Skepticism On Free Trade?

The Wall Street Journal is reporting Republicans Grow Skeptical On Free Trade.

By a nearly two-to-one margin, Republican voters believe free trade is bad for the U.S. economy, a shift in opinion that mirrors Democratic views and suggests trade deals could face high hurdles under a new president.

The sign of broadening resistance to globalization came in a new Wall Street Journal-NBC News Poll that showed a fraying of Republican Party orthodoxy on the economy.

Six in 10 Republicans in the poll agreed with a statement that free trade has been bad for the U.S. and said they would agree with a Republican candidate who favored tougher regulations to limit foreign imports.

Though President Bill Clinton famously steered the Democratic Party toward a less-protectionist bent and promoted the North American Free Trade Agreement, his wife and the current Democratic front-runner, Hillary Rodham Clinton, has adopted more skeptical rhetoric. Mrs. Clinton has come out against a U.S. trade deal with South Korea.

One fresh indication of the party's ideological crosswinds: Presidential candidate Ron Paul of Texas, who opposes the Iraq war and calls free-trade deals "a threat to our independence as a nation," announced yesterday that he raised $5 million in third-quarter donations.

[Mish comment: Ron Paul's actual position on free trade can be found Issues 2008. He has valid reasons to object to the WTO and some provisions of the other agreements but all in all he is making a mistake on free trade. NAFTA is not going to make a single nation out of Canada, the US, and Mexico any more than the EU made a single country out of Italy, France, and Germany. I support Ron Paul but he is wrong on free trade]

Poll Question / Results
Which of the following statements comes closer to your point of view?

• Statement A: Foreign trade has been good for the U.S. economy, because demand for U.S. products abroad has resulted in economic growth and jobs for Americans here at home and provided more choices for consumers.
• Statement B: Foreign trade has been bad for the U.S. economy, because imports from abroad have reduced demand for American-made goods, cost jobs here at home, and produced potentially unsafe products.

Statement A/foreign trade has been good ..... 32
Statement B/foreign trade has been bad....... 59

The WSJ should know better that to phrase a question like that. Statement B plays on recent unsafe products made in China even if the flaw was a bad design or bad inspection by a US company. Statement A leaves out the biggest benefit of free trade: lower cost on tens of thousands of items.

In essence, the "because" clause as phrased in the Statements A and B are so biased that it is hard for many to to answer A. What I suspect happened is that any hard advocate of free trade answered A on general principles, and everyone else answered B.

Consider these alternative statements:

• Statement A: Free trade means lowers prices of goods at stores like Wal-Mart, Target, Best Buy, and Bed Bath and Beyond. Free trade benefits me because I shop at those stores.
• Statement B: I would gladly pay higher prices on everything even if it only saved a few U.S. manufacturing jobs.

A completely different answer would likely have been given in response to those alternative statements. There does seem to be a rising tide of protectionism, but that flawed poll is sure not proof of it.

Tariffs Are Not The Answer

Tariffs are not the answer to trade issues, nor are import restrictions, nor is competitive currency debasement.

It is simply impossible to stop globalization and global wage arbitrage via import restrictions or tariffs without destroying the economy. The Smoot Hawley Tariff Act proved that.

The interesting thing is this saber rattling is coming at a time when imports are starting to decline on their own accord. See Cargo Decline Portends Consumer Weakness for more are shipping container declines and consumer weakness.

In response to weak consumer demand, Wal-Mart (WMT) is cutting prices. Other stores such as Target (TGT), Best Buy (BBY), etc. will be forced to follow suit. Now imagine the effect if legislation was enacted that forced the prices of those goods back up.

The politicians (and unfortunately the WSJ as well) are playing on the seen (the loss of U.S. manufacturing jobs and unsafe goods). The unseen is all the shipping jobs, doc jobs, trucking jobs, etc that were created in this trade boom. Also part of the unseen is currency debasement by the Fed and Congress that is the root cause of consumers getting rid of dollars as fast as they can.

Tariffs are not the solution to trade issues when the problem is currency debasement by the Fed. Since currency debasement is the problem, it cannot be the solution as well. That is the message behind the recent rise in the price of gold.

Is Fair Trade The Answer?

Some would argue the solution is "Fair Trade".

The problem with "Fair Trade" is that "Fair" is in the eyes of the beholder and no one wants to lead by example. Every country has a different definition of fair, and every country wants concessions from everyone else first. For example, the EU will not give in on agricultural subsidies no matter how unfair those subsidies are to third world countries (and they are blatantly unfair). The U.S. has taken the convenient position that it is all in favor of eliminating agricultural subsidies if the EU acts first.

I believe the first country that actually practices free trade, reduces regulation, and gets government out of the lives of private citizens regardless of what any other country does will flourish. Sadly, no one wants to be first, especially the U.S. and EU.

Addendum

After Posting I found this article by Ron Paul's weekly Texas Straight Talk column: Regulation, Free Trade and Mexican Trucks.

Free trade is not complicated, yet NAFTA and CAFTA are comprised of thousands of pages of complicated legal jargon. All free trade really needs is two words: Low tariffs.

Free trade does not require coordination with another government to benefit citizens here. Just like domestic businesses don't pay taxes, foreign businesses do not pay tariffs – consumers do, in the form of higher prices.

If foreign governments want to hurt their own citizens with protectionist tariffs, let them. But let us set a good example here, and show the world an honest example of true free trade. And let us stop hurting American workers with mountains of red tape in the name of safety. Safety standards should be set privately, by the industry and by the insurance companies who have the correct motivating factors to do so.

That is a much more sensible position than claims that NAFTA is going to unite the U.S., Canada, and Mexico into a single country. As described in the above article Ron Paul is correct. All free trade needs to work is elimination of tariffs and removal of government interference. His weekly straight talk comes across much better on free trade than he does in Issues 2008.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/