There’s supporting free trade, and then there’s being a sucker

June 22, 2011

When the country engaging in mercantilist-protectionist policies is also your banker, I guess you tend to look the other way. My fellow CNBC contributor Peter Navarro makes the devastating case:

For starters, we must puncture the myth that China’s main manufacturing edge is solely its cheap labor. Indeed, while low labor costs are a factor, when you carefully research the biggest source of China’s manufacturing advantage, it is actually a complex array of unfair trade practices, all of which are illegal under free-trade rules.

The most potent of China’s “weapons of job destruction” are an elaborate web of export subsidies; the blatant piracy of America’s technologies and trade secrets; the counterfeiting of valuable brand names like Nike and Chevy; a cleverly manipulated and grossly undervalued currency; and the forced transfer of the technology of any American company wishing to operate on Chinese soil or sell into the Chinese market.

Each of these unfair trade practices is expressly prohibited both by World Trade Organization rules as well as rules established by the U.S. government, e.g., the Treasury Department has sanctions against currency manipulation (which, alas, the Obama administration refuses to use against China despite campaign promises to do so).

Make no mistake. All of these real economic weapons have led to the shutdown of thousands of American factories and turned millions of American workers into collateral damage, all under the false flag of so-called free trade.

The second myth we must expose if we are to ever reverse the job-killing trade deficits we now run with China is the idea that free trade always benefits both countries. That doesn’t hold true if one country cheats on the other. Instead, when a mercantilist China uses unfair trade practices to wage war on our manufacturing base, the American economy is the big loser.

I am not sure of the solution here, though more vigorous pursuit of these issues in the World Trade Organization would be part of it, certainly. (And reducing our debt would reduce China’s leverage.) Otherwise, I mean, what is the point having a WTO? Though if you wanted to go further, especially on the currency issue, there is this idea from economist Peter Morici:

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35%. That would neutralize China’s currency subsidies that steal US factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

I am for open trade and subjecting the U.S. economy to maximum competitive intensity. That will spur more innovation, productivity and economic growth.  China should do the same.


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The bottom line on trade is that free trade should be the goal, but not the means to the goal.

Free trade deals should be a PATH to free trade. Meaning, an agreement detailing steps that must be taken that will end in free and fair trade. The path must include incentives (moving closer to free trade) for fair trade, and penalties (tariffs) for unfair trade.

So what is unfair trade? Unfair trade is any behavior violating international norms. That could be currency manipulation, subsidies, force labor, human rights violations, lack of labor rights, disregard of environmental norms, and so forth.

It is cheaper to break the rules. Preserving the environment, paying a minimal wage, and allowing workers to organize costs more money. So companies that play by the rules are penalized, while companies (and countries) that ignore the rules are rewarded. Because free traders act like cult followers and no amount of evidence will convince them otherwise, the current policies are destroying this country’s base.

The reason that not a single one of our trade agreements work and result in massive trade deficits on our part is because we refuse to punish unfair trade. Instead, we punish the American companies and workers who play by the rules.

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