2011 October 09 Sunday
Free Trade Versus Mercantilism

The Washington Post editorial board strikes a morally superior pose for free trade. This is called fighting the last war.

THE AMERICAN Recovery and Reinvestment Act of 2009, a.k.a. “the stimulus,” had its pluses and minuses. But few would dispute that some of the worst bureaucratic hassles and international disputes associated with that $825 billion measure stemmed from its protectionist “Buy America” provision, which prohibited the use of imported steel on tens of billions of dollars’ worth of infrastructure and building modernization projects.

Yet President Obama proposes to do it all over again.

And this upsets the WPost editorial board. But why spend several hundred billion in economic stimulus spending just to have a substantial part of the money go to buying goods from China? We are running up debts (payable by our future selves) in order to stimulate China's economy.

What I'd like to hear from the WPost editorial board: a realistic plan for closing the US trade deficit. The trade deficit, and not an excess of US trade barriers, is the biggest trade problem facing the US economy by far. In fact, the trade deficit is one of the biggest problems facing the US economy, though not its biggest one.

Also in the WPost read Robert J. Samuelson's "Our one-sided trade war with China".

Just how many American jobs have been lost to subsidized Chinese exports is unclear. Economist Robert Scott of the Economic Policy Institute, a liberal think tank, estimates the number at 2.8 million from 2001 to 2010. A study by three academic economists concludes that imports from China account for about a quarter of lost U.S. manufacturing jobs from 1990 to 2007; that’s almost 1 million jobs. These are both large declines, but they are only a modest fraction of America’s present jobs shortfall. The recession cost 8.8 million payroll jobs.

The Chinese government keeps its currency weak in order to encourage multinational corps to shift more of their manufacturing to China (in addition to helping local champions steal tech from the multinationals). Those manufacturing jobs take engineering and research jobs with them.

The intractable trade deficit is attributable in part to manufacturing’s shaken status. And in many areas, craftsmanship in America has been eroding. Forty percent of the nation’s engineers work in manufacturing, for example, and that profession’s numbers have been declining. That is a particular problem because innovation often originates in manufacturing, frequently in research centers near factories, which aid in the creation of products and the tweaking of them on assembly lines.


As multinationals place factories abroad, they are putting research centers near them, with as-yet-undetermined consequences. At the very least, this trend challenges the view that the United States has the best scientists and research centers and is thus the research-and-development pacesetter.

We need to make more stuff in order to afford our energy imports. We need factories in order to keep research centers. We also need basic research spending that translates into jobs in the US rather than jobs in China.

A look at median earnings of men over the last few decades shows how far we've fallen. Women entering the work force for a while masked the decline in buying power per worker. I expect this decline to continue for a whole host of reasons. At best better policies could slow the rate of decline. But the Tea Party and "Occupy Wall Street" movement haven't yet shown a clue as to root causes for declining living standards. So there's no push from either side of the political spectrum for policies that will attempt to attack the problem.

Share |      By Randall Parker at 2011 October 09 10:32 AM  China Mercantilism

Mercer said at October 9, 2011 4:21 PM:

Romney's e-book on the economy takes a hard line on China.

A.Prole said at October 10, 2011 12:13 AM:

Believe it or not, the whole rationale behind the elitists push for 'free trade' is the notion that free trade raises average incomes.
Somehow this justification has been lost in the noise #as it is obviously not true#, and silly and stupid justifications are trotted out instead, such as free trade 'boosts global development' - as if any American gave a damn about third world iving standards.

dchamil said at October 10, 2011 7:01 AM:

We criticize China for manipulating its currency to gain a trade advantage. Yet we do the same thing. Bernanke's 'quantitative easing' is nothing more than a manipulation of the currency to cheapen the dollar.

solaris said at October 10, 2011 1:40 PM:

>"Believe it or not, the whole rationale behind the elitists push for 'free trade' is the notion that free trade raises average incomes."

It does raise incomes - for the elites. If you want to know why the rich are getting richer while everyone else is treading water or worse, so-called 'free trade' is the answer.

What adds insult to injury is that it's not free trade at all.

Quequeg said at October 10, 2011 4:58 PM:

I would like to see a policy of raising tariffs by a few percent per year (e.g., 3%/year) as a flat tariff across all goods, including oil. (By the way, last I checked, oil was about 1/3rd of our trade deficit.) We would keep raising the flat tariff each year until we had a trade balance. I think that would work, but the free-trade religion has too many believers in high places for anything like this policy to become a reality anytime in the foreseeable future.

Yet, through most of US history, our government has been more willing to have tariffs.
"Presently only about 30% of all import goods are subject to tariffs in the United States, the rest are on the free list. The "average" tariffs now charged by the United States are at a historic low. The list of negotiated tariffs are listed on the Harmonized Tariff Schedule as put out by the United States International Trade Commission.[11]"
Year Average Tariff
1792 15.1%
1810 10.1%
1860 15.0%
1910 15.0%
1960 7.3%
2010 1.3%

Sam said at October 10, 2011 8:17 PM:

Why not cap the top wages of companies that import products. A CEO's top wage would be some multiple of the average workers wage. Yes Walmart too. Make it in America and you can make whatever top wage you can get the board to vote. They say they out source for the shareholders. Let's test that theory.
I wonder if it would be legal under GATT?

Mercer said at October 10, 2011 8:27 PM:

Dean Baker published a free e-book last month. Trade and monetary policy were major themes of the book. He is a liberal but what he says about trade is similar to what Romney and Pat Buchanan say. Highly recommended. It is available here:


Lou Pagnucco said at October 11, 2011 11:35 AM:


Great post.

WDC and Wall Street appear to be vultures pecking Main Street's carcass.

On wages, U.S. is now about 14th, and falling - certainly not #1 as FOX viewers think.

Note that the Obama regime's "Cash for Clunkers" led to increased foreign automotive market share:

No change. No hope. No real choices.

Lou Pagnucco said at October 11, 2011 11:55 AM:

Just posted -

CEOs on the Job "Creation" Panel are big offshoring job exporters -

"Even The CEOs On Obama's Job Creation Panel Are Shipping Jobs Out Of The United States"


Insult to injury.

Matt said at October 11, 2011 2:14 PM:

A genuine trade war at this point would be a mistake. At any other time, the US could have done it from a position of strength. At this point there is no guarantee that protectionist policies wouldn't make things worse.

A possibility without shutting down US international trade could be an 'ASKI marks' like system. Foreign sellers into the US market could be given 'ASKI dollars' that can only be used to buy US manufactured goods.


That is a potential method of dealing with the problem, though I prefer simplifying the tax system, reducing regulations, and a currency (fiat) with a fixed number of units (no monetary inflation).

Rohan Swee said at October 14, 2011 1:19 PM:

I take a very jaundiced view of all the recent posturing about China's currency manipulation. We manipulate the hell out of own currency, and I don't think a rising yuan is going to have that much of an effect on the trade imbalance. It's a relatively minor factor right now in the mix of pernicious trade policies/practices. But mostly I'm disgusted by the jingoistic drum-beating which is just the bought-and-paid-for lackeys trying to deflect attention from the fact that the Chinese are only, rationally, doing what they can get away with, and our country is being bled dry because that's exactly the way the Americans who pay for the policy want it. (Not that they have any intention of doing anything about currency manipulation, anyway.) As other posters note, there are all sorts of workable, graded tariff/tax options that could be used to balance trade, but their implementation involves the pie-in-the-sky assumption that anybody in Washington believes in the existence of a national interest.

The big boys like the current set-up just fine, and they can easily outbid the smaller players in buying legislation, along with unleashing a torrent of propaganda demonizing American (not "American" in name only) manufacturers as protectionist losers. It works, too. I'm constantly astounded at the number of Americans I run across who appear to honestly believe that any defensive measures against predatory mercantilism is evil and bad and makes you a corrupt-union-boss fellating poopie head stupid person who must want a centrally planned soviet-style economy.

I must say that this week's passing of those latest idiot FTA bills left me in a certain state of peace, the kind you feel when it finally sinks in that it's all over but the shouting. Not huge in themselves, just the last little finishing nails in America's cheap melamine and fake-wood veneer (but indisputably "made in the USA") economic coffin. If our "representatives" will pass this kind of crap with unemployment at current rates, even when everyone (including proponents) knows by now that the result will be net job-loss and accelerated hemorrhaging of industries, then it's time to let go of the last fond faith in "of the people, by the people, for the people". Well, so be it. Let's all be careful out there.

Randall Parker said at October 16, 2011 10:09 AM:


If the Chinese (and other East Asians) weren't manipulating exchange rates the Fed wouldn't have as big a need to manipulate the dollar to try to generate enough demand for US goods and services.

When I took macroeconomics in college the prof assured us that we would never run a large trade deficit for a long time because as a result of a trade deficit the value of the dollar would fall until the deficit closed. So what happened to that mechanism of trade balance regulation? I'd really like to hear the current crop of macroeconomists explain it.

Quequeg, Mercer, Lou, Matt,

If you want to get people to click thru on your links learn how to use "a href" HTML tags.

Derek said at October 16, 2011 1:24 PM:

"we would never run a large trade deficit for a long time because as a result of a trade deficit the value of the dollar would fall until the deficit closed. So what happened to that mechanism of trade balance regulation?"

Dollar hegemony.

The value of the dollar may fall but under dollar hegemony it won't fall low enough that American financial institutions, speculators, funds, etc. can't launch bear raids against other countries and simply out-muscle them if they start going into deficit and bleed dollars. Naturally, American financial institutions, funds, etc. hold the most dollars, control the most dollar-denominated assets, can create dollars, etc.

Under dollar hegemony, the only way these other countries can defend against bear raids is with dollars. So they need to constantly hold lots of dollars by having a trade surplus. There is simply too much risk not to do so, and thus too much incentive to do so.

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