Ronald Reagan in his The New Republican Party said,
We have to recognize that in this country "ideology" is a scare word. And for good reason. Marxist-Leninism is, to give but one example, an ideology. All the facts of the real world have to be fitted to the Procrustean bed of Marx and Lenin. If the facts don't happen to fit the ideology, the facts are chopped off and discarded.
I consider this to be the complete opposite to principled conservatism. If there is any political viewpoint in this world which is free from slavish adherence to abstraction, it is American conservatism.
It is with those words in mind that conservatives reexamine their position on free trade. .
Our economic theory which we made the case for free trade. The graph above highlights the cost of protectionist policy. The pink area Qs1 to Qs2 was the distortion of labor. The workers that produced those goods could not compete in the world market. The pink area Qc2 to Qc1 are the consumers who could not purchase the goods at the higher price. The blue area is money squeezed out of the private sector for government to invest instead. We argued:
Free Market force can not be stopped but only delayed and participating in the fee market is the greatest ambassador of freedom. Tariffs cause goods to be higher and protect jobs that are no longer viable. There will be pain in the short term as jobs go to low cost foreign lands but the wealth created by those jobs will grow the opportunities for other Americans. As the global economy grows the American Industries will get their share of the pie which will lead to employment opportunities for those displaced. This will lead to a Win-Win for everyone. World Wealth will grow pulling nations out of third world poverty. Consumers will get goods at lower prices. The American workers will be employed in jobs that are supported by the free market's virtuous cycle, instead of sheltered by hurtful tariffs.
Americans having experienced the virtuous cycle of the free market and listened to the pro and cons of fee trade. In time free trade was given a chance. Free Trade Agreements like NAFTA opened our markets to countries like Canada, Mexico, Australia, Singapore, Chile. In total with have entered free trade with 17 countries and have treaties. The suspension of the Jackson-Vanik amendment to allow non-free market economies such as China to get most favored nation status--which had exemptions for third world countries from lowering trade barriers from goods made in America.
American corporations embraced free trade. They closed shops in America and opened them in lower cost countries. Asia developed policies to take advantage of free trade and gain those investments. These policy became known as Asian Mercantilism. For the most part free trade worked as theorized.
World wealth grew exponentially and third world countries were lifted out of impoverishment American workers while displaced found other jobs and more goods became available. It looked to be a win-win situation. Critics did point to the Asian mercantilism. Free Traders such as Milton Friedman explained why even if one party didn't play by the rules of market, market forces would eventually self correct.
Friedman laid out the argument in "The Case for Free Trade":Before throwing up your hands in horror, carry the analysis one step further. How would we pay the Japanese? We would offer them dollar bills. What would they do with the dollar bills? We have assumed that at 360 yen to the dollar everything is cheaper in Japan, so there is nothing in the U.S. market that they would want to buy. If the Japanese exporters were willing to burn or bury the dollar bills, that would be wonderful for us. We would get all kinds of goods for green pieces of paper that we can produce in great abundance and very cheaply. We would have the most marvelous export industry conceivable.
Of course, the Japanese would not in fact sell us useful goods in order to get useless pieces of paper to bury or burn. Like us, they want to get something real in return for their work. If all goods were cheaper in Japan than in the United States at 360 yen to the dollar, the exporters would try to get rid of their dollars, would try to sell them for 360 yen to the dollar in order to buy the cheaper Japanese goods. But who would be willing to buy the dollars? What is true for the Japanese exporter is true for everyone in Japan. No one will be willing to give 360 yen in exchange for one dollar if 360 yen will buy more of everything in Japan than one dollar will buy in the United States. The exporters, on discovering that no one will buy their dollars at 360 yen, will offer to take fewer yen for a dollar. The price of the dollar in terms of the yen will go down--to 300 yen for a dollar or 250 yen or 200 yen. Put the other way around, it will take more and more dollars to buy a given number of Japanese yen. Japanese goods are priced in yen, so their price in dollars will go up. Conversely, U.S. goods are priced in dollars, so the more dollars the Japanese get for a given number of yen, the cheaper U.S. goods become to the Japanese in terms of yen.
The price of the dollar in terms of yen would fall, until, on the average, the dollar value of goods that the Japanese buy from the United States roughly equaled the dollar value of goods that the United States buys from Japan. At that price everybody who wanted to buy yen for dollars would find someone who was willing to sell him yen for dollars.
Friedman's argument won the day. The 2008 financial collapse has the American economy mired in stagnation. Economist site America's negative trade balances as one of the largest drag on the economy. This has call free trade policy in question. Conservatives reflexively come to the defense of free trade. We now have over 20 years of data to look at the results of trade liberation to see if our defense of free trade in all cases is correct or just dogma to economic ideology.
I'm convinced that Reagan would now call on free trade for only partners that would allow free market principles. He would not offer blanket support to free trade.
The chart below the trade balances in dollars from the 1980 to 2010.
We can see the Asian Mercantilism strategy worked--especially for China. As they took in the majority of the wealth created by the global economy. If Friedman's argument is correct we should see an appreciation in the yaun--Chinese dollars.
As we can see, Friedman's theory was incorrect. Even though the Chinese GDP has grown rapidly their purchasing power has not increased but in fact dropped. When one takes in the account the drop in the dollars purchasing power the fact that Chinese's currency still depreciated in relation to the dollar is more disturbing. Why was Friedman wrong?
He didn't think a regime that would exploit its own people to the benefit foreigners. His no worker would sit by and watch the fruit of his labor be confiscated. He could not fathom the thought that one country would peg their currency to the US dollar for the sole reason to be the lowest labor cost on the totem pole. Yet this is exactly what China has done to become the manufacturer of the world. It has pegged its currency below those of developed nation's so our Harvard and Cambridge MBA could see that it was going to be the Chinese worker who would absorb all the risk associated with currency appreciation not the investor. How much has the Chinese currency peg undervalued the yuan? Studies estimate by 40%.
What does this mean? It means 40 cents of every dollar given to the Chinese will be sacrificed to maintain the mercantile scheme. The remaining 60 cents is split between the corporation, chinese government and worker. This is why the Chinese consumer is so pitiful.He is trapped in a system wages are rising internally bringing inflation but externally his work is always worth 1/7 of a dollar. Before one argues of the malinvestment that Tariffs cause. One should look at the massive malinvestment being allowed by the current policy. This business insider web page (especially the 2 minute Bloomberg video on China summarizes the malinvestment quickly) or this Australian Documentary (The Australian Documentary 14 minutes is excellent at laying out the massive malinvestment in China). Those links will put to rest any arguments that Tariffs would cause malinvestment when you see the scale of malinvestment by an oppressive sweat shop regieme.
In 2011 our trade imbalance has been -106.7551 billion dollars. If all of these dollars are converted to yauns the chinese worker would lose 42.7 billion dollars in the currency conversion which he can not put towards consumption. The USA would have to have GDP grow by .7% just to recreate the wealth lost to Asian Mercantilism. Quarter 1 2011 GDP growth was .4%. Their is the the rub. China's economic revival hasn't built a free market virtuous cycle but has built a totalitarian run society funded by forcing its workers into the sweat shops.
Reagan said this:
The principles of conservatism are sound because they are based on what men and women have discovered through experience in not just one generation or a dozen, but in all the combined experience of mankind. When we conservatives say that we know something about political affairs, and that we know can be stated as principles, we are saying that the principles we hold dear are those that have been found, through experience, to be ultimately beneficial for individuals, for families, for communities and for nations -- found through the often bitter testing of pain, or sacrifice and sorrow
He would have followed with
Are belief in free markets allowed us to deal with dictators and totalarians on equal terms. This was a mistake that must be corrected. We can no longer deal with countries who sole aim is sell their country's men freedom for cheap goods. We as a country can no longer fund the oppression of billions in the name of free market theory. In the real world able body Americans stand in unemployment line so Chinese can find freedom in a sweatshop.
When a conservative says international trade must be done with only partners who are bound by the rules of the free market and a basic necessity of that is floating currency exchange between countries, he is simply showing the same common sense that tells him to come in out of the rain
It is time to come out of the rain. It is time to get the greatest engine of prosperity chugging on all cylinders. It's time to tap American Energy to manufacture American goods in the American Free Markets. Those countries that want to join us in the greatest economic engine in the world with the no barriers. They must do so by adopting the rules of American Capitalism.