Free Trade is Scary!

Every four years the American public learns about how free trade is not good for the American worker. It usually comes from the Democrat candidate pitching change. But nothing changes. If anything, free trade is expanded. So why is such a problem every four years never addressed at any other time? Because the positives far outweigh the negatives.

One of my favorite writers is James Surowiecki who writes for The New Yorker. He hit on this subject recently with an article called The Free-Trade Paradox. The premise is that the poor benefit more directly from the output of free trade than the wealthy. He highlights a paper by Christian Broda and John Romalis called Inequality and Prices: Does China Benefit the Poor In America? As a per centage of spending, the poor buy more durable goods than the wealthy. Durable goods can be produced anywhere. The wealthy tend to spend more on services which are more likely to be locally delivered. Here is an excerpt:

Then, too, the specific products that middle- and lower-income
Americans buy are much more likely to originate in places like China
than the products that wealthier Americans buy. Despite a huge increase
in imports from China—they sextupled as a percentage of U.S. imports
between 1990 and 2006—Chinese products are still concentrated mostly in
lower-price markets. (By some estimates, Wal-Mart alone has accounted
for nearly a tenth of all imports from China in recent years.) By
contrast, much of what wealthier Americans buy is made in the U.S. or
in high-wage countries like Germany and Switzerland. This is obvious
when it comes to luxury goods—Louis Vuitton bags, Patek Philippe
watches, and so on—but it’s also true of many other goods, like
electronics, kitchen appliances, and furniture, categories in which
American and European manufacturers have continued to thrive by selling
to the high-end market. According to the Yale economist Peter K.
Schott, machinery and electronics products made in developed countries
sell in the U.S. for four times the average price of Chinese products.
And, since the late nineteen-eighties, that price gap has widened by
almost forty per cent.

So this doesn’t encompass everything associated with free trade, but it does illustrate how the benefits of free trade are felt by a wide range of people. As Surowiecki points out, corporate profits and resource accessibility benefit the rich by wide margin over the poor.
But the argument is one sided. It is assuming that the US is always a purchaser of goods and services produced elsewhere. But many companies are positioning themselves for a coming free trade flip flop. Currently the dollar is cheap when compared to many other currencies, but even without that advantage countries that are emerging as economic legit will buy American. Why? Because the education level, innovation level, creativity level, and Intellectual Property enforcement level are all too beneficial to pass up. Unfortunately, this is a delayed effect, but it is coming… and soon.


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