September 2011
World trade today operates on an economic playing field where labor cost bottom fishing and regulatory arbitrage are the norm. This was not the case as recently as the mid '80s when the Reagan administration used and adjusted tariff policy to counteract foreign mercantilism and non-tariff barriers. Properly implemented, tariff policy can also support fair domestic wage rates and protect industries with high regulatory or environmental burdens from being driven out of business by cheap imports from nations lacking responsible regulations.
The "conventional wisdom" holds that protected industries become fat and lazy price gougers. Free trade, on the other hand, supposedly benefits all nations by spreading industrial development around the world, bringing the benefit of cash wages to third world populations who can then become consumers of goods that globalization has made cheap enough for them to afford. Thus an upward global spiral of prosperity "will raise all boats", and in fact something like that did seem to be happening under the liberalizing influence of post-WWII US policy.
During the '80s and '90s, however, the US balance of trade turned from positive to persistently negative as globalized U.S. corporations moved their production abroad to stay ahead in the "race the bottom." To explain why manufacturing jobs dropped from 30% to just above 10% of the US labor force in half a century, economists pronounced that higher productivity was responsible (caveat: the Labor Department admits that its statistics ascribe outsourcing cost savings to US "productivity"). In the process, the US stopped making consumer essentials, from shoes to TVs to lightbulbs, and the trade deficit ballooned to a three quarter trillion dollar annual rate during the "W" Bush years.
Such enormous deficits had to be financed by borrowing from countries that were running trade surpluses. Any country but the US would quickly see its currency devalued by such profligate deficits. But since WWII the dollar has been the clearing currency of international trade. Consequently, when the US credit bubble burst in '08, the demand for dollars only strengthened because world traders still needed dollars to clear their purchases and the crisis had made dollars much more difficult to borrow.
Now that a few years have passed since that crash, US unemployment hovers near 10% while the proportion of the workforce without a proper job is closer to 20%. State and local governments play into a losing game, fishing to attract business from other locales with tax offsets, even while they lay off workers and public school teachers to balance budgets hit by declining revenues and rateables. Any honest economist would tell you a downward economic spiral is underway, exacerbated by this self-imposed austerity. But that conclusion is often contradicted by officials who are trumpeting optimism to shore up their misguided austerity measures. Meanwhile the US public lives in a twilight zone of uncertainly waiting for the other shoe to drop.
Will it be another financial crisis precipitated by credit default swap dominos? Will it be a US Treasury default imposed by Tea Party know-nothings in Congress? Or will it be a second-round mortgage crisis, set off by declining property values due to mortgage industry intransigence in dealing with unemployed home-owners? With Washington obsessed by politics, the trade deficit continuing at a halftrillion dollar annual rate (about 6 million dollars a second !), and service jobs joining industrial jobs flowing out of the country in search of "bottom" costs, some sort of crisis is inevitable. And because the US has generally succeeded in globalizing it's manufacturing, it's employment, its dollar, and its Treasury debt, inevitably the crisis will be global in scope.
One "solution" to US troubles typically applied to other countries in financial trouble -- national impoverishment via currency devaluation – is actively resisted by our big trading partners because a dollar devaluation would slash the value of their vast dollar holdings. Currently four and a half trillion dollars of US Treasury securities are held by foreign investors or governments, to say nothing of trillions more in private securities and IOUs. China and Japan are our biggest creditors. China in particular has recently been vocal about looking for some alternative to the dollar. These creditors realize they have been riding a red/white/&blue tiger: that can not pay its debts and can not stop running up more debt at an alarming rate.
Our big trading partners are also loath to press for the other corrective "solution" applied to debtor nations – imposed national austerity – because that would eviscerate their biggest export market. So, with the two orthodox neoliberal solutions off the table, how is the US ever going to bring its international accounts back into balance? The selfimposed domestic austerity we are embarked upon is not going to do it because those of us who still have jobs and money in our pockets will continue buying imported lightbulbs, shoes and TVs. And with outsourced labor readily available at $2 an hour, or less, why would any profit minded capitalist even dream of opening a light bulb factory here?
According to its proponents, a global free market will optimize the sourcing of labor, materials and capital, and maximize productivity while minimizing cost. However, experience has repeatedly shown that unregulated markets tend to booms and busts. World trade is no exception. What we are looking at now is the final stage of a goods import boom to a country that foolishly has come to depend on imports for a financially unsustainable quantity of essential goods, fueled by a boom in dollars loaned back to us by our trading "partners." Do we have to experience the looming bust to comprehend that sustained trade imbalances lead to unsustainable international financial imbalances? Just as regulation was needed to restrain bank panics, regulation is needed to restrain financial panics, which are predictable when a country's international debts mount with no end in sight. However the panic occurs, whether it is currency panic or a cascade of credit default swaps triggering a another anking crisis, it will impoverish both debtors and creditors, wiping out asset values on a wholesale basis. A cascade of business failures attend these panics, and economic contraction follows. While some rich people may become less rich, others who bet (hedged/swapped) on default become more rich. Meanwhile, millions of middle and working class people will lose the jobs, lose their homes, and be wiped out financially.
Is "our solution" a global bureaucracy empowered to regulate world trade? The term "global bureaucracy" has an all-powerful ring to it, and perhaps that may not be such a good idea, after all. But since we already have a relatively all-powerful membership organization devoted to global trade, perhaps the best way to defuse the looming …crisis might be to agitate for a reform of the WTO. What we would be looking for is a set of WTO rules with the objective of keeping every country within a reasonable range of import/export equilibrium.
Up to this point one of the chief objectives of the WTO has been to encourage lower tariffs, together with national commitments to "bind" those tariffs so once they are lowered they can't be raised up again. But when some country begins running an unsustainable chronic trade deficit, common sense tells us that temporary adjustments to that inflexible tariff landscape are needed. Tariffs are actually the oldest, simplest, most flexible, and most directly expeditious way to regulate trade. Of course, what we are talking about is regulating trade to prevent destabilizing imbalances. Even though this is a simple idea, it has never been considered because tariffs have always been associated with colonial era mercantilism – the manipulation of a country's trading relationships by its government to serve that country's narrow interests. Here we are turning that association on it head, proposing to use tariffs to protect the interests of the global community at large while also protecting innocent working and middle class populations from unemployment and financial punishment.
This simple expedient is not going to be popular on Wall Street because doing away with imposed austerity will make punitive loan rates, privatizations, and related asset liquidations far less likely. Wall Street profits from hedging and currency speculation would also be sharply reduced. Rules promoting trade equilibrium may also be opposed by countries currently pouring exports into the US consumer market, because such imposed national tariff adjustments would temporarily make their exports less affordable here. Offsetting those negatives, the Armageddon of a $ panic will be averted, so countries holding our IOUs will be protected and central bankers and governments that otherwise might be urged to participate in a bailout of unprecedented proportions will be able to relax.
While we are at it, logic tells us that if tariff adjustments can be used as tools to promote trade equilibrium among nations, there is no reason why those same tools can't also be applied to promote policy objectives relating to factors that give one country an advantage over another when it comes to the production of goods involved in trade. Other things being equal, countries that allow their industries to treat the environment as a free dumping ground will have significant cost advantages over countries that enforce environmental protection. Tariff policy can turn up the pressure on irresponsible nations by giving protection to nations that enforce environmental standards. In addition, countries where working conditions are unsafe and oppressive, where child labor is common, where workers are fired, beaten or murdered if they try to organize, where labor is kept cheap by human oppression… should not be allowed to compete on even terms with countries that treat workers fairly and respect their right to bargain collectively for better pay and benefits. Quantifying such differences between nations might sound like a bureaucratic maze, but actually, environmental conditions can be measured objectively using water samples; air samples, food samples… etc. Similarly, labor rights can be fairly measured by sampling the opinions of the work force using random sampling techniques that that give a predictable margin of error.
Within a straightforward rules-based global solution as described here, free trade could generally flourish, currency gyrations due to trade imbalances would be damped down to a range that could be set by policy, and austerity imposed as an international financial sanction would be completely eliminated. The United Nations declaration of human rights would get some teeth in the enforcement of fair labor standards, and Mother Earth could at last begin to recover from several centuries of unrestrained industrial abuse.
The "conventional wisdom" holds that protected industries become fat and lazy price gougers. Free trade, on the other hand, supposedly benefits all nations by spreading industrial development around the world, bringing the benefit of cash wages to third world populations who can then become consumers of goods that globalization has made cheap enough for them to afford. Thus an upward global spiral of prosperity "will raise all boats", and in fact something like that did seem to be happening under the liberalizing influence of post-WWII US policy.
During the '80s and '90s, however, the US balance of trade turned from positive to persistently negative as globalized U.S. corporations moved their production abroad to stay ahead in the "race the bottom." To explain why manufacturing jobs dropped from 30% to just above 10% of the US labor force in half a century, economists pronounced that higher productivity was responsible (caveat: the Labor Department admits that its statistics ascribe outsourcing cost savings to US "productivity"). In the process, the US stopped making consumer essentials, from shoes to TVs to lightbulbs, and the trade deficit ballooned to a three quarter trillion dollar annual rate during the "W" Bush years.
Such enormous deficits had to be financed by borrowing from countries that were running trade surpluses. Any country but the US would quickly see its currency devalued by such profligate deficits. But since WWII the dollar has been the clearing currency of international trade. Consequently, when the US credit bubble burst in '08, the demand for dollars only strengthened because world traders still needed dollars to clear their purchases and the crisis had made dollars much more difficult to borrow.
Now that a few years have passed since that crash, US unemployment hovers near 10% while the proportion of the workforce without a proper job is closer to 20%. State and local governments play into a losing game, fishing to attract business from other locales with tax offsets, even while they lay off workers and public school teachers to balance budgets hit by declining revenues and rateables. Any honest economist would tell you a downward economic spiral is underway, exacerbated by this self-imposed austerity. But that conclusion is often contradicted by officials who are trumpeting optimism to shore up their misguided austerity measures. Meanwhile the US public lives in a twilight zone of uncertainly waiting for the other shoe to drop.
Will it be another financial crisis precipitated by credit default swap dominos? Will it be a US Treasury default imposed by Tea Party know-nothings in Congress? Or will it be a second-round mortgage crisis, set off by declining property values due to mortgage industry intransigence in dealing with unemployed home-owners? With Washington obsessed by politics, the trade deficit continuing at a halftrillion dollar annual rate (about 6 million dollars a second !), and service jobs joining industrial jobs flowing out of the country in search of "bottom" costs, some sort of crisis is inevitable. And because the US has generally succeeded in globalizing it's manufacturing, it's employment, its dollar, and its Treasury debt, inevitably the crisis will be global in scope.
One "solution" to US troubles typically applied to other countries in financial trouble -- national impoverishment via currency devaluation – is actively resisted by our big trading partners because a dollar devaluation would slash the value of their vast dollar holdings. Currently four and a half trillion dollars of US Treasury securities are held by foreign investors or governments, to say nothing of trillions more in private securities and IOUs. China and Japan are our biggest creditors. China in particular has recently been vocal about looking for some alternative to the dollar. These creditors realize they have been riding a red/white/&blue tiger: that can not pay its debts and can not stop running up more debt at an alarming rate.
Our big trading partners are also loath to press for the other corrective "solution" applied to debtor nations – imposed national austerity – because that would eviscerate their biggest export market. So, with the two orthodox neoliberal solutions off the table, how is the US ever going to bring its international accounts back into balance? The selfimposed domestic austerity we are embarked upon is not going to do it because those of us who still have jobs and money in our pockets will continue buying imported lightbulbs, shoes and TVs. And with outsourced labor readily available at $2 an hour, or less, why would any profit minded capitalist even dream of opening a light bulb factory here?
According to its proponents, a global free market will optimize the sourcing of labor, materials and capital, and maximize productivity while minimizing cost. However, experience has repeatedly shown that unregulated markets tend to booms and busts. World trade is no exception. What we are looking at now is the final stage of a goods import boom to a country that foolishly has come to depend on imports for a financially unsustainable quantity of essential goods, fueled by a boom in dollars loaned back to us by our trading "partners." Do we have to experience the looming bust to comprehend that sustained trade imbalances lead to unsustainable international financial imbalances? Just as regulation was needed to restrain bank panics, regulation is needed to restrain financial panics, which are predictable when a country's international debts mount with no end in sight. However the panic occurs, whether it is currency panic or a cascade of credit default swaps triggering a another anking crisis, it will impoverish both debtors and creditors, wiping out asset values on a wholesale basis. A cascade of business failures attend these panics, and economic contraction follows. While some rich people may become less rich, others who bet (hedged/swapped) on default become more rich. Meanwhile, millions of middle and working class people will lose the jobs, lose their homes, and be wiped out financially.
Is "our solution" a global bureaucracy empowered to regulate world trade? The term "global bureaucracy" has an all-powerful ring to it, and perhaps that may not be such a good idea, after all. But since we already have a relatively all-powerful membership organization devoted to global trade, perhaps the best way to defuse the looming …crisis might be to agitate for a reform of the WTO. What we would be looking for is a set of WTO rules with the objective of keeping every country within a reasonable range of import/export equilibrium.
Up to this point one of the chief objectives of the WTO has been to encourage lower tariffs, together with national commitments to "bind" those tariffs so once they are lowered they can't be raised up again. But when some country begins running an unsustainable chronic trade deficit, common sense tells us that temporary adjustments to that inflexible tariff landscape are needed. Tariffs are actually the oldest, simplest, most flexible, and most directly expeditious way to regulate trade. Of course, what we are talking about is regulating trade to prevent destabilizing imbalances. Even though this is a simple idea, it has never been considered because tariffs have always been associated with colonial era mercantilism – the manipulation of a country's trading relationships by its government to serve that country's narrow interests. Here we are turning that association on it head, proposing to use tariffs to protect the interests of the global community at large while also protecting innocent working and middle class populations from unemployment and financial punishment.
This simple expedient is not going to be popular on Wall Street because doing away with imposed austerity will make punitive loan rates, privatizations, and related asset liquidations far less likely. Wall Street profits from hedging and currency speculation would also be sharply reduced. Rules promoting trade equilibrium may also be opposed by countries currently pouring exports into the US consumer market, because such imposed national tariff adjustments would temporarily make their exports less affordable here. Offsetting those negatives, the Armageddon of a $ panic will be averted, so countries holding our IOUs will be protected and central bankers and governments that otherwise might be urged to participate in a bailout of unprecedented proportions will be able to relax.
While we are at it, logic tells us that if tariff adjustments can be used as tools to promote trade equilibrium among nations, there is no reason why those same tools can't also be applied to promote policy objectives relating to factors that give one country an advantage over another when it comes to the production of goods involved in trade. Other things being equal, countries that allow their industries to treat the environment as a free dumping ground will have significant cost advantages over countries that enforce environmental protection. Tariff policy can turn up the pressure on irresponsible nations by giving protection to nations that enforce environmental standards. In addition, countries where working conditions are unsafe and oppressive, where child labor is common, where workers are fired, beaten or murdered if they try to organize, where labor is kept cheap by human oppression… should not be allowed to compete on even terms with countries that treat workers fairly and respect their right to bargain collectively for better pay and benefits. Quantifying such differences between nations might sound like a bureaucratic maze, but actually, environmental conditions can be measured objectively using water samples; air samples, food samples… etc. Similarly, labor rights can be fairly measured by sampling the opinions of the work force using random sampling techniques that that give a predictable margin of error.
Within a straightforward rules-based global solution as described here, free trade could generally flourish, currency gyrations due to trade imbalances would be damped down to a range that could be set by policy, and austerity imposed as an international financial sanction would be completely eliminated. The United Nations declaration of human rights would get some teeth in the enforcement of fair labor standards, and Mother Earth could at last begin to recover from several centuries of unrestrained industrial abuse.
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