Did Free Trade Cause the Recession?
For many years the world has suffered under a "free trade" regime that eliminates good paying jobs in every country, sending the work to countries that keep wages low and restrict workers' ability to organize for a better life. The profits went to an already-wealthy few and the inequities increased, wealth concentrating massively at the very top.
And now consumers around the world have run out of money. This is not a surprise.
Did these "free" trade policies cause the recession?
Imagine a company in South Carolina that makes 20,000 pairs of shoes a week and distributes them to stores. Now, imagine that the company closes its South Carolina plant, opens a plant in a low-wage country, ships all the machines and raw materials there, ships back 20,000 pairs of shoes each week and distributes them to the same stores. Is that "trade?" Are the raw materials sent out of the country an "export?" Are the shoes brought back into the country an "import?"
The only thing that has been "traded" in this scenario is American jobs traded for huge executive bonuses. The workers in the low-wage country are not paid enough to buy any remaining American-made products. And, as the economic collapses as a result of shenanigans like this, American workers are no longer able to buy shoes so the executives won't be getting bonuses next year.
I submit that nothing in this example is "traded" except that our standard of living has been traded away. And this exchange brings little benefit to the workers in the low-wage country. This is exploitative trade, not free trade, and we need to protect our workers, the workers in other countries and the world's economy by demanding that our trade partners provide living wages and benefits. We can enforce this demand by attaching import tariffs at a level that makes our own goods competitive. This removes the advantage gained by exploiting workers - and the revenue reduces our own tax burden to maintain our competitive infrastructure. It is an incentive to pay their workers enough so they can reciprocate and buy the things we make here. Instead of the race to the bottom that led to this recession such tariffs create an incentive to raise standards of living around the world.
Let's have national policies that prevent exploitation of workers and the environment and that share prosperity. This is a choice between lifting each other up or continuing a spiral to the bottom.
Follow Dave Johnson on Twitter: www.twitter.com/dcjohnson
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
I agree wholeheartedly.
Yeah we should build a wall around the united states to keep all those foreigners from destroying our country. They are responsible for the recession.
I would say the problem is the elected leadership.
"Foreigners" are just a convenient scapegoat - have been for thousands of years.
.
Boy, you got the wrong thing out of this post, didn't you. The point being made is not that foreigners are bad, or that foreign made goods are bad, but that an economy with our basic standard of living cannot compete with one of China's basic standard of living without some tariffs to offset the VASTLY lower costs that the companies in China have to face!
See Dave Johnson's Profile
Along with the freedom to dump toxic wastes into the environment, injure workers at will, etc..
not only the externalities, but also the subsidies for key industries, VAT export rebates and VAT taxes on imports that china practices and we do not
Free trade has been the enabler of the race to the bottom of the wage scale. It's not even free trade, as most countries still continue to implement taxes and tariffs that protect major parts of their economy.
The U.S. protects agriculture, but not manufactured goods. China is full of joint ventures that are practically owned by the national or local governments. Most countries only want free trade in those items which they can't produce themselves, which is little different than the protectionist policies of the past.
The big American corporations see free trade as a way to get rid of those problem unions and sell their manufactured goods at the same price, while paying less to assemble them in China. It's just another way for corporate management to make big bucks off the backs of their workers and customers.
Now corporations have managed to drive the wages of their best customers (their employees) down to low enough levels so that they can no longer afford the products they produce. All of the supposed new workers in China & India don't make enough to afford their products.
So called U.S. free trade policies have turned a few multi-millionaires into billionaires at the cost of making everyone else poorer. It has been a class war for the past 30 years and there is no question which class has already won.
The vast majority of the job losses in the US was because US companies were driven out of business due to foreign competition, not because US multi-nationals closed facilities in the US and began new ones abroad.
Can you back that up with a link?
Ummm....WR
I'm not sure why you think these nasty multinationals employing people in poor countries equates to "exploiting" them when those jobs generally have improved their standard of living. Tariffs and protectionism have long ago been discredited as a means for economic stimulation. In fact, they accomplish just the opposite. You do remember that Hoover tried that approach and how it clearly contributed to the global depression that followed?
Same old free market fundie nonsense; apparently you cannot see the forest for the trees....
The global dynamic has changed, both in foreign policy and trade; what most of you folks fail to grasp is that a world full of nations lining up to be fleeced by multi-national corporations made that entire system workable and very profitable for western nations exploiting cheap labor--but there is NOTHING to ensure that Wall Street's grand desire to exploit everyone again will meet with compliance. The rest of the world isn't held captive for exploitation like US citizens.
And please, your argument that "those jobs generally have improved their standard of living" is an insult to anyone with a sound intellect and non-conservative mind.
But free market fundies will not be reformed; as with those who embrace other illogical religions, there faith is stronger than their sanity or logical reasoning.
I don't want to create a straw man to attack, so I will pose this as a question. When you use terms like "free market fundie nonsense" are you really saying that the arguments for the free market are all nonsense? Do you refute the historical and current events that have shown that tariffs lead to retaliatory tariffs? Can you really argue that tariffs do not lead to higher costs that are passed on to consumers and the domestic businesses that use those products? You laugh at the notion that these jobs have improved the standard of living for people employed by multinational corporations, but do you really think that their lives would be better without the job? If so, then are they being forced at gunpoint to work at this job?
I have a lot more faith in free market principles than I do the socialistic and protectionist proposals put forth in this blog. I have a grasp on reality, not some utopian pipe dream.
I love the "forest for the trees" remark. Dave Johnson has a blog by that name.
Um.... Okay, that's complete bull....
Do we really want to bring Smoot-Hawley back and insure that this economic downturn turns into a depression? The consequences of placing barriers to trade are retaliatory barriers. Take a look at the mexican trucking issue this year. We violated our agreement under NAFTA and as a result they imposed tariffs on a number of goods in the US. If we don't want to ship jobs overseas, then maybe we should look at ways to attract them? Why not increase the amount of H1b visas so that Microsoft doesn't have to open up a plant in Canada? Why not decrease our corporate tax rate that is one of the most oppressive in the world? You can see the benefits of low taxation in attracting business in the US as almost all companies are incorporated in places like Delaware, Nevada and Wyoming.
See Dave Johnson's Profile
"Why not increase the amount of H1b visas so that Microsoft doesn't have to open up a plant in Canada?"
Exactly my point. These trade policies are wiping out our jobs.
"Why not decrease our corporate tax rate that is one of the most oppressive in the world?"
Exactly my point - our trade (and other) policies are set up to benefit a wealthy few. In this case by cutting corporate taxes a wealthy few would benefit at the expense of the rest of us who have to pay taxes to maintain the infrastructure that keeps those corporations competitive.
Are you arguing in favor of increasing the number of H1b visas? We limit the number every year to "protect American jobs" but in reality this protectionism only increases the incentive for companies to shift jobs overseas. Without creating additional barriers to trade, if we opened our immigration policy we would see in influx of American jobs.
Regarding our tax rate, if we were to lower it to levels that compare to international norms, multinational corporations would not have the same incentive to keep profits abroad. Wouldn't it be nice to have that money invested in the domestic portions of the company, possibly even to hire new employees rather than staying in foreign accounts? We are not losing out on revenue because the money would have stayed abroad.
Companies bring in workers via H1b visas because companies find it very difficult to locate talent. Plus, once those workers are here, they are essentially Americans and add to the US economy, not subtract from it (like moving the facility to another country does).
sounds like black mail to me - let us import cheap labor, or we shift our production offshore
why not hire and train some of the many un and underemployed automotive engineers to fill these tech postions?
Yes I would like to bring back Smoot-Hawley.
Let us say there is a guy making $100,000 a year and he also gets a bonus of $6,000 a year. He spends it all. His employer reduces the bonus to $2,000 a year. If he cuts his spending by 25 percent are we to blame the spending reduction on the bonus reduction?
If you blame Smoot-Hawley for the Depression that is what you are doing. After Smoot-Hawley, trade declined from 6 percent of GNP to 2 percent of GNP. Blaming a 25 percent unemployment rate on a 4 percent decline in trade does not pass the smell test.
Blaming Smoot-Hawley is also a misreading of history. Smoot-Hawley was not a shift away from free trade to protection but a continuation of trade protection. At the time it was proposed the US was already the world’s most trade protectionist nation and had been for more than a hundred prosperous years. The Smoot-Hawley tariffs were not the highest tariffs the US had. Nor did they last very long. Passed in the summer of 1930 they became effective the following year and began to be reduced after 1932 by the Roosevelt administration. When the Depression got worse in 1937 tariffs were already back to the pre Smoot-Hawley levels. Smoot-Hawley did what it was intended to do. It kept us a net exporter throughout the Great Depression and protected jobs from the dumping of foreign goods.
I'm certain you are smart enough to understand that no single factor caused the great depression, and so am I. I did oversimplify in my first post. I meant to use something familiar to highlight the destructive capability of trade wars, and the potential for tariff decisions to be politically rather than economically based. For a more recent examples see my post above.
As a separate issue and a sincere question, right now I believe that over half of the items imported are not consumer products but intermediate products used by manufacturing sectors such as the auto industry. You seem to have a pretty good understanding of the depression era, what percentage of imports were intermediate products as opposed to consumer?
Something the anti-tax crowd is ieither ignorant to, or conveniently overlooks is that before there was an income tax the govt govt most of its income from tariffs
reinstituing tariffs- expecially against unfair traders, labor and environmental exploiters, repressive regimes, intellectual property theives, product dumpers and currency manipulators is an absolutely legal and appropriate method to address these imbalances
As well as relieve some of the tax burden on individuals and businesses
Did you REALLY just say that our corporate tax rate is too high????? Right now almost the ENTIRE Forbes top 500 companies are not paying ANY taxes. NOT ONE DIME!!! The fact of the matter is that on paper we have one of the highest corporate tax rates, but in realized dollars we are getting less than 5% on average!!
here we go again with the myth of smoot hawley. the governments own stats show that smoot hawley had virtually zero effect on trade or the depression.
Nobel Laureate Krugman wo is generally infavor of trade and has written extensively on the subject says right on his website that attempts to link smoot hawley with any causal effect on the depression are inaccurate and revisionist.
you can make an ever so slim case that tariffs can hurt in time of trade surplus, but not so in a time of trade deficit. when there is a deficit the damage has alreay been done. A tariff or Vat and export rebate program is an absoluteluy appropriate and legal method to right an imbalance.
the bottom line is the trade deficit and subsequent foreign debt service drain money out of the country - trade surplus brings money in - why else are the growing economies of the world like china and india are aggressively pursuing manufacturing? and mercantilist policies such as currency manipulation, industry subsidies,export tas credits and their own protected markets?
There already is a trade war going on and the US is noit only too clueless to realize it, we are losing it big time.
unilateral "free' trade isn't working - at least not for everyone below the top income levels
See comment above discussing both the reason why that referenced was used and current examples of how tariffs have resulted in retaliatory actions. I understand the argument that if the net loss created by tariffs and barriers to our products is off set by the jobs saved here or products protected then we save. Will you accept the fact that when politicians get involved in making economic decisions they end up basing them on political reasons. Take a look at where the manufacturing plants for GM are going to be placed, or at the various banks that were given TARP funding. You could even just look at the economic decision to buy into GM and then have our 50 billion dollar investment only give us a 60% ownership stake. In order to pay the tax payers back, GM will have to be worth 30% more than its peak value in 2000. When over half of the products we import are used in manufactur
Its just plain ridiculous to even be suggesting there are ANY worker shortages - skilled, educated, semi skilled or otherwise when we have double digit unemployment
Employers need to do a better job of locating where the skilled labor is - such as MI, OH, IL, IN, CA, WA etc, or recruting and assisting relocation for these un and underemployed workers, and taking some responsibility on their own to train workers for the unique skills they may be lacking (although its rare to see those claiming skill shortages actually define what those skills are) BEFORE seeking imported labor ESPECIALLY at a time when we have high unemployment
You are right. We need fair trade, not free trade. Bill Clinton took a $30 million contribution to his 1996 re-election campain from Red China. The pay-off was Most Favored Trading status for Red China to import duty-free into the US which was passed two weeks before he left office. At that time, the US trade deficit was running about $14 million a month and now runs over $60 million.
At the same time, US companies get tax breaks to ship plant and equipment offshore to the lowest possible labor pool and then import back in duty free. The winners are the 20% of the US population which owns and controls 80% of the wealth. The losers are the 80% of the population who weren't born with a silver spoon in their mouths and must work for a living and live off 20% of the wealth. Streets full of unemployed hungrey people is not a pretty picture.
"At that time, the US trade deficit was running about $14 million a month and now runs over $60 million. "
The trade deficit increase so much because US consumers bought more than consumers from the rest-of-the-world. US consumers were able to buy more because of over-borrowing and a rapid increase in asset prices (stocks and homes) caused by inflationary monetary policy and lax lending standards by financial institutions. To correct the imbalances, US consumers need to liquidate debt and save, and our trading partners need to stimulate domestic related demand. This will take time and, unfortunately, unemployment will remain high in the process. I think this monetary phenomena is far more responsible for the trade deficit, then free trade policy. Also, don't forget that half the trade deficit beginning in about 2004 to mid-2008 was due to the increase in the price of oil.
trade deficits are NEVER good dugan - it is money going out of the country - often to unstable or hostile regions as well, or labor exploiters and evironmental degraders
non eof whom we should be encouraging trade with
See Dave Johnson's Profile
"Bill Clinton took a $30 million contribution to his 1996 re-election campain from Red China."
I just can't let lies like this go without any comment. You should be ashamed of yourself, coming here and spouting this kind of stuff.
It's about time someone on this web site told the truth,thanks Dave
Free trade certainly didn't cause the recession, but the rapidity that free trade has occurred this decade as a result of China's entry into the WTO has created imbalances that have certainly contributed to it. The loss of textile jobs and loss of market share by US production in the textile and apparel market has been ongoing in the US since the 1960s, and hasn't been a problem to this point as more than enough new jobs have been created to replace those lost jobs, plus consumers and companies save money by buying such products abroad, they can buy more of them, which means higher employment abroad and more construction abroad to build those facilities for production, which adds to US exports of durable goods and commodities.
http://con
Look how textile and apparel employment about peaked in 1943, during WW2. It then pretty much stabilized (increased during Vietnam war period for military related production), then started gradually falling after Vietnam. The big drop since 2000 has been rapid, however, and with the collapse of the housing boom and consumer spending, services and construction employment has collapsed, while textile and apparel employment abroad is probably more stable. It appears the imbalance had become so dramatic and occurred so suddenly this decade, that it will take many years to sort it out.
Pretty sad when our country can't even make our own clothing or shoes
your attempts at rationalization are getting pretty stale dugan
I will agree that chinas entry in the WTO displaced too many US workers too fast. but I would reach a far differnt conclusion there were several problems with chinas entry but here are the core ones
trade with a repressive communist regime. Hu Jintao is #4 on the state depts "worst dictators" list . lack of product safety, labor, human rights, envriormental protection should never have been rewarded
introducing billions of low cost workers was bound to create displacement. tjhe US was woefully unprepared for such a devastating event - total lack of a substantial social safety net to handle the displacements - health care, more and longer term unemployment insurance, wage insurance for the underemployed, real job retraining and education assistance and so forth
Yes, in the 90's there was enough job creation to offset the jobs lost to Nafta. however that changed when china enterred in. then came the 01 recession - US mfg has not recovered since and job creation no longer offset the tremednous losses that extended beyond mfg and into other sectors
I've heard it before on Thom Hartmann's show that an unknown but large percentage of "trade" that the US has is simply one company subsidiary making a product overseas, and then "selling" it to another subsidiary in the US to distribute it. That's even LESS trade, because it's ALL ONE COMPANY!!!!
"Free" trade was not the only factor in causing this recession, but it would have been enough to cause one several years ago, had there not been a collusion with the Fed to provide cheap (or free) credit to the people!!
Yes, but without that transaction, the company would have to pay taxes on the profits it makes in the US, so it is an important part of corporate trade!
its clearly a way to increase profits while exploiting lower cost labor and skirting regulations
the US has (had) the cleanest and safest factories in the world, and globalization is shifting this production to countries that have no such concern for emplyees welfare or environmental protection
not only that, but also a a way to dodge taxes and avoid safety and environmental regulation
You nailed it Dave; and really, I just can't imagine--outside of the US & some EU nations--that the rest of the world is anxious to step up for additional fleecing by exploitive [and mostly western] multi-national corporations.
As with US clout in the realm of foreign policy, the nations not held in check by US influence are moving on without care for consent; and as with foreign policy it will be a rude yet necessary awakening when our policy makers finally realize that we are no longer calling the shots.
And for that very reason, NeoCon hawks and neoliberal economists once again will be ratcheting up calls for war--in both the military and economic realms.
The policy that you speak of is called LEVELISM.
Levelism uses tariffs to balance the advantage gained through lower wages and lower environmental rules.
Levelism does not impose tariffs on high wage high environmental standards countries and is therefore not protectionism.
Levelism merely levels the playing field. The best competitor will still win.
.
Free trade is a buzz word. There is no free trade in the world. There are trade arrangements that benefit some nations and destroy other nations. The trade our country is confronted is mercantelistic trade. Our raw materials and scrap are sent to emerging manufacturing countries. They produce and ship to us their manufactured goods. Our people go on the public dole and our young people of college degrees explore foreign lands for opportunity. Our other young people grow up stillborn without developing knowledge or skill. The only opportunity that has existed for the past three decades has benefited the upper 20% of the upper income levels as speculation, money churning and fraud has substituted for competence, production and achievement. This corruption has led to a citizentry of diminishing competence, character and motivation.
Ardent free trader Paul Krugman investigated trade patterns last year and one of his findings was not only that a lot of so-called "trade" was one company sending productio offshore, there were pattens to it.
Companies often retained the highest skill, highest technology, low labor quantity manufacturing jobs here in the U.S. because it was cost efficient; what they've been dumping are the high labor quantity, lower skill, lower technology jobs, and sending them to China etc.
Think about that -- we decided it was a great idea to take tons of really good jobs but slightly lower tech, medium pay, higher labor input jobs, and send them away, to be replaced with... well, what? Fiction? Dreams of a high tech job? Mumbo-jumbo about 'financial innovation'?
We've made it a priority to get rid of good manufacturing jobs in order that one company send part of its production offshore, and *this* we call "trade".
"Ardent free trader Paul Krugman...
From all that I've read by Krugman, I would assume that he'd more likely be labeled a neo-keynesian than a free market fundie....
Krugman has always supported free-trade.
My favorite is "Former Enron adviser Paul Krugman." (I'm hoping people can take a joke)
and then if the locals start to earn a decent wage they will import a few million H1Bs.
They did it to IT. They want to do it to nursing. ( But not doctors, lawyers and politicians ).
It is an short circuiting of the supply and demand principle. If the demand is high it is suposed to motivate people to enter a field, not motivate a government to import people to increase the supply.
.
Exactly - when I was going to engineering school back in the day - there were pages and pages of engineering jobs in the paper - and because of this demand, enrollment in tech schools swelled, because there were good jobs for graduates.
today there is little demand for engineers due to outsourcing and h1bs, so its touhg to encourage kids to pursue engineering trades - who wants to study for 4-5 yeears , go into debt for thenext job to get shpped to india?
Many schools are eliminating or cutting back their tech programs due to lack of demand
one of my brither in laws is a dept chair at the local community college - they cancelled their CAD program due to lack of demand - all the jobs had been outsourced
It is still amazing to me how the right wing has so effectively sold "free trade" to the majority of Americans. It's like "free trade" is one of the Ten Commandments. What we are doing is a disaster economically, yet it still remains extremely popular, even with the people who's wages are stagnant or worse.
Well, it's been sold just as heavily by liberals and the Democratic Party (whose watch was NAFTA passed on?).
See Dave Johnson's Profile
NAFTA passed the House in 1993 with 132 Republicans and only 102 Democrats
While I will admit that Bill Clinton (who was not a liberal, but a centrist) championed NAFTA, you should also note that so did George H.W. Bush (a neocon by ANY definition) and that it passed the Congress with more REPUBLICAN votes than DEMOCRATIC votes....
You must be logged in to comment. Log in or connect with
