able to afford cheap goods.
Free trade has been shown to be beneficial to our economy as a whole. But that benefit has been very unevenly spread. Free trade means that a rising tide does NOT lift all boats. If you have a stable well paying job, then free trade is great for you due to the cheap goods. If your job is lost due to cheap labor in China or India, then free trade sucks for you personally. And don’t give me that old tired saw “Retrain! It’s so fun and easy to go back to school while you are trying to raise a family and make mortgage payments.”
Continued free trade and stable governments in China and India for the next 50-100 years will eventually mean that their general standard of living will be brought up to our level, and wages will equalize throughout the industrial world. Then we will be at the Utopia of free trade where the only reason for one country to produce something instead of another is the skill of the workers and everyone will be making what they make best and all will benefit.
So to the OP: In government, freetrade benfits ALL lawmakers personally because they are from the upper edge of oour economic society. And free trade benefits enough normal folks at any one time that it is rarely detrimental at the polls. When we were losing textiles to overseas, it benefitted electronics workers who wanted to buy cheap jeans. When we were losing electronics manufacturing, it benefitted auto makers who wanted new stereos.
Thank you BoringDad.
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I think I’m going to export this over to Great Debates.
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Absolutely NOT true. You may notice that Even though the U.S. imports amount to about $2 trillion dollars per year, the U.S. unemployment rate is at 4.7%, which is one of the lowest in the world. How come, if its exported so many jobs? Because the people who lost those jobs wound up working in areas where the U.S. maintains a competitive advantage.
No discussion of free trade can be complete without discussing David Ricardo’s theory of Comparative Advantage..
Everyone should read that link. It’s a short, clear explanation of why free trade is a good thing. And btw, this is one of the most ‘settled’ issues in economics. Almost everyone agrees that free trade is beneficial, and when you find opponents to free trade, you’ll find that it’s almost always a vested interest in the status quo. Lobby groups for inefficient manufacturers, trade unions, etc.
Trade deficits are not always a bad thing. For example, consider what happened to Japan in the 1990’s. The U.S. had a huge trade deficit with Japan, and Japan over all had a huge trade surplus with the world, in part because of protectionist policies which prevented imports. So Japan built up huge cash reserves, which caused a bubble in real estate at home, and which caused Japanese companies to speculate on investments abroad. Remember all the scare stories about Japan ‘buying up’ America?
Well, what happened is that the bubble burst, Japan’s real-estate holdings collapsed dramatically, and Japan’s economy has not yet recovered. The U.S. in the meantime made out like a bandit. Essentially it got lots of cheap goods, and its own money was poured back into U.S. real estate, then the Americans eventually bought back the real estate at a huge discount.
The U.S. has been running a trade deficit for a long time. The money gets poured back into the U.S. economy as foreign investment in U.S. products and real estate. One of the reasons for the trade deficit is the strength of the U.S. economy, which is outgrowing most of the world. Americans simply have more money to spend on products each year than other people do. Another bad reason is protectionism. Tariffs on U.S. agriculture, steel, and other products has a negative impact on the balance of trade. Get rid of the tariffs, and those products become more valuable on the world market.
Another reason may be tax policy. Most countries raise taxes through a value-added tax (VAT), which doesn’t apply to exported goods. Therefore, goods for export can be made for a lower cost. The U.S. has other taxes which do not discriminate between products made for domestic vs foreign consumption, so the tax acts as a tariff on U.S. products.
Correct those imbalances, and the trade deficit will drop substantially.
I don’t understand what you are saying here Sam. How does VAT in England discriminate against US goods. I don’t believe that the US places taxes on manufactured goods. We have sales taxes which are applied at time of consumer purchase. Are you saying these taxes are paid on US exports?
The WTO allows countries that use a VAT to allow a full rebate of the VAT on exported products. The U.S. uses income taxes exclusively, and WTO rules do not allow discounts on the income tax for exported goods. So U.S. goods carry an extra burden compared to countries that rebate the VAT. This is essentially a tariff.
Whether this is an advantage or disadvantage against any specific country depends on how much the other countries taxes its corporations with income tax, how high their VAT is, and whether they discount it for exports. But overall, it’s a net disadvantage for the U.S., and it’s one of the prime drivers for supporters of a VAT in the U.S.
This is pretty much all wrong. VAT style taxes are destination based indirect consumption taxes and are neutral with respect to trade in commodities (but, unhappily, not to services). US sales taxes are origin based and distort trade.
Neither of them, however, will do anything to the trade balance: the effect of a (perfect) VAT on trade is purely to remove tax considerations from export prices. An RST will distort exports away from comparative advantage depending on intermediate good use. In both cases any cost advantage will disappear through the exchange rate.
To back up what I said earlier (lower trade barriers do not cause trade deficits under floating exchange rates): imagine we have some situation with an initial current account deficit and corresponding capital account surplus*. Everyone understands that dollars bought = dollars sold (and if that’s not in people’s plans, the price adjusts) right? Now suppose the US lowers protection on sugar. What happens? How do the foreigners get to sell more sugar? People have to pay them in foreign currency, so they have sell $US. Who buys the $US?
In order for the trade deficit to increase, you must show that people want to invest more in the US relative to other places as a result of the lowered protection: either US investors are less keen investing overseas or foreigners are more keen in investing in the US. Without this, the capital account can’t change. And if the capital account can’t change, the current account can’t change. So why would it be?
So what happens? Reducing protection increases trade: exports and imports. Tariffs are a tax on both imports and exports. Who wins from reduced protection? Exporters. Other import competing industries apart from those whose tariff is reduced. Those consumers and factor suplliers lucky enough not to be in the way. And, yeah, at least for large tariffs, the gainers could overcompensate the losers.
As for China’s fixed exchange rate, it doesn’t make much of a difference to the US as long as China doesn’t fall in a heap or do something crazy. It doesn’t make much difference to this argument, as the result is to divert trade from one source of imports to another. It’s hard to see why the US trade deficit would be affected by any bilateral deficit.
*[sub]No, they’re not quite identical, and nor is the trade balance the current account, but close enough for these purposes.[/sub]