Free Trade?

Certain phrases can be magic in their evocative power to stir the emotions and the memory.  Such a phrase is “Free Trade.”  For me, it brings back memories of my youth.  I remember my older brother “freely” trading me my small dimes for an equal number of big nickels.  That lesson was almost as painful as the time my father decided to teach us both the perils of gambling according to Las Vegas rules.  As I recall, I ended up “trading” to my father my mowing the lawn for free for an entire summer.

The phrase serves as a reminder because it taught me that “Free Trade” is functionally equivalent to, “I think I am going to win this one.”

If you think that you have some production edge, then you tend to be for Free Trade.  If, for instance, your labor costs are lower than everybody else’s or your material is cheaper or your automation level is higher, you believe you can make widgets cheaper than anybody else.  Hence all those open borders are simply markets where you expect to make a killing.

If, on the other hand, your labor costs are high, your material expensive or your automation level low, your widgets get pretty expensive.  In this case, open borders do not open markets abroad for your sales.  Instead, your widgets will stand nakedly overpriced in every one of those marketplaces.

Worse, open borders imply that domestic widgets will have to face competition from that other guy’s cheap and shoddy goods made with unfair labor practices.  Since nobody but rabid xenophobes will put up with consistently getting ripped off merely for the sake of a “Made in Ruritania” label, open borders spell the end of the domestic widget market.

America, rather serendipitously, managed for a number of years to be on the good side of this production balance.  Hence we have tended to confuse Free Trade with Americanism.

Due to our supply of immigrant workers and our abundant natural resources, we were able to produce large quantities of cheap (well, okay, shoddy) goods to ship to the world.  When that combination started to fail, we were blessed, beginning in the late nineteenth century, by leading the world in automation.  This kept us favorably biased towards Free Trade right through World War Two.

It should be noted that our products, with a few exceptions, were never top quality in the world’s markets.  We gave great bang for the buck, period.  Up to the war, every major market we dominated had better quality local products — at a much higher price.

There was a period, after the war, where the bankruptcy of our allies and the devastation of our enemies allowed us to add a qualitative edge in several critical markets such as automation, agriculture and aerospace.  (It may seem odd to include agriculture in the mix, but the “Green Revolution,” begun in the U.S., allowed us to deliver higher yield, more nutritious farm products to a hungry world.)

This was the period that produced our most bombastic “Free Traders.”  The fusion of Free Trade with patriotism proceeded apace.  To be for Free Trade was to be for everything America stood for.  Competition, efficiency, let the best man win, etc.  Still, since the deck was stacked in our favor, it would also have been lunacy to be for anything else.

Having gotten fat and complacent in the Fifties and Sixties (reading the management books written by successful CEO’s in that era is a sad and amusing experience), we got our brains bashed in the Seventies and Eighties.  Foreign producers had learned to put their plants where the labor was cheap, automate the heck out of their production and design both products and production to yield superior quality products at low cost.

All of which has led to a resurgence of both the old and the new style of Isolationism.  In the old style, we wanted everyone to buy our goods but to leave us out of their quarrels.  The new breed still wants to be left out of the world’s quarrels, but it now wants to be able to pick and choose which goods should have “Free” trade and which should be tariffed.

Nativists like Pat Buchanan have had a field day equating NAFTA with anti-Americanism and Free Trade with “selling our people down the river.”  To listen to the debate today is to hear an emotional repetition of arguments that have probably been made since international trade began.

It is a fine, time-honored debate and makes for some fine, time-honored rhetoric, but personally I suspect the question is rapidly becoming moot.  By which I mean that events are obsolescing  both the argument and the reality of “Free Trade.”

Consider.  The whole argument is essentially about any nation’s ability to tax incoming goods.  But that taxation assumes the ability to know two basic things:  where an item was produced and the national location of the buyer and seller.

Today we are producing Honda and BMW’s in the American South, with components from Japan and Germany combined with parts from America, Mexico, Indonesia, etc., all assembled by Americans.

Suppose these multi-national corporations decide to ship some of those Hondas to Japan or some of those BMWs back to Germany.  Exactly where were these cars built?  Where the engines and transmissions were built?  Then they are, respectively, Japanese and German products which should not pay tariffs for merely returning home.  Were they built where their metal came from?  Where their semi-conductors came from?  In both those cases they are such melanges that it is virtually impossible to parse the result.  How about the software?  That was probably written by Indian guest workers living in the Silicon Valley.  Or in a London suburb.  Or just outside of Stuttgart.

Day by day, high tech products are gaining such a mixed ancestry that no provenance can be determined or expected.  This makes imposing a tariff an exercise about as satisfying as shooting oneself in the foot.  No matter how you do it, you will end up, at least partially, penalizing yourself.

Now let’s take a look at the Internet.  The tax people are already having headaches determining exactly where to consider that a multinational transaction took place.  That Honda was not built by its parent company in Japan, but on a production line owned by an American subsidiary of Honda.  The Japanese mother company decided not to produce the car in Japan, but it was  another subsidiary that produced the engines and transmissions for shipment to America.  Yet another subsidiary actually ordered (and paid for) the car to be shipped back to Japan.

And that set of transactions is, at least theoretically, decipherable.  You can say that this company ordered the car built in America, that company built it and yet another ordered it sent back to Japan.  You can decipher them, identify where the entities reside, and tax them accordingly.

But, increasingly, transactions are not taking place anywhere real at all.  Instead, they are being conducted in a mythical kingdom called Cyberspace.

Multinationals have for years been conducting money transfers in the banking equivalent of Cyberspace.  It is easy to imagine that, as time goes on, more and more products will be ordered, scheduled, built, sold and shipped, all via transactions conducted in Cyberspace.

The legal entities that do all this work may soon exist only in Cyberspace.  In many ways it is the natural habitat of multinational companies anyway.

So as more and more of the high dollar products are built of components built all around the globe and bought and sold by entities that have less and less of a physical reality, exactly how are we to impose tariffs on them?

But the idea of “Free Trade” makes sense only if its opposite, tariffed trade, exists.  If tariffed trade becomes an obsolete concept, so will Free Trade.

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