Posted on 02/18/2005 9:55:18 AM PST by Willie Green
For education and discussion only. Not for commercial use.
It is difficult to decide whether the trade figures for 2004 or the Bush Administration's reaction to them indicate the greater danger to the American economy and nation. Last year's trade deficit hit $617.7 billion -- surpassing the record 2003 deficit by 24 percent. The deficit in goods was even higher, at $666.2 billion. The imbalance increased as a share of the economy to 5.3 percent of gross domestic product, up from 4.5 percent in 2003. This is a situation usually associated with underdeveloped countries on the brink of financial collapse.
The Bush Administration is ideologically opposed to doing anything about the deteriorating international situation. It is content to passively accept whatever transnational corporations and foreign governments do to shape the world economy to their advantage. Attempts at positive spin took their most unbelievable form in Treasury Secretary John Snow's testimony to the Senate Budget Committee on February 10. "What those numbers reflect is the fact that the American economy has been doing well relative to other economies," he claimed. "We are importing more from those other economies because we are creating more disposable income."
Yet, according to Commerce Department figures released in January, disposable income by the third quarter of 2004 had increased at an annual rate of 3.5 percent. How does that translate into a 24 percent hike in the trade deficit? Snow apparently assumes that Americans will spend most of any increase in income on imports rather than on American made products. Why would this be true unless American firms are being beaten out by their foreign competitors?
This pattern is not seen elsewhere. Per capita income in Europe and Japan is on a par with America. The European Union actually has a larger combined economy than does the United States, with Japan in third place. Both the EU and Japan run trade surpluses, and in fact use their large gains in the U.S. market to boost their own economic output and income.
China does the same. It is growing three times as fast as the U.S., and its American trade surplus of $162 billion, up by $38 billion from 2003, is a sign of its strength as the rising manufacturing hub of Asia. Beating out the competition in foreign markets is the real sign of successful commerce and government policy, not losing market share to overseas rivals as has been the American case for over a decade.
Here is the fundamental error that has bedeviled political economy for centuries. Is international trade essentially about cooperation or competition? Classical liberals see free trade as creating a world peacefully arraigned by a division of labor and economic integration (a concept of global unity that goes well beyond trade). The Bush administration is in this camp. Those with a more realist or conservative bent see a world based on a more fundamental economic principle, relative scarcity. The first law of economics is that there is never enough to go around; wants are unlimited while the ability to satisfy those wants is limited at any point in time (though it can be increased over time). Thus, there is always competition to gain "the lion's share" of what is available, be it jobs, raw materials, industrial capacity or the means to advance to the next level of prosperity through the accumulation of capital and technology.
Everyone agrees that capitalism is based on competition. Firms are driven to innovate and expand or be left behind by their commercial rivals. What the free traders overlook is that there are societal consequences if the nation's capitalists consistently lose to foreign competitors, or abandon the nation for operations overseas (again in response to competitive pressures).
Americans understood this national aspect of competition during the decades when the United States attained global leadership. By the dawn of the 20th century, America was the largest, most productive economy in the world. In 1902, Brooks Adams published THE NEW EMPIRE proclaiming how American had surpassed Europe as the center of the world economy. While not as well known now as his brother Henry, Brooks was a prominent member of the 4th generation of the illustrious Adams family, counting from Founding Father President John Adams. Brooks and Henry Adams were in the intellectual circle surrounding President Teddy Roosevelt.
"The world seems agreed that the United States is likely to achieve, if indeed she has not already achieved, an economic supremacy. The vortex of the cyclone is New York. No such activity prevails elsewhere; nowhere are undertakings so gigantic, nowhere is administration so perfect; nowhere are such masses of capital centralized in single hands. And as the United States becomes an imperial market, she stretches out along the trade routes which lead from foreign countries to her heart, as every empire has stretched out from the days of Sargon to our own," wrote Adams.
The former global Superpower, Great Britain, according to Adams "is gradually assuming the position of a dependency, which must rely on us as the base from which she draws her food in peace, and without which she could not stand in war," a view borne out in the two world wars of the 20th century. Because London had adopted free trade while Washington still practiced protectionism in Adams' day, American firms were able to profit greatly from their penetration of the British Empire – much as the rising (reborn) empire of China is doing in the American market today.
Indeed, at the end of Adams's interpretative world economic history, he warns that the center of gravity may continue to shift, to Asia. Japan was a rising power in his time, but he thought in the long run China would prove more formidable. "Prudence, therefore, should dictate the adoption of measures to minimize the likelihood of sudden shocks," he advises. "American supremacy has been made possible only by applied science. The labors of successive generations of scientific men have established a control over nature which has enabled the United States to construct a new industrial mechanism, with processes surpassing perfect," he argues, but "America holds its tenure of prosperity only on condition that she can undersell her rivals."
One of my favorite passages also comes near the end of the work: "Life may be destroyed as effectively by peaceful competition as by war. A nation which is undersold may perish by famine as completely as if slaughtered by a conqueror. Therefore, men thrown into acute competition by rivals must have the ingenuity to secure an equality of equipment, else they will suffer; it may be by hunger, it may be by the sword, but in either case the purpose of nature will be attained. Nature abhors the weak."
While it is fashionable to dismiss works of that period as "social Darwinism," labels do not change how the world works, which is in ways just as intense now as ever. Brooks warned against the classical economists dogma of free trade. "Now men are apt to lecture on political economy as if it were a dogma, much as the nominalists and realists lectured in medieval schools. But a priori theories can avail little in matters which are determined by experiment....No one can say a priori what will succeed; the criterion is success." By this standard, U.S. trade policy is a failure, no matter how many academic economists claim it should be working in theory.
The dangerous situation in America today is no longer just one of particular industries being battered by foreign competition. The declining dollar indicates an impending financial meltdown, which would be a clear indicator of the nation's economic defeat in the global arena, and the coming end of its world leadership. America may no longer be a "new empire" but it would be tragic if its leaders allowed foreign rivals to push the country into a retirement home prematurely.
Virtually every quarter in the 90's was a new trade deficeit record. But like the homeless, when a democrat is in power, there is no problem.
Give it up Dems.
if you present americans with the cost of something priced in real dollars, unaffected by global effects - the cost of a college education, the cost of paying for private sector healthcare or health insurance - what happens? they run screaming to the government for subsidies. why? because most of them can't afford to pay for those things.
being able to ONLY afford imported chinese products is not a sign of wealth. my wealth is not measured by how many many $9 toasters I can buy.
I don't really want more income taxes or tariffs. The inherent disadvantage of tariffs over an income tax is that tariffs will bring on retaliatory tariffs from our trading partners.
Maybe economic growth in China is so high because it's still mostly a 3rd world country. Economic growth, historically, flattens out as economies mature. China is fighting significant internal economic issues - runaway credit, preferential lending practices to party owned or controlled companies, areas of hyper-inflation - that must be faced. They will face a few cycles of recession, maybe severe, as they continue to absorb dollars. Japan was in this position in the 70's and 80's, although they also had a scandalously over-valued real-estate market devouring a lot of free capital and generating bad loans.
By the way, they've announced that they are going to start moving to a market-basket currency model, which will push the Yuan up some. Such an increase can easily be absorbed in a low-cost labor market like China. The solution to the problem is to keep them moving towards the WTO and let them grow their way out of it. Economic growth will lead to political reform. You cannot have consumer choice on the scale available in China today and expect other forms of choice and expression to remain bottled up.
Japan, the EU, now China: seems we're always just moments away from economic doom.
From: http://www.state.gov/r/pa/ho/time/id/17606.htm
Smoot-Hawley Tariff
The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports.
Massive expansion in the agricultural production sector outside of Europe during World War I led, with the postwar recovery of European producers, to massive agricultural overproduction during the 1920s. This in turn led to declining farm prices during the second half of the decade.
During the 1928 election campaign, Republican Presidential candidate Herbert Hoover pledged to help the beleaguered farmer by, among other things, raising tariff levels on agricultural products.
But once the tariff schedule revision process got started, it proved impossible to stop. Calls for increased protection flooded in from industrial sector special interest groups and soon a bill meant to provide relief for farmers became a means to raise tariffs in all sectors of the economy. When the dust had settled, Congress had agreed to tariff levels that exceeded the already high rates established by the 1922 Fordney-McCumber Act and represented among the most protectionist tariffs in U.S. history.
The Smoot-Hawley Tariff was more a consequence of the onset of the Great Depression than an initial cause. But while the tariff might not have caused the Depression, it certainly did not make it any better. It provoked a storm of foreign retaliatory measures and came to stand as a symbol of the ‘beggar-thy-neighbor’ policies (policies designed to improve one’s own lot at the expense of that of others) of the 1930s.
Such policies contributed to a drastic decline in international trade. For example, U.S. imports from Europe declined from a 1929 high of $1,334 million to just $390 million in 1932, while U.S. exports to Europe fell from $2,341 million in 1929 to $784 million in 1932. Overall, world trade declined by some 66% between 1929 and 1934.
More generally, Smoot-Hawley did nothing to foster trust and cooperation among nations in either the political or economic realm during a perilous era in international relations. The Smoot-Hawley tariff represents the high-water mark of U.S. protectionism in the twentieth century. Thereafter, beginning with the 1934 Reciprocal Trade Agreements Act, American commercial policy generally emphasized trade liberalization over protectionism. The United States generally assumed the mantle of champion of freer international trade, as evidenced by its support for the General Agreement on Tariffs and Trade (GATT), the North American Free Trade Agreement (NAFTA), and the World Trade Organization (WTO).
Additional Reading: Barry Eichengreen, “The Political Economy of the Smoot-Hawley Tariff,” Research in Economic History, 12 (1989), pp. 1-43. Douglas A. Irwin, “From Smoot-Hawley to Reciprocal Trade Agreements: Changing the Course of U.S. Trade Policy in the 1930s,” in Michael D. Bordo, Claudia Goldin, and Eugene N. White, Editors, The Defining Moment: The Great Depression and the American Economy in the Twentieth Century (Chicago: University of Chicago Press, 1998). Charles P. Kindleberger, The World in Depression, 1929-1939 (Berkeley and Los Angeles: University of California Press, 1973). Peter Temin, Lessons from the Great Depression: The Lionel Robbins Lectures for 1989 (Cambridge, Massachusetts: MIT Press, 1989).
Where do you get the idea that the imports are not paid for?
Hey we can just run up the plastic forever with no end in sight
Are you suggesting that the trade deficeit is somehow contributing, or even causing the budget deficeit of the federal government? If so, explain.
What drives a lot of this is the idea of economics as zero-some; something trade protectionists share with Communists, who are their intellectual kin. I.E. One country only becomes wealthy by impoverishing another country.
I included reference links to support my assertions.
You have not.
Ugghh, make that "Zero-sum" not "Zero-some."
Who do you think pays for the tariff? The American Customer!! You are thinking that taxing Americans and enriching Federal coffers means that "we make money on this"? Ted Kennedy would be so proud of you!!
No. Consumers by cheap imports because Americans are price driven with 99% of their purchases.
Somehow, after reading the title of the thread, I knew it was posted by Willie.
Didn't even have to click on it.
I guess there is something to be said for consistency...
And what has happened to the American standard of living in those thirty years? Has it suffered? No.
No ? I kinda remember that in 1975 a blue collar worker on one paycheck could buy a house, have health insurance, go away on vacation, send a kid to college, and retire on a pension. I kinda remember that while adjusted for inflation the prices of cars have remained pretty constant, auto loans were three years then but are six years now.
Ah... but you are presenting economic facts... williegreen and oceanview lose you there.
What has the trade deficit been as a percent of GDP over the past 30 years?
if Japan had mantained an artificial currency peg, if they had slave wages and low living standards - the trade situation with them would be far far different then it is today. Toyota employs 200,000 americans in the auto business. China is draining US jobs in manufacturing and technology.
Horse manure. I pay off my plastic debt cards, then rack it up again, just like most everyone else. Just because a few people can't manage a household budget, doesn't mean it's an economic indicator for the whole nation.
As far as everything I (we) buy being made in China, that's B.S. as well. I buy cheap stuff that's made in china, consumable goods, like coffee makers etc that have a short lifespan. I buy Good stuff that I expect to last from either the USA, Canada, Europe. which may or may not contain parts from various other places in the world.
Finally, EVERYTHING I buy here, I buy from a American retailer, pay American federal and state taxes on it. They employ American people (I insist) and pay their salaries in American Dollars.
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