Clarifications on the Case for Free Trade

Ludwig von Mises Institute ^ | Saturday, January 10, 2004 | Paul Craig Roberts

[A. Pole]

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[Paul Ross]

"...People who argue this way implicitly assume that the foreign capital inflows are going to the construction of new plant and equipment, or at least into new businesses bringing new jobs. However, the facts are different. In recent years, the vast bulk, in some years almost 100%, of foreign capital inflows represent foreign acquisition of existing US assets. Foreign ownership of US stocks, bonds, and real estate is heavy and rising. Foreign ownership means that the current and future income streams produced by these assets belong to foreigners. We are paying for current consumption (imports) by giving up our wealth and future income flows. Being a net importer of capital in this case means that we are consuming wealth, not producing it."

Precisely.

The empirical misrepresentations by the import lobby as to precisely WHAT is happening economically has needed case-by-case critical debunking for a very long time.

[raybbr]

We do not dispute that global gains might exceed first world losses. Nevertheless, the flow of factors of production to absolute advantage in place of comparative advantage vitiates the case for free trade--that it produces mutual gains to the countries involved. What we may be witnessing is global capitalism destroying national sovereignties, leading to a global government, much as Marx described capitalism’s role in the overthrow of feudalism and the rise of the nation-state.

Might, being the operative word. Yet, do we really need to take the chance that losses might not exceed gains?

[raybbr]

Some try to avoid the issue of comparative advantage with an argument that we always benefit anytime we can acquire a good or service at a lower opportunity cost. This is true as partial equilibrium analysis. If 20,000 US workers involved in the production of brassieres lose their jobs to cheaper foreign producers, their loses will be outweighed by gains to 100 million American women. However, we cannot generalize this argument without the assumption of trade based on comparative advantage. If the full range of domestic labor involved in tradable goods and services can be replaced by cheaper foreign labor, the loss of incomes outweighs the lower prices. The lower prices themselves will be lost to currency devaluation.

I can see their eyes glossing over and their brains shutting out this passage declaring "Brassiere makers are the buggy whip makers of yesterday".

[B-Chan]

SLAM DUNK. Great post, A.Pole. -- both a lesson and a warning.

Too bad no one here will heed it.

[A. Pole]

Too bad no one here will heed it.

It is not so bad. My estimate is that number of free trade believers and those who are critical is similar. See my tag line.

[WilliamofCarmichael]

This time would the critics (one critic, at least) of Mr. Roberts pul-leeze! respond with something substantive?

(One critic came close recently but had to streach a bit claiming Robert's was discounting Nov's job gains with announced future job losses. At least the critic tried.)

Mr. Roberts makes sense to me and I want to know why he's wrong.

I am already well aquatinted with the names used to "refute" Mr. Roberts in all the prior threads (some are pretty good general-purpose, non-specific put-downs. Thanks).

What are the facts that refute him?

[Clintonfatigued]

This is the best free trade posting yet. Shows what free trade is supposed to be, and it's not what's happening now.

[ARCADIA]

Libertarians might say all to the good. But this overlooks that they live in a sovereign country. The downward adjustment in wages and salaries necessary to bring the US into equilibrium with the global labor market requires reductions that cannot be achieved.

Exactly. At some point the system will be forced beyond the point of no return; beyond where we can maintain a standard of living through a stream of endless debt. That is when the the trading arraignment will end. When that happens the US and much of Europe will precarious position, our domestic suppliers will have to race to meet the new demands. We would need to raise new capital to finance the expansion of our domestic productive resources; even if it means writing off and defaulting on part of the debt. Free trade proponents are playing a very dangerous game; we know about the short term gains, but once those are exhausted, we will be left with long term instability, and even the real possibility of a major war.

[dennisw]

Excellent article

[A. Pole]

Exactly. At some point the system will be forced beyond the point of no return; beyond where we can maintain a standard of living through a stream of endless debt.

There is one dangerous aspect which needs to be stressed. It is much easier technically for society to tolerate the raise in standard of living than the lowering of it beyond certain thresholds.

For example, one such threshold is the access for the most of population to means of transportation. If your people were used to move by foot, getting on bicycles and buses is feasible. But if your people were moving by cars, switching to the buses and bicycles or even foot might mean a major disruption.

I do not mean the plain dissatisfaction, I mean that physical reality of infrastructure - the highways and suburbs are not designed for people moving at slow speed.

This problem with transportation might never materialize, we might get new fuel technologies, cars made in China might be cheap enough for everybody, etc ... Still the general rule is that reduction of standard of living must be disruptive even if the society is willing to go along!

Also in the past in time of crises or depression people could fall back on farming or move in with their relatives living on the farms - this was being done during the Great Depression. Today it is possible for the few.

Another thing is global trade which creates complex network of dependencies. Since economy of scale encourages further division of labor, spare parts for one necessary product might be made in different parts of the world. One of the key if not the most important reason for economic collapse in Soviet Union was that after the separation of individual republics and disruption of supply networks the production could not be continued.

If the globalization cannot be avoided, then it must be MANAGED in the direction of raising the standard UP in poorer countries without lowering them significantly in the affluent ones.

[A. Pole]

If the globalization cannot be avoided, then it must be MANAGED in the direction of raising the standard UP in poorer countries without lowering them significantly in the affluent ones.

This might involve strengthening of safety networks because the changes are accelerating. Airbags and seat belts are more needed when we drive faster.

[Fee]

Schumer has half the answer but he is also the problem. It is call illegal immigration. On one hand he understands the problem of corporate globalism, but he relies on Hispanic and Asian voters in NY as his winning coalition in every election, so when it comes to enforcing our borders and immigration laws he is absent from duty. The cost of taking care of education, welfare, and emergency health problems, plus the domestic downward pressure on nontechnical (and soon technical) job salaries is somehow absent from Schumer's strategy to protect American standard of living. As far as I am concern the problem is with part of the GOP and most of the Democrat Party.

[WilliamofCarmichael]

What we may be witnessing is global capitalism destroying national sovereignties, leading to a global government, much as Marx described capitalism’s role in the overthrow of feudalism and the rise of the nation-state. . .A hidden agenda might be behind "globalism"--the international redistribution of first world income and wealth.

I've been saying for years, it's a Marxist revolution from the top down -- with NEP built in, enter the useful idiots.

Yo! useful idiots. When they start asking you if you sell rope, run away!

Who are they? Try your New Democrat Third Way progressive ("a free market is needed to build wealth in developing countries") comrades for starters -- and while you're in Devos, look around. You'll be surrounded by "they." That's where "they" make the rules -- and "they" are just getting started.

[WilliamofCarmichael]

Try to imagine the political instability in store for the US as the ladders of upward mobility collapse. The reality toward which we head is not a libertarian paradise.

It's been done, kinda. The movie "Falling Down" introduced the "angry white man." The new version is about angry Americans.

And Mr. Roberts didn't even talk about "guest workers" and the importance of remittances for the redistribution of wealth. The WTO is about to start setting the rules, it has only to ask the ILO and the migrant "rights" industry, What do you want is to do?

[WilliamofCarmichael]

". . .offshore production for home markets was not the reason for the capital flows[; i.e. real free trade. To wit:]. When Japanese and Germans invest in automobile plants in the US, it is to produce products for sale in US markets, not to displace car production in Japan and Germany by selling cars produced in the US in their home markets.

How many times has that point been made in these threads -- I have yet to receive an answer to my question BTW. If "free traders" point to insourcing to show the benefits of "free trade" why do our corporations say that they must move production off shore? Foreigners are moving here to produce and sell here. Go figure.

[meadsjn]

This article was posted when it was new in 2004 and the discussion quickly degenerated into the standard name-calling. Damn shame, IMO, because the points are critical to our future as a nation. The global economic utopia envisioned by the Free Traitors is just as elusive and false as that envisioned by the Marxists.

Below is a link to a great excerpt from When Corporations Rule the World by David C. Korten, 1995. I don't recognize the author and don't know his affiliations, but the excerpt discusses some of the changes in mindset in the schools of economics in recent years.

The Betrayal Of Adam Smith

[meadsjn]

Check out that link in #19.