26 July, 2009
I must confess, I got it wrong, it seemed a good idea at the time, but it turned out like all other ideologies, WRONG!!! I am talking about the ideology of free trade, the philosophy that says that it generate wealth to all that practice it. As it turned out it does not!
The principle of free trade is simple, if I can grow tomatoes better (more efficiently, as economists say) then my next door farmer, who in turn can grow cucumbers better then I do, then we are both better off by I growing all the tomatoes and my next door neighbour growing all the cucumbers and we trade tomatoes for cucumbers between us. In this way we each get better products all around.
In real life, more efficient usually means cheaper, we all agree that if we produce widgets here for say, $4.00 a piece and the Chinese produce them for 10 cents each, it is a prima facie evidence that, the Chinese are more efficient in producing widgets thus we should stop making them, buy all our widgets from the Chinese and concentrate on producing something that we are more efficient at, say gismos, sell them to China and we would all be better off for it, or would we?
Let us pause and look at the “efficiency” again, suppose our workers produce 10 widgets per hour and a Chinese worker can manage only 2 widgets per hour, wouldn’t you say that our workers are more efficient then the Chinese? On this example, of course they are! So you can see that “cheaper” is not always synonym with more efficient, here is why;
If our widget wage costs (actual wage paid to workers and on-costs) amounts to $40.00 per hour whiles a Chinese worker equivalent cost is only $2.00 per 10 hours day, the vast gap in wage costs completely obscures our advantage in terms of efficiency.
Therefore, we get rid of our workers and produce all our widgets in China albeit it would take five times the number of Chinese workers to produce the same number of widgets.
And in order to further obfuscate the treachery to our more workers we use the euphemism outsourcing. Hey man, you are not sucked, you are just outsourced. (How strange, you never hear of outsourcing the CEO’s of large corporation, do you?)
Further, in order to ensure that outsourcing is REALLY successful, the free traders call on our governments to remove all import duty our forefathers put in place for the very reason of protecting jobs. They even go as far as demonise the word “protection” as a dirty word, something to be avoided at all costs. No politician OF EITHER SIDES, wish to be called “protectionist”, oh no! As if protecting our jobs is the wrong thing to do.
Whose side these people are on?
And so we are handing over our manufacturing expertise to under-developed nations, lock stock and barrel, some of whom don’t even like us. We are quickly reaching the point that whole sections of manufacturing industries are disappearing from our local landscape. What is going to replace lost employment in apparel, steel mills and food canneries that disappeared in recent years?
The economic rationale of free trade implies that everybody has some comparative advantage whereas we may not be as good as say the Chinese at making widgets but are really good in making gizmos, so we let the Chinese make all the widgets and we make all the gizmos … but wait, it has not worked like that at all. What in fact has happened is that, China is making BOTH widgets and gizmos.
Slowly and not so slowly we see that the emerging economies, (a euphemism for China and India) China in particular, are taking over sector after sector of our manufacturing industries, it is like slicing a salami- every day a small slice of our manufacturing industry is carved away without any impact until we wake up one day and realise that the salami has gone.
Few of us ask where does this jobs destruction lead us get the standard spin is that we do not need manufacturing industry to prosper, we can still prosper by being a service economy . It make no sense whatsoever we cannot produce wealth by producing nothing.
Serving each other drinks and making each others’ beds is not an economy!
One day we shall wake up, not only with no factories and with no manufacturing expertise, then what?
The Chinese will have us by the sort and curly and they will pull, have no doubt about it!
* * * * *
All ideologies, euphemisms and spins do not change one fact and that is that CHINA IS A TOTALITARIAN COMMUNIST COUNTRY. All the Western democracies would be better advised to take this fact into account when dealing with China before we hand over our manufacturing industry.
Whilst we all pontificating on the merits or otherwise of free trade China is forging forward, not by reciprocating our free trade but by practicing protectionism – the Chinese current import duty tariffs may not be high but don’t let it fools you, the Chinese government has achieved protectionism by other means, not the least their by tight control over EXCHANGE RATES, foreign currency restrictions and other administrative and bureaucratic limitations and control, all aim at supporting their emerging economy not ours.
Since 1984, the Renminbi (China’s people’s currency) has been devalued by 200%. This is as “good” as having across the board tariff of 200% increase on all imports at the time when our tariffs are for Chinese products coming down.
Further the Renminbi is not a readily convertible currency. Traditionally Chinese citizen could not receive allocation of foreign currency for imports, unless they had earned foreign exchange in previous exports. (These restrictions have somewhat relaxed in recent times due to large foreign currency reserves accumulated in recent years.)
As you can see, China’s current wealths is a combine result of sever protectionism on their side and the free trade ideology on our side.
In fact China approach is not unique, all historical economic empires were built on the foundation of protectionism, or mercantilism as it was known years ago. England’s Navigation Act of 1651 reserved all English trade, including to, from and between its colonies to be carried only by English ships (or ships owned by English nationals). The Corn Laws of 1815 that prohibited importing grain into England at a price less than 80 shillings per quarter (28 pounds) are some of such examples of protectionism going back to the 19th century.
Britain before 1846 (when the Corn Laws were repealed), the USA from 1860 to 1914, Germany from 1870 to 1914, Japan of after WWII and Australia till the 1970′s all developed their economies on a foundation of protectionism.
If free trade is best for nations, how is it that every modern state that rose to prominent and power …. Was protectionist?
Asks Pat Buchanan rhetorically in his book Day Of Reckoning and continues to cite that
All four presidents on Mount Rushmore – Washington, Jefferson, Lincoln, Theodore Roosevelt – were economic nationalists.
[- pp 195]
The apparent discrepancy in the benefits of free trade is simple to explain, free trade is beneficial to both parties ONLY when it is practised between nations of similar standard of living.
There are many examples that prove this hypothesis, not the least the free trades among the states in the USA, Australia, and the EU, as well as our free trade with New Zealand albeit we are competitors on many products when it comes to international trade.
A recent survey done in Australia, has shown that about 80% of shopper SAYING that they prefer Australian products over overseas’ even if it costs more BUT when it comes to action, only about 20% of shoppers actually put their money where their mouth is.
I suspect that the situation in America and other western democracies is similar. Come on people, put you money where your mouth is, use it or loose it!
© Copyright Jacob Klamer 2009