Monday, June 24, 2013

Why we Don’t Need Trade Wars

In the movie ‘L'Auberge Espagnole’ (‘The Spanish Apartment’) a French college student goes abroad to Barcelona, Spain, to learn Castillian Spanish and complete his studies of economics, with the promise of an attractive job offer from his sponsor upon his return to France. In one scene, one of the economics professors insists upon teaching the course – to his students who come from all over the world – in Catalán, the historical language of Catalonia, the region of Spain of which Barcelona is the capital. “If you want Castellano” – (the language of Castille that came to dominate Spain as a whole and South America besides – what we call ‘Spanish’) – “then go to Madrid!” he booms.
No doubt Catalán is a beautiful language with a rich literary and cultural heritage. But it is worth noting that while this business prof is training his charges in Catalán, the Chinese are teaching their business students (and 300 million of their closest friends, more than the population of the United States) … in English! Pop quiz: Who’s going to dominate the global economy in the 21st century?
This Catalonian professor was practicing what could be called cultural protectionism; insisting upon doing things his way, insulated from external realities. But his students will pay a price in diminished opportunity, for preferring the provincial to the global, blinders to eyes wide open.
And so it is with the more overt forms of economic protectionism and isolationism: tariffs, quotas, regulation that discriminates against imports, supposedly in favor of exports, etc. Most of these measures help only a few privileged or politically connected groups of people, and only for a short period of time, while injuring the welfare of the society at large, especially over the long term.

Trade Facts and Stats
Here are some facts and stats which paint a picture of the globally interconnected economic world in which we live today :
• International trade has tripled to quadrupled in the last 50 years.
• During the same two generations of expanding globalization, the US workforce and total employment have doubled. Prior to 2008, the unemployment rate averaged 5 to 6 percent. Trade is not causing loss of the number of jobs (the employment crisis of 2009 – 2011 was not caused by trade, free or otherwise).
• Trade does not cause declining wages. Real hourly compensation in America, including non-wage benefits, increased 41% on average from 1973 to 2007, and 23% from 1991 to 2007.
• Over the past 40 years or so, median US household income has increased 20%, from about $40,000 per year to about $50,000. The average size of a household was 3.2 people in 1967; 2.6 people today . Therefore those household income figures translate into more dough per individual today.
• 20% of humanity lives in China, and trade with China constitutes 15% of all US foreign trade.
• The USA spends about 2% of its GDP on goods imported from China; $260 billion in consumer goods and $60 billion in industrial goods. Two-thirds of that are products designed in the US, manufactured in Japan, Gernany, South Korea, Taiwan, Singapore, Malaysia and/or the US, and finally assembled, at the end of the chain, in China. Think Apple iPad.
• The percentage of the world’s population living in ‘absolute’ poverty ($1.25/day or less) has decreased from over 50% in 1981 to 25% in 2005. In China, 600 million people have climbed out of absolute poverty in the last 30 years.
• Quality of life has improved across the board in the developing world in this era of globalization. For example, since 1960:
- Life Expectancy: from 45 years to 65 years
- Infant Mortality: down 60 percent
- Food: from less than 2,000 to more than 2,600 calories/day
- Literacy: from less than half to over two-thirds
-- Child Labor: down from 25% to 10%.
• American companies employ 10 million workers outside of the United States. Fewer than 5% are in China; an equal number are in Germany, a country with 1/17th the population of China.
• More than two thirds of American foreign investment flows to other wealthy peer countries, not Third World ‘sweatshops’.
• Wage rates and labor costs are not the same thing. If Fatcatistan’s workers get paid twice the ducats per hour of workers in Pauperia but produce three times the value output, then Fatcatistan has the lower labor costs.
• In 1776, 97% of Americans were farmers. Now only 3% of the population works in agriculture, yet we are the best-fed (overfed? most obese?) nation on earth and the world’s leading exporter of food.
• Employment in the American Manufacturing sector declined 20% in 17 years, from 17.1 million jobs in 1991 to 13.5 million in 2008. On the other hand, employment in the Service sector during the same period increased 51% from 37 million to 56 million. Thus a decline of 3.6 million jobs in manufacturing has been offset by a 19 million-job increase in construction, professional, business, financial, education, health and other services.
• American consumers spend 60% of their discretionary income on services today, whereas two generations ago, they spent more than that proportion on manufactured goods.
• Meanwhile, manufacturing output – productivity – increased by about 60%. We’re making more stuff, producing more value, with fewer people, just as we did in agriculture in past generations.
• America (a.k.a. 250,000 companies) is the world’s #1 exporter. We make $380 billion worth of semiconductors, civilian aircraft, vehicle parts and accessories, passenger cars, industrial machines, pharmaceutical preparations, telecommunications equipment, organic chemicals, electric apparatus and computer accessories …and twice again as much more stuff. Not too shabby for a country that ‘doesn’t make anything anymore’.
• When imports go up, so do exports. When imports go down, so do exports. Anti-trade / pro-protective tariff theory predicts the opposite, and fails.
• The Trade deficit is negatively correlated with unemployment. That is, when the deficit goes up, unemployment falls / employment increases. If you are pining for the good old days, those few individual years when we got the trade deficit ‘under control’, you are a cheerleader for recessions: 1961, 1975, 1982, 1991, 2001.
• More than half of imports into the US are raw materials or intermediate products that American manufacturers use as inputs to their final product. Domestic American companies need imports.
• 97% of job displacement in the US is due to technological change, not trade. Every year, 15 million jobs disappear and another 15+ million are created. Trade-related job churn accounts for up to 500,000 of that, which is to say 3%.
• Stuff that is traded in international markets gets less expensive all the time, whereas products and services protected or insulated from competition get more expensive. Think computers on the one hand vs. college tuition on the other; TVs vs. medical services; cellphones vs Super Bowl tickets; clothing vs. car repair. Trade makes stuff cheaper for you and me.
• Two thirds of GM and Ford’s business is outside the US.
• With your outsourcing hysteria, get some IN-sourcing tranquilizer: For example, Japanese manufacturers employ about a third of all Americans who work in the automotive industry, in factories in 11 US states. The 5+ million American employees of foreign-owned affiliates here earn on average 30% more than employees of domestic companies. Ask them if they think that’s a bad thing.
• Americans own over $100 trillion worth of assets. Our negative Net International Investment Position (the difference between foreign assets that we own and American assets owned by foreigners) is less than 2 percent of that. 40% of that less-than 2% are equity positions – stocks, real estate, direct investment – that is not a debt burden; it does not need to be ‘paid back’.
• Price discrimination, like charging different prices for tickets to occupy the same movie theatre seats to adults, seniors, children and students, is a perfectly economically rational and legal practice. Yet when a foreign company sells in the US market below average cost, we call it ‘dumping’, call the international police and slap fines on the ‘criminals’. Someone please tell BMW that I would like a 2014 740iL ‘dumped’ in front of my garage with the key in the ignition and a blue bow on top. In return I promise: 1) I’ll send a check for $100 to satisfy the ‘below average cost’ requirement (including shipping, handling and gift-wrapping), and 2) I won’t sue or lobby my congressman for a redress of grievance.
• About 100,000 Americans are employed in the steel industry; about 4 million (that’s 40 times as many more) work in industries that use steel to make products. The steel tariff of 2002 may have helped the few steel workers temporarily, but it screwed everyone else, like the steel-consuming industries and you and me who buy or rent cars, machine tools, industrial equipment and office space. Thankfully the tariff was repealed in 2004 under persuasion from that evil foreign menace to our sovereignty, the World Trade Organization (WTO).