U.S. Must Burst the Free Trade Bubble; Manage Its Own Trade
January 17, 2003
by John Bakane
CEO of Cone Mills
With the bursting of the tech bubble, the equity markets bubble and the C.E.O. compensation bubble, it is time to also address the Free Trade bubble. Like all bubbles, the Free Trade bubble was conceived during times of irrational exuberance, is based upon myths, and if not managed, will end up badly. Don't get me wrong, world trade is good; but unmanaged trade particularly with controlled economies such as China's, will be disastrous for the U.S. way of life.
Much of our free trade policy was established when the delusion, that high tech would transform the U.S. economy was in full bloom. Thus, the academic argument of comparative advantage became trendy: we would make high tech stuff and import everything else. The theory of comparative advantage says it maximizes world standards of living but leaves the impact on individual economies a moot point. Obviously, this hasn't worked to the benefit of the U.S., as we now run a trade deficit in just about everything but agricultural products and commodities.
The myths which fueled the free trade bubble were based upon competitive free market models - let low wage countries make high labor content products and let high wage countries make ''smart people stuff.''
A few minor details have been left out, notably, that the U.S. is not a free market economy; it is a mixed economy managed by government policy. Thus, taxes, regulations and redistribution of income are integral parts of the American economy. Nobody has focused on the fact that the U.S. economy relies on income taxes to fund these government activities while most other nations rely upon sales or VAT taxes. These differences are part of the difficulty facing the U.S. as the W.T.O. has allowed the E.U. to assess trade penalties because of the U.S. export tax credits (which are not sanctioned by the W.T.O.). Other economies don't have this problem if value added taxes (sales taxes) are the primary funding sources for their governments. Tax issues between the U.S. and other countries are fundamentally irreconcilable.
We don't treat our semi-skilled workforce as a disposable commodity in the U.S.; we pay for a minimum standard of living through public health, education, retirement and food programs as well as a legislated minimum wage. If our industrial base is ceded to China, the U.S. government will not be able to continue funding present standards for health, education, retirement and other programs because there will be an insufficient tax base. This issue is not a future concern, it is today's problem caused by the need to support the baby boom retirees as well as educate their children.
We have a social contract with our government that prohibits certain private sector economic practices such as price fixing, monopolies, supply discrimination and predatory trade practices. The irony is that U.S. firms engaged in these practices are prohibited from doing business in U.S. markets while foreign firms do not have to comply. The list of foreign firm's non-compliance issues is lengthy:
Minimum Wage Taxes: Federal, state, social security, medicare/medicaid, unemployment, workmen's compensation, compliance with OSHA, ERISA, etc.
Monopoly: Over 50 percent of all workers in China are employed by state-owned firms resulting in state-owned monopolies as defined by our own regulation metrics.
Price Fixing: Prices and supplies of all products are essentially fixed by Chinese pricing policy boards. Also, exchange rates are fixed by the Chinese government.
Illegal Subsidies: Capital flows are subsidized by the Chinese government; Chinese banks hold massive non-performing loans, which subsidize export supplies and prices.
Dumping/Predatory trade practices: The Chinese government has targeted the home furnishings industry for massive export growth and will promote and subsidize all activities associated with that goal.
Like all bubbles, things that don't make sense don't last forever and bubbles all end badly. If the U.S. does not regain control of trade policy, this is a glimpse of the future:
U.S. manufacturing industries will be cut off from capital markets because the perception will be ''You can't compete with the Chinese government.'' Manufacturing CEOs and CFOs will tell you this is already happening.
Employment and economic growth will be anemic. U.S. manufacturing employment is declining, imports are growing and Chinese GDP is growing robustly. The only growth we are seeing is in government jobs and spending both of which are funded by deficit spending.
Congress will cut back social programs. Retirement income, Medicare, Medicaid, public health and education will be cut back. U.S. standards of living and the quality of life will decline.
In 2003, the U.S. will ask the W.T.O. to enforce weapons inspectors upon Saddam Hussein.
In a separate conversation the U.S. will ask China to purchase $10 billion in U.S. bonds in order to support U.S. homeland security spending.
It is laughable for the U.S. to lose its sovereignty to manage fiscal (tax policy) to the W.T.O. while the world turns a blind eye to China Inc. It's time for the U.S. to renegotiate the terms and conditions for U.S. membership in the W.T.O. and manage trade with China just as China manages trade within and outside its borders.
CEO of Cone Mills
With the bursting of the tech bubble, the equity markets bubble and the C.E.O. compensation bubble, it is time to also address the Free Trade bubble. Like all bubbles, the Free Trade bubble was conceived during times of irrational exuberance, is based upon myths, and if not managed, will end up badly. Don't get me wrong, world trade is good; but unmanaged trade particularly with controlled economies such as China's, will be disastrous for the U.S. way of life.
Much of our free trade policy was established when the delusion, that high tech would transform the U.S. economy was in full bloom. Thus, the academic argument of comparative advantage became trendy: we would make high tech stuff and import everything else. The theory of comparative advantage says it maximizes world standards of living but leaves the impact on individual economies a moot point. Obviously, this hasn't worked to the benefit of the U.S., as we now run a trade deficit in just about everything but agricultural products and commodities.
The myths which fueled the free trade bubble were based upon competitive free market models - let low wage countries make high labor content products and let high wage countries make ''smart people stuff.''
A few minor details have been left out, notably, that the U.S. is not a free market economy; it is a mixed economy managed by government policy. Thus, taxes, regulations and redistribution of income are integral parts of the American economy. Nobody has focused on the fact that the U.S. economy relies on income taxes to fund these government activities while most other nations rely upon sales or VAT taxes. These differences are part of the difficulty facing the U.S. as the W.T.O. has allowed the E.U. to assess trade penalties because of the U.S. export tax credits (which are not sanctioned by the W.T.O.). Other economies don't have this problem if value added taxes (sales taxes) are the primary funding sources for their governments. Tax issues between the U.S. and other countries are fundamentally irreconcilable.
We don't treat our semi-skilled workforce as a disposable commodity in the U.S.; we pay for a minimum standard of living through public health, education, retirement and food programs as well as a legislated minimum wage. If our industrial base is ceded to China, the U.S. government will not be able to continue funding present standards for health, education, retirement and other programs because there will be an insufficient tax base. This issue is not a future concern, it is today's problem caused by the need to support the baby boom retirees as well as educate their children.
We have a social contract with our government that prohibits certain private sector economic practices such as price fixing, monopolies, supply discrimination and predatory trade practices. The irony is that U.S. firms engaged in these practices are prohibited from doing business in U.S. markets while foreign firms do not have to comply. The list of foreign firm's non-compliance issues is lengthy:
Minimum Wage Taxes: Federal, state, social security, medicare/medicaid, unemployment, workmen's compensation, compliance with OSHA, ERISA, etc.
Monopoly: Over 50 percent of all workers in China are employed by state-owned firms resulting in state-owned monopolies as defined by our own regulation metrics.
Price Fixing: Prices and supplies of all products are essentially fixed by Chinese pricing policy boards. Also, exchange rates are fixed by the Chinese government.
Illegal Subsidies: Capital flows are subsidized by the Chinese government; Chinese banks hold massive non-performing loans, which subsidize export supplies and prices.
Dumping/Predatory trade practices: The Chinese government has targeted the home furnishings industry for massive export growth and will promote and subsidize all activities associated with that goal.
Like all bubbles, things that don't make sense don't last forever and bubbles all end badly. If the U.S. does not regain control of trade policy, this is a glimpse of the future:
U.S. manufacturing industries will be cut off from capital markets because the perception will be ''You can't compete with the Chinese government.'' Manufacturing CEOs and CFOs will tell you this is already happening.
Employment and economic growth will be anemic. U.S. manufacturing employment is declining, imports are growing and Chinese GDP is growing robustly. The only growth we are seeing is in government jobs and spending both of which are funded by deficit spending.
Congress will cut back social programs. Retirement income, Medicare, Medicaid, public health and education will be cut back. U.S. standards of living and the quality of life will decline.
In 2003, the U.S. will ask the W.T.O. to enforce weapons inspectors upon Saddam Hussein.
In a separate conversation the U.S. will ask China to purchase $10 billion in U.S. bonds in order to support U.S. homeland security spending.
It is laughable for the U.S. to lose its sovereignty to manage fiscal (tax policy) to the W.T.O. while the world turns a blind eye to China Inc. It's time for the U.S. to renegotiate the terms and conditions for U.S. membership in the W.T.O. and manage trade with China just as China manages trade within and outside its borders.
